Capital Markets

PwC: Venture-backed IPOs at a Standstill

The accountancy's study shows that offerings are at a 30-year low this year, and Q2 went by without a single one.
Stephen TaubSeptember 29, 2008

While most eyes are fixed on the near-freeze in the lending markets, the environment for issuing new issues of stock has also deteriorated severely. The venture capital-backed initial public offering market is at a 30-year low, PricewaterhouseCoopers LLP reports in a new study.

In fact, the second quarter marked the first time since 1978 that there have been absolutely no venture capital-backed IPOs in a single quarter.

“There is little indication that the market will recover anytime before the second quarter of 2009,” said Tracy Lefteroff, global managing partner of the Venture Capital & Private Equity Practice at PwC. “However, venture capital investment continues to remain strong and steady.”

The report includes data from the MoneyTree Report, a quarterly survey that tracks cash-for-equity investments by the professional VC community in private, emerging companies in the United States. The MoneyTree Report is produced by PwC and the National Venture Capital Association, based on data from Thomson Reuters.

IPOs are critical to the venture capital market since they are one of the few ways that early investors in small companies can cash out their investment and realize a gain.

According to the study, the dearth of IPOs will contribute to the lengthening of the VC-backed company life cycle, resulting in bigger, but fewer, IPO’s over the next few years.

PwC believes that longer-life cycles of companies will lead VCs to continue to invest more per company overall, resulting in larger exits to maintain expected returns.

The study also asserts that the average VC-backed IPOs are likely to become bigger than historically seen, given the higher costs from complying with Sarbanes-Oxley requirements combined with the rising expectation that a threshold of about a $500 million market capitalization offers a good chance to attract equity analyst coverage.

PwC, however, stresses that the drying up of the IPO market has not heavily impacted the VC market in general. It insists that despite the sharp decline in exits and poor economic conditions, VCs are still investing and raising funds at a steady pace. To be sure, in the first half of 2008 VCs invested about $62 million higher than the same period in 2007.

“VC investment in start-ups has remained strong, while funding of capital-intensive sectors such as Cleantech and Life Sciences companies has continued,” PwC emphasizes. This suggests a continued trend of more accelerated investment at both ends of the pipeline – in Start-up/Seed companies and in more mature companies, especially those in the Later stage, according to the report.