Amid the euphoria over the latest large-scale acquisitions in Scotland and the latest figures for MBOs and MBIs, there are areas which merit concern. Graham Watson, a partner in Deloitte & Touche Corporate Finance, frequently takes a more sanguine, longer-term view of the market.

''As corporate Scotland struggles to come to terms with higher interest rates and the continued strength of sterling, research by Strathclyde University's Fraser of Allander Institute confirms an emerging trend of concern over the health of the Scottish economy,'' he said.

''And questions are now being asked whether the tremors in the economy will reverberate through to the heart of the Scottish venture capital community.''

He is quick to point out that Scotland has a vibrant local

capital market which last year allowed a record-breaking #530m worth of MBO and MBI deals to be completed.

Independent research by Deloitte & Touche Corporate Finance and the Centre for

Management Buy-Out Research shows that, after London, Scotland enjoys the highest number of venture capital offices of any region of the UK. ''This is despite a UK market share of regional MBOs and MBIs by value which ranks only fifth between 1995

and 1997.''

However, he adds: ''The Scottish economy continues to produce relatively few transactions of real significance. This had led to considerable competition among the community of professional advisers and funders.

''While this is an encouraging scenario for vendors, it remains

to be seen just how sustainable capital structures of today are when faced with the prospect of a more hostile economic environment in the coming year.''

The effect may be to put

greater pressure on the generalist approach which has traditionally been the hallmark of the Scottish venture capitalist and adviser, a ''uniquely Scottish phenomenon, running in the face of trends

elsewhere and particularly in the US market.''

The advantage has been that it has allowed risks to be spread more widely but ''the increasing pressures in the market may force greater segmentation. As the local market matures and competition intensifies, it is perhaps inevitable that the market for the generalist will shrink.

''As a result clients demanding specialist skills and established track records will gravitate increasingly to those who are best positioned to add real value.

''The major Scottish houses all possess strong local teams and sufficient fire-power to handle most transactions today.

Leading professional advisers, capable of adding value through

a combination of tailored investment, sector awareness and astute negotiating, are equally well

positioned to deliver on the most complex work from a Scottish base.

''And as the key players gear up for further growth, greater market and product focus - as well as a squeezing of market share from the smaller houses - will follow.''

Following on from an increased segmentation, Watson sees a two-tier market developing. ''Some venture capital houses may be forced to modify their ambition and react to the emerging trend by consolidating focus and deal size.

''In time this should lead to a greater concentration of funding, skills and expertise. In addition Scottish-based houses may focus their efforts towards particular deal sizes and particular industries.

''A greater concentration of industry skills may also alleviate some of the criticism that the venture capital market has adopted a commodity approach to the movement of money,.''

He points out that venture

capitalists in American's Silicon Valley have already applied a similar strategy successfully.

''There, a small group of

highly experience investors, many of whom are successful industrialists in their own right, are adding enormous value by backing ambitious start-ups and young companies at the leading edge of technology.

''While Scotland enjoys a healthy local capital market, too little investment is directed towards emerging technologies.

''Government-backed initiatives are in place to tackle this deficiency but speed is of the essence. Competitive pressures leading to greater market segmentation is one way of encouraging change more quickly.''

Watson strongly advocates what he calls harnessing international precedent with local success. By using the local skills base and expertise of advisers and venture capitalists in a more targeted way, he believes Scotland could replicate some of the achievements of the US market, a target that

has tended to elude the British economy.

''It would be a significant step forward for the venture capital community in Scotland if some of our most successful entrepreneurs were to lead the formation of a more focused investment fund along the lines of the Silicon Valley model.

''Considerable equity would follow such a fund and management talent would be applied to accelerate the growth of investee companies. Importantly, the network of contacts existing within the fund would be available to deliver strategic synergies more quickly than a pure financial investor could hope to add.

''Perhaps the challenge at the edge of this millennium would be the reincarnation of some of our outstanding and visionary corporate leaders.

''Backed by a solid share of the existing pool of money and financial talent already evident in Scotland, local bus inesses would secure access to a world-beating combination of talents.''