Exits on the up

Venture-backed exits grew in value and number in 2005, as the US and Israel saw increasing M&A valuations, while Europe experienced an increase in IPO, a trend set to continue this year and into 2007, according to Transition, the fourth annual Ernst & Young Venture Capital Insight Report.

Global consumer markets, increased international competition, investment opportunities in emerging markets, the higher cost of building a company in the mature markets and advancements in technology are all continuing to drive the globalization of both venture funds and their portfolio companies.

Gil Forer, global director of Ernst & Young’s Venture Capital Advisory Group, said: “Market demand continues for great companies, including venture-backed companies, both in terms of initial public offerings and acquisitions. At the same time, the number of exit options available to venture-backed companies, whether the exchange or the funding vehicle, is increasing, making it more important than ever to allow a company’s business imperatives to determine the choice of exit.”

This annual report on the state of the venture capital industry indicates that while in the near term in the US there will probably be continued reliance on both M&A and exploration of more innovative exit opportunities, improving market conditions and investor demand for venture-backed offerings are likely to result in increased venture-backed IPO activity in both the US and Europe throughout 2006. In the emerging markets, the increasing number of China-focused venture capital funds being raised and invested suggests there is a robust population of venture-backed Chinese companies in the IPO pipeline.

According to the report, venture capital investments worldwide reached US$31.3bn. The US, Canada, Europe, and Israel represent 93% of capital invested, while China and India account for the remainder. Venture capital firms in the US raised US$41bn in new funds in the last two years. European firms closed on €3.7bn in 2005, more than double the previous year’s figure.

In Europe, venture-backed IPO activity surged last year with 60 offerings that raised €2.03bn (US$2.40bn), a 71% increase in transactions and a 185% increase in capital raised.

The report also reveals there is a potential exit backlog of 1,912 private venture-backed companies in the US, Europe and Israel. These companies, with a cumulative US$51bn of venture capital invested in them, have not received financing in several years and are reportedly ripe for exit.