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US venture-backed liquidity plummets 58 per cent in 2008 to USD24.1bn, says Dow Jones

With no initial public offerings and just USD3.9bn generated via mergers and acquisitions of 65 venture-backed companies in the fourth quarter, last year was the worst in terms of liquidit

With no initial public offerings and just USD3.9bn generated via mergers and acquisitions of 65 venture-backed companies in the fourth quarter, last year was the worst in terms of liquidity for US venture capitalists since the post-tech bust doldrums of 2003, according to Dow Jones VentureSource.

Overall, US venture-backed companies generated USD24.1bn in liquidity through IPOs and M&A transactions in 2008, down 58 per cent from the USD57.6bn in liquidity produced in 2007.

Just seven companies completed public offerings in 2008, raising USD551m, a far cry from the USD6.8bn generated through the public listings of 76 companies in 2007 and the lowest totals recorded since VentureSource began tracking the industry in 1992.

‘Last year proved to be a very rough one for the US venture capital industry,’ says Jessica Canning, global research director for VentureSource. ‘With virtually no IPOs and corporations only making choice acquisitions, the liquidity markets have essentially been cut off for venture investors.

‘Additionally, the ever-increasing amount of time it takes for a company to go public or get acquired is stretching out the lifecycle of venture funds and therefore returns to venture firms and their limited partners.’

After peaking in 2007 at a seven-year high of USD50.9bn, liquidity generated through the sale of venture-backed companies fell 54 per cent to USD23.5bn in 2008. Only 325 venture-backed companies merged or were acquired in 2008, the lowest number of transactions since 1999, and down 29 per cent from the 457 companies sold in 2007.

What’s more, the 65 venture-backed companies sold for an aggregate USD3.9bn in the fourth quarter of 2008 was the lowest quarterly total since 1999, far below the 123 companies sold for USD16.4bn in the fourth quarter of 2007.

‘The median amount paid for a venture-backed company in 2008 was roughly USD45m, half of the USD90m figure for 2007,’ Canning says. ‘Since the fourth quarter of 2007, we’ve seen the median acquisition price drop steadily from quarter to quarter in lock-step with the decline in M&A transactions.’

The largest transaction in the fourth quarter was eBay’s USD945m acquisition of Timonium, Maryland-based transaction service provider Bill Me Later. The largest deal over the full year was Dell’s USD1.4bn acquisition of data storage company Equalogic, announced in the fourth quarter of 2007 but closed in January 2008.

No public offerings at all were completed by venture-backed companies in the second and fourth quarters of 2008. Says Canning: ‘Currently 18 venture-backed companies are in IPO registration but nearly all of these companies filed before the stock market fell in October and will likely remain in a holding pattern or withdraw their offerings until the market recovers.’

The largest IPO of the year was of New York-based RiskMetrics, a provider of financial and wealth management software, which raised USD174m in its January IPO.

Dow Jones VentureSource says it’s taking more time and money for venture-financed companies to achieve liquidity. In 2008, companies raised a record median of USD22.6m in venture capital and took a record median of 6.5 years to reach liquidity through M&A transactions.

For IPO companies, the median amount of venture capital raised before the public offering fell 19 per cent from USD69m in 2007 to USD56m last year. The median time to reach liquidity was a record 8.3 years, more than a year longer than the 7.2-year figure for 2007.

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