No Exit? IPO Market Not Kind To VCs In 2001

It’s no big surprise that the IPO market of 2001 has been more foe than friend to private equity investors. The lack of initial public offerings this year means millions of investment dollars remain stuck in the pipeline, leaving venture capitalists wanting for a viable exit strategy. As the year-end damage assessment begins, the venture capital community will likely discover that the lagging IPO market has wrought havoc on the entire industry.

For starters, a meager 36 venture-backed companies have managed to price this year, out of 78 total public offerings, according to VentureXpert. Last year’s market saw a whopping 261 venture-backed public offerings out of 445 IPOs.

The fallout translates into a staggering loss of financial capital; 87% less has been raised via public offerings this year than last by private-investor backed companies.

Whereas VC-backed offerings raised $24.86 billion in 2000, this year’s offerings have raised just $3.20 billion. That figure includes the recent $417.6 million offering of Weight Watchers International (NYSE:WTW), backed by Invus Group Ltd., last week.

Thus, it seems that stalled market gripes may be valid, as few industries appear to have more inert dollars tied up in the pipeline than venture capital. Last year’s offerings provided an exit to $14.62 billion in known private equity disbursements. In 2001, that figure has dropped by 81%, with the total amount of VC investments liquidated reaching just $2.77 billion.

These dismal figures will receive little boost from the recent rise in activity in the initial public offering market. As of press time, just one VC-backed company is on the calendar, Magma Design Automation Inc. (Proposed NNM:LAVA). The company is backed by 13 private equity investors who have pumped approximately $108.47 million into its coffers.

By The Numbers

As retail investors calculate the costs of a bearish market on their stocks, private investors are weighing the severity of the damage done to their portfolios.

For the few firms that have managed to usher an investment through the IPO stage this year, the magic of public liquidity isn’t what it once was. As of press time, the 36 venture-backed IPOs, as a group, were trading at 1.28% above offering. This compares to the 2.0% that the year’s total IPOs are posting as a group.

Interestingly, venture-backed companies that priced in the first half of the year are doing much worse than those that staged offerings in the second. The 21 companies that priced from January through June were down 11.15% at press time. The 14 that priced during July through November were up 16.19% above offering.

And while more IPOs priced in the first half of the year, the amount of known investment dollars they carried with them is nearly the same as those that priced in the second half; $1.12 billion of private monies saw an exit in the first half compared to $1.64 billion in the second half.

Still, companies backed by the heftiest investment dollars are not necessarily posting the best results. For example, Cross Country Travcorps (NNM:CCRN), backed by $746,000 from Charterhouse Group International and Morgan Stanley Venture Partners saw its $17 offer price pop by 40%, to $23.82 at press time. Yet Max Re Capital (NNM:MXRE), with $455.8 million in venture monies, was up just 1.5% over its $16 offer price to $16.60.

Overall, however, the majority of venture-backed IPOs were above offering at press time, with just 15 companies trading below. Align Technology Inc. (NNM:ALGN) proved to be the biggest loser of the group, down more than 76% from its $13 offer price to $4.01. Backed by ABS Ventures and The Carlyle Group, the company received a total $134.3 million worth of venture dollars.

Verisity Ltd. (NNM:VRST) was the biggest winner, up 100% over its $7 offer price at press time to $14.00. The company received $22.6 million in financing from Advent International Corp., Sequoia Capital, Gemini Fund Management and VenGlobal Capital.

Colleen O’Connor can be contacted

This is a free sample of content available to paid subscribers of Private Equity Week. Click here for more information.