After posting record levels of investment in 1999, what does an industry do next to keep the momentum going? For the UK private equity business, the answer is to keep getting bigger - not just more deals but a bigger slice of each deal for venture capitalists.

According to the British Venture Capital Association (BCVA), some £8bn was invested during last year in 1,358 companies, both in the UK and abroad. It was, in fact, the sixth year in a row in which investment levels had risen - funds invested actually exceeded the level of funds raised, according to the BVCA - and it also saw the highest amount yet invested in start-ups and early stage companies.

Not surprisingly, given that 1999 was a banner year for the sector, the focus of much of the investment was in technology and biotechnology companies. Computer software companies accounted for half of the total of just over £1bn invested, while internet company investment increased by four times. Other sectors to benefit included biotechnology, support services, health, leisure and entertainment.

The biggest investors in the UK venture capital business are US pension funds, according to the BVCA, while UK insurance companies invested more last year than UK pension funds. Indeed, for several years now US and overseas investors have invested much more heavily in the UK private equity sector than their UK counterparts.

Earlier this year, a study by the London Business School, seeking to understand why UK pension funds were apparently cutting back on their investments in venture capital, found that the pension fund industry had negative preconceptions about risk and returns in private equity investment. This meant that many pension funds were reluctant to commit resources to the sector.

Industry participants say this perception is now changing - although the sharp downturn in technology stock prices in recent months has hardly helped to quell fears about the risks of investing in start-ups and, most particularly, internet companies, which have seen their valuations collapse this year.

US investors have much more experience of investing in these sectors than their European counterparts but even they are now beginning to cut their losses and retreat to the sidelines, market participants say.

Still, the UK industry remains in relatively good shape despite the downturn in markets. Oliver Tant, head of the transactions group at KPMG, notes that while the number of deals being completed this year has remained relatively stable, the size of each deal, and of its equity portion, continues to grow.

For venture capitalists, volatile stock markets pose a problem mostly when exiting. Initial public offerings are becoming less attractive as an exit route, primarily because the companies are too small.

UK investors, in particular, have a well-known and long-standing aversion to small companies, despite the fact that the London Stock Exchange's Alternative Investment Market (AIM) was among the best performers in 1999. And in any case, venture capitalists tend to know their exit strategies as soon as they make an investment.

"The market is not terribly good at valuing small and medium enterprises. It's usually better to find an industry buyer," Mr Tant says. "The secret of a good leveraged buy-out is to spot an opportunity before anybody else and to know who you're selling to when you make the investment."

Shahzad Malik, a partner at Advent Venture Partners, believes the health, life sciences and biotechnology sectors are currently good places for value investors because of the fundamentals surrounding the industries - a guaranteed market for their products, long patent protection periods, and high profit margins.

The craze for biotech stocks peaked in March with the blaze of publicity surrounding the human genome project. But much of its rise up to that point was a crawl out of a long slump in the 1990s, when it was completely overtaken by the internet sector. The failure of the biotech sector to maintain the level of investment seen at that time is due almost entirely to the inability of biotech companies to deliver on exaggerated research capabilities or to produce the drugs they claimed they could. This led to a collapse in confidence in the sector that has not been entirely dispelled by the recent recovery in sentiment, industry experts say. "It takes a long time to get a drug to market, but very few industries have 20-year protection for their patents. These are all attractive investment considerations for a value investor," Mr Malik says. Advent sees itself in a niche between seed investors, which invest in a company at the very start, and the big private equity houses such as Apax Partners and Schroder Ventures that buy into established names.

Whatever the particular dynamics of the venture capital sector, there is certainly no shortage of business start-ups looking for backers. "We get 2,000 or 2,500 business plans every year [from companies looking for investment funds]," Mr Malik says. "We will take 10 per cent of them seriously, and invest in about 1 per cent of them."