Getting Lucky: The Irish PE and VC Scene

By Garrett Black
March 14, 2014
Datagraphic on Ireland's PE & VC scene from 2008 to today. | By Jennifer Sam

Datagraphic on Ireland’s PE & VC scene from 2008 to today. | By Jennifer Sam

In honor of St. Patrick’s Day, and before the whiskey (pardon,uisge beatha) really hits us, we decided to take a look at how the Emerald Isle’s PE and VC scene has fared since the nadir of the financial crisis. Ireland still suffers from the recession’s aftershocks, even though it exited from it months ago and remains an attractive lure for numerous companies and multinationals seeking business incentives, such as its 12.5% corporate tax rate. Is that enough, however, to thwart the recession’s lingering effects? Within the PE and VC world, has the Celtic Tiger remained something of a Celtic kitten (however lovable that sounds), or is the Guinness flowing freely once more?

Before we get into the number-crunching, let’s briefly recap important economic factors:

Back in 2010, there was the little matter of Ireland’s debt crisis culminating in multi-billion-euro bailouts, coinciding with the bursting of the country’s property bubble. These were preceded by far-reaching tax changes, which consisted of taxing carried interest at 15% and shifting it from being taxed as income to capital gains. In addition, the corporate tax rate dropped to 12.5%. The new rates were applied to a “widely defined category of businesses engaged in research, development or innovation activities,” according to Ronan MacNioclais, PwC. In addition, there were some attractive changes to the existing Irish R&D tax credit system.

With any luck, these changes will help explain recent trends in private equity and venture capital.

Check out our lucky datagraphic on the Irish PE & VC scene (from 2008 to today) by clicking the image above.

PE: The Flowing of the Green

The main sectors of interest to PE in Ireland appear to be B2B, which comprises 28% of PE deal flow there, financial services (23%), B2C (21%) and information technology (15.6%), with healthcare and energy capturing the rest. Most of the capital invested went to financial services; this statistic is probably explained by the gargantuan €6.6 billion buyout of Anglo Irish Bank’s U.S. Loan Book portfolio by Lone Star, J.P. Morgan Chase and Wells Fargo in 2011. Let’s remove that deal in order to see if any trends emerge:

Private equity deals include buyouts, add-ons, growth and PIPEs | Source: PitchBook

Private equity deals include buyouts, add-ons, growth and PIPEs | Source: PitchBook

Now the bump in deals and capital invested in 2010 and 2011 makes sense given the favorable tax climate in Ireland (probably one of the few times the words “favorable,” “climate” and “Ireland” have appeared so closely together in a sentence, although I am partial to a touch of rain here and there). And the drop in 2012 could be due to a number of factors, although I would surmise that the continued fallout from the Eurozone banking crisis dampened the burst of activity in 2010 and 2011, before investor confidence was restored by Ireland’s steady climb out of its shaky financial situation. The U.K.’s double-dip recession in the beginning of 2012 couldn’t have helped matters either; plus, firmsappeared to be more focused on fundraising.

Even if 2013’s 11 deals and €700 million look paltry compared to 2010 and 2011 totals, it appears Ireland is experiencing a steady resurgence in PE activity, with capital invested in 2014 nearing 2013’s levels through the first two and half months of the year.

VC: Wild Rover Round or VC You’re the Devil
(Irish drinking songs, in case you didn’t know)

The jump in Ireland’s VC activity from 2010 to 2011 is no small potatoes and quite intriguing. What happened to spark the growth seen in the chart below?

Source: PitchBook

Source: PitchBook

Perhaps there was a delay in response to the tax incentives initiated in 2010, though that conclusion is almost as shaky as the post-St. Paddy’s Day walk home. However, another contributing factor could be the time it took key investor Enterprise Ireland, the Irish government agency responsible for supporting Irish businesses, to ramp up its investing efforts. As this report details, the international environment was not friendly to venture capital in general in 2010, but even more importantly, Enterprise Ireland established two new funds in 2010, and enlarged another, providing the firm with fresh cash ready to be invested.

In addition, valuations might have been so low for Irish companies that it proved an easy opportunity to make lower-risk investments; this would explain the 8% increase in early stage financings from 2010 to 2011.

Whatever the cause, in 2011, VC investors came back into the fray like a hurler close on the heels of a sliotar, and activity has remained high ever since, even if capital invested has decreased since 2011.

2014 seems promising for both PE and VC in Ireland. Deal activity on both fronts has started off fairly strong, with Enterprise Ireland alone making 11 VC investments in the past six months and VC fundraising in 2013 eclipsing 2006’s total, boding well for the future. The proverbial luck of the Irish seems to finally be coming back around, and good timing too, because here in Seattle it’s time to go honor our Irish heritage. Sláinte!

Datagraphic on Ireland's PE & VC scene from 2008 to today. | By Jennifer Sam

Datagraphic on Ireland’s PE & VC scene from 2008 to today. | By Jennifer Sam

 

Featured image courtesy of Umberto Salvagnin.

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