PE Tech Report

NEWSLETTER

Like this article?

Sign up to our free newsletter

US venture-backed companies face liquidity plunge as IPOs dry up in second quarter

With the broader economy sputtering, venture capital firms are finding it increasingly difficult to generate returns through the sale or public listing of portfolio companies, according to

With the broader economy sputtering, venture capital firms are finding it increasingly difficult to generate returns through the sale or public listing of portfolio companies, according to the latest Quarterly U.S. Liquidity Report from Dow Jones VentureSource.

In the second quarter of this year there were no initial public offerings of US venture-backed companies, while liquidity generated via mergers and acquisitions fell to USD4.7bn with just 56 transactions completed.

‘The US venture capital industry is in the midst of the second-longest IPO drought we’ve seen since we started tracking the industry in 1992,’ says Jessica Canning, global research director for Dow Jones VentureSource.

‘The last completed public offering for a venture-backed company was in March and we’ve seen 10 companies withdraw IPO registrations since then. Even though there are currently 22 venture-backed companies in IPO registration, it’s clear they’re in a holding pattern and waiting for market conditions to improve.’

In terms of overall liquidity, which includes IPOs, mergers and acquisitions, the second quarter’s USD4.7bn marks a 47 per cent drop from the same period of 2007.

According to the report, the quarter’s 56 M&A deals is the smallest number of transactions completed in a quarter in at least a decade and well below the second quarter of 2007, which saw USD8.8bn generated via 97 mergers and acquisitions.

While acquirers were paying a median of more than USD55.8m for venture-backed companies in the second quarter last year, the median amount paid for a venture-backed company in the most recent quarter rose by 57 per cent to USD87.6m.

‘The broader pull-back in the economy is affecting corporate spending and is clearly impacting the number of deals in the M&A market,’ Canning says. ‘Corporations might be out looking for venture-backed companies to acquire but many are either doing so quietly or choosing to hold off on entering into negotiations. However, the rise in the amount paid for acquisitions demonstrates corporations’ willingness to pay for companies that are important for their growth.’

Information technology companies accounted for the bulk of capital raised via M&A in the second quarter with 41 transactions generating some USD3.3bn in liquidity, a 29 per cent drop for the segment from nearly USD4.6bn raised in 61 M&A transactions during the same quarter last year.

Software companies accounted for the majority of IT deal flow with 28 transactions worth nearly USD1.2bn. The largest deal of the quarter was Time Warner’s USD850m acquisition of the San Francisco-based online social networking company, Bebo.com.

Only six venture-backed health care companies completed M&A transactions in the second quarter, raising just USD267.8m, some 86 per cent less than the USD1.9bn raised in 16 deals for the segment in the second quarter of 2007.

With nine completed M&A transactions, the business, consumer and retail industry accounted for USD1.2bn in liquidity, well below the USD2.2bn generated by 17 deals in the same period of last year.

What’s more, it took venture capitalists more time to steer these companies to exit deals. The median number of years between initial equity funding and exit via an M&A transaction now stands at a record seven years, although the median amount of venture capital raised prior to liquidity remains fairly steady at USD21.3m.

‘We’re at the mercy of the market right now,’ Canning says. ‘We’re just going to have to wait and see if liquidity recovers in the second half of the year.’

Like this article? Sign up to our free newsletter

MOST POPULAR

FURTHER READING

Featured