It's crunch time...

April 1999: It seems such a good move. Timber-frame housing specialist Avonside accepts money from a venture capitalist to go private, freeing itself of the regulatory burdens imposed by the stock exchange. The idea is that the management will have the freedom to respond to market opportunities with more agility. Managing director Craig Slater gets £22.4m from private equity group Alchemy Partners. Non-executive chairman Nicholas Talbot assures shareholders that the illiquidity in the market for small companies' shares makes it a dream deal for them. Champagne all round.

March 2003: The once distinguished name of Avonside has been replaced by the clunky Novaside Timber Frames. Slater has long since gone. The company is in receivership, stripped to just 22 staff. This once proud company has to be rescued by a trade sale to Strathclyde Homes for a paltry £1m. Strathclyde finance director Mark Feeney says that Novaside needs to respond to market opportunities with more agility. According to Feeney, the books show that Alchemy Partners is no longer involved in Novaside. Get out the brandy: it's time to drown our sorrows.

This is one of the sadder fates of to befall those housebuilders that got involved with venture capitalists during the swath of delisting in 1999/2000. These venture capitalists offered quick cash to fund the management buyouts of Banner, Ward and Fairview, to name but a few. But it was a short-term option, made dangerous by contractual commitments to three-to-five year exit strategies for the backers. These clauses can mean a company with a 100-year history is sold off to rivals, broken up or relisted just to raise a quick, chunky return. Leslie Kent, a housebuilding analyst at JM Finn says: "We're reaching the stage now where, a few years after buying in, the venture capitalists are thinking about how to capitalise on their investments."

City sources believe that relisting will provide little return to venture capitalists on their initial investments. Teather & Greenwood analyst David Taylor says the small size of these housebuilders would mean that their ratings would be as low as when they delisted. "I wouldn't have thought that flotation would be terribly easy," he says. "The market would feel that there are enough mid-sized housebuilders. The pressure is for consolidation, not more housebuilding vehicles."

There is a history to venture capitalists making trade sales. In July last year, 3i put its stake in Banner Homes on the market for £28.5m, about three years after it had backed an £18m buyout. A bidding war ensued, ending after the Prowting family bought a 75% stake in the company, beating off competition from, among others, Wimpey Homes. Banner was perhaps fortunate that the Prowting family wanted to get back into housebuilding so quickly – two months previously it had sold its 62% stake in Prowting Homes. And, given its background in the industry, the family seems likely to be patient owners. An analyst at the time hinted at the short-termist nature of 3i's ambitions: "Obviously the Prowtings had the cash and 3i wanted a quick sale," he said.

David Holliday, managing director of Kent-based Ward Homes, has seen the nastier side of the quick trade sale. Holliday founded Admiral in 1989 with a £75m funding package that gave venture capitalist Phildrew Ventures a majority stake. In May 1996, the company had ideas about floating on the stock market, but by September it had been sold off. Phildrew had grown frustrated at the difficulty of listing at a time when the housing market was still faltering, and pushed Admiral into a trade sale to get its return – ignoring the fact that this would lead to the dismantling of what was considered one of the freshest, most impressive young housebuilders around. Bryant Homes snapped Admiral up, then broke it up – within 12 days of its sale Admiral had lost 30% of its staff and had closed two of its three offices.

This did not deter Holliday from taking the risk a second time – but it is clear that the Ward management resolved to retain more control over its destiny. Holliday took over at Ward in February 1998. By the summer of 2000, he and his management had taken the company private for £34.2m, again backed by Phildrew. Holliday believed that going private was vital to build a business that had posted a loss of £10.1m in the 12 months to 31 October 1998. Phildrew took a 70% stake, but management decided not to leave the fate of this holding to its whims – last year it bought back 50% of the stake, on the back of a £13m pre-tax profit. Mike Lethaby, Ward's finance director, will not confirm that IRRFC – the group that took over the Phildrew Venture fund – has already broken even on the deal, but suggests that the partial buy-back means that it is more relaxed about its investment: "They've made a very good return. We've bought ourselves some time. It probably gives us two to three years until the next refinancing is needed."

The Ward story is an example of how a strong business model can reconcile the short-term ambitions of a venture capitalist with a housebuilder's long-term aims. But Ward is atypical. Many choose simply to steer clear of venture capitalists. The management of Cala Homes took the company private in May 1999 for £95m, and despite the high pricetag, it borrowed from a bank rather than a venture capitalist. A Cala spokesperson says: "The Bank of Scotland has provided us with a stable platform with which to grow our business. It has been good a partner that really understands our business."

It is hard to believe that the former management of Avonside and Banner would say the same of the backers that helped took away the freedom they were looking to attain when they left the stock exchange.

Earlier this month, retirement housing specialist Beechcroft chose to fund its £34m buyout from Laing through the Bank of Scotland. A source close to the deal said: "The trouble with a venture capitalist is that their timeframe is always so short."

The incompatibility of the needs of housebuilders and City swashbucklers means that divorce is inevitable – even the Ward model does not leave the couple living happily ever after. A senior analyst makes the venture capitalist sound like a young stud, constantly eyeing up new adventures and sexier relationships, while the housebuilder is looking to settle down and nest. "Ultimately venture capitalists want to see the light at the end of the tunnel – but the housebuilders don't want to see the business that they have built up destroyed."