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Deloitte survey reveals impact of low IPO activity on the venture capital industry

Some 81% of venture capitalists believe an active IPO market is essential to the success of the venture capital industry, according to a new report on the global venture capital industry, issued by Deloitte and the British Private Equity and Venture Capital Association (BVCA). The majority of respondents (84%) surveyed felt that current levels of IPO activity were too low to support a healthy venture capital industry.

The survey indicates that the majority of venture capitalists think that without the higher returns generated by IPOs, the exit opportunities offered by M&A alone are not compelling enough to draw limited partner interest over the long term.  The UK respondents thought that an active IPO market was essential for the success of the industry, for the following reasons: to provide superior returns to limited partners (42%), provide growth capital to developing portfolio (33%), and access to capital required to compete (21%).

David Halstead, Deloitte technology partner, says: “The survey results highlight that the venture capital industry is still feeling the ripple effects of the economic downturn and the industry is still concerned about limited partner interest in the long term.  However, with signs of an upturn in IPO activity in recent months and the easing of the liquidity crisis, the tide seems to be turning.  We are already seeing strong investor appetite in the marketplace for equity in public companies, which could help spur tremendous economic value if the IPO process can be jump-started again.”

Mark Florman, Chief Executive of the BVCA, says:  “The past few years have not been kind to UK IPOs in particular, and with turmoil on the euro area periphery, public markets remain stubbornly resistant to all but a handful of new issues. What this survey demonstrates is just how much of a barrier there has been to venture capitalists looking to exit or grow their companies. If public investors can re-discover their appetite for fast-growing, innovative companies, then not only will venture capital funds benefit, but so will their own portfolios.”

Healthy investor appetite for equity in public companies (84%), followed by economic stability (68%) and freely available capital (43%) were cited as the most important factors to create a healthy and vibrant IPO market.

Globally, the sectors that respondents planned to invest in over the next five years included: cloud computing (69%), new media/social networking (65%) and clean technologies (62%).  The hot UK sectors were clean technologies (68%), cloud computing (60%) and medical devices and equipment (48%). 

Globally, NASDAQ (87%) was the most popular choice of stock exchange for venture-backed IPOs over the next 5 years, followed by the New York Stock Exchange (NYSE) (39%) and the Shanghai Stock Exchange (33%).  
 
In the UK, NASDAQ (73%) remained first choice for stock exchange listings.  However, domestic markets for IPOs were still significant, with the UK respondents choosing London Stock Exchange AIM (59%) and London Stock Exchange (41%), as the second and third most promising stock exchanges.

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