Ireland has fallen out of the top 20 most attractive global countries for venture capital and private equity investment according to a new report issued today by Spain's IESE Business School in collaboration with Ernst & Young. It's position has fallen from 16 (2006 result) to 21 (2009).

The Global Venture Capital and Private Equity Country Attractiveness Index 2009 is the first broad international index which has been created to measures country attractiveness to investors in Venture Capital (VC) and Private Equity (PE) community. A total of 66 countries spanning six continents were included in the survey.

The index reveals contrasting levels of opportunity and diverse challenges in today’s post-recession economy for international risk capital.

The 10 countries topping the list were:

1. United States
2. Canada
3. United Kingdom
4. Australia
5. Hong Kong
6. Singapore
7. Japan
8. Switzerland
9. Netherlands
10. Germany

In its analysis of why Ireland is viewed as a less attractive location the report cites poor access to credit, the low risk appetite for investors, and predominance in Ireland of sectors which VC/PE community find less attractive such as retail, leisure and construction all as contributing factors to the fall down in ranking.

The report also lists a number of threats to Irish recovery in term of its attractiveness internationally including the dept of the Irish recession in comparison to other countries, the increase in company failures and the fall off in volume of mergers and acquisitions.

However, the analysis confirms that there are opportunities for Ireland to recover lost ground in terms of renewing its attractiveness to the international investor community.

Government’s commitment to focus on high potential and "smart economy" businesses such as new green technologies, a strong highly attractive Medical Device/Pharmaceutical Industry as well as a drop in valuations are all cited as key opportunities for Ireland to improve its international profile as an attractive investment location.

Commenting on today’s report John O’Halloran, Transactions Director in Ernst & Young says “Today’s top 10 list are all countries perceived internationally on the road to economic recovery. For example, Australia would not have a strong history as an attractive location for this type of investment however; its relative stability in the international turmoil has attracted many risk averse investors”.

On conditions in Ireland, he continues “We’re seeing a number of new domestic funds and more mature international investment funds poised to take advantage of the real value to be achieved during the extreme downturn in Ireland”.

He continues “This is the first time that VC/PE country attractiveness has been assessed to such an extent and we believe the index is a more accurate reflection of actual investment on the ground to that of similar reports in the same field. Countries that fared well in the ranking were those that have excelled in enhancing competition, openness and professionalism within their borders”.

The index is based on six key criteria that investors cite as most important to them: economic activity; the depth of capital markets; taxation; investor protection and corporate governance; the human and social environment; and entrepreneurial culture and opportunities.

The aim of the index is to contribute to investors’ challenge of deciding where to allocate VC and PE. It also aims to help policy makers as they seek to influence economic conditions and strengthen the vitality of their own regions.

“As LPs consider where to allocate their capital, and PE and VC funds look to make the right investments themselves, the investing landscape will continue to evolve. There will undoubtedly be comparative winners and losers, and the index will prove to be a valuable tool in helping funds navigate through this uncertain time”.

Strong improvement from Emerging Markets

The United States came out first in the ranking, and was therefore used as the world benchmark. The study - - which is based on data going back to 2000 – reveals that China, Poland and India have taken major strides over the last five years in boosting their appeal to VC and PE investors. Among those countries that have slid in investor attractiveness, in comparison with other countries, in recent years are Kuwait, Latvia and Oman.

Reasons behind different countries’ success in the ranking vary, said O’Halloran. China’s high ranking stems in great part from political economic decisions, while Poland’s increased attractiveness can be traced to its accession to the EU, as well as the expansion of capital markets through the establishment and development of the Warsaw Stock Exchange.

The US continues to be the leading magnet for VC and PE investment due in part to the country’s common law legal system, said O’Halloran, which provides both flexibility and protection for VC and PE transactions.

“The entrepreneurial spirit and culture of U.S. society also remains a critical factor. “This mentality leads to greater innovation, employment and, in the end, prosperity,” he said.

One notable pattern emerges in the survey: countries scoring higher for investor protection and corporate governance all earned high marks, since these criteria lead to liquid and efficient capital markets. These markets, in turn, foster a dynamic environment that facilitates deal-making flow and exit opportunities.