An analysts' report of private equity investment across all sectors of European industry has painted a sombre picture for innovative small and medium-sized enterprises looking for investment in the early stages of their development.

With few signs of improvement, the "Money for Growth" report from PricewaterhouseCoopers that uses 2002 data concludes: "In the relatively risk-averse investment climate in Europe we need a concerted and sustained resurgence of activity across the technology sector for private equity deals to build momentum and free funding for the most innovative new technologies." Some of those technologies are included in the portfolio of cutting-edge applications represented by advanced PM companies.

Although 2002 was the second best ever year for European industrial investment, the Euro 27.6 billion invested fell far short of the Euro 35 billion invested in 2000. However capital is clearly available, albeit at a lower level.

Less happily for the technology sector, total technology investments fell 29 per cent to Euro 5.3 billion, continuing the downward trend from 2000. Some areas prospered: the management buy-out share of total investment increased by 41 per cent.

The real cause for concern is the amount of new private equity - the venture capital component earmarked for investment in the important start-up and early expansion stages of companies' existence.

The amount raised in 2002 was Euro 4.3 billion, a thumping reduction of one third from levels achieved in 2001. The 2002 venture capital figure represented just 16 per cent of total European investments, down in just a year from 24 per cent. "This is a worrying indicator for all involved with innovative technologies," declared the European Commission.

So where did the venture capital go? The answer given by Money for Growth is that venture capital investments have shifted downstream. Early stage finance went instead to later-stage expansion and buy-out activities. Across industry buy-out activity leapt to more than 60 per cent of total investments from the 40 - 50 per cent typical of earlier years. In the technology sector, buy-outs doubled from 15 per cent to 29 per cent.

There are two aspects to the redirection of capital, according to the report's lead author, Keith Arundale. "First, investors are very risk-averse at present, feeling that technologies such as 3G telephony are ahead of the marketplace. They are enthusiastic for up-coming technologies, but their instincts say 'wait and see'.

"Second, a lot of money is tied up in existing investments. Low market valuations for technology companies leave few incentives to sell out and reinvest, so they prefer to refinance existing investments while awaiting and financial market recovery to allow attractive exits.

"The high-risk component of venture capital has moved downstream and as a result we have a funding imbalance across the investment stages which, although commercially defensible for an investor, does not augur well for promising technologies looking for commercialisation."

The report covered 21 countries and reports strong national differences. France led in private equity investment followed by the UK and Sweden. But when venture capital investment was isolated, the UK led with E800 million, followed by Germany and France.

Money for Growth also makes comparisons with the United States. Despite significant falls in recent years, US venture capital investment in technology at Euro 18.7 billion was five times that of Europe, down from nine times in 2000. The gap is closing, but there is some way to go for Europe to match the maturity, size and risk tolerance of the US.