Stronger IPO vital for venture capitalists: Report

Last Updated: Thu, Jul 07, 2011 15:36 hrs

More than 57 percent of the India venture capitalists surveyed stated that current IPO activity levels in India are low, whilst 38 percent considered that the activity levels are adequate.

In contrast, more than 80% of the global venture capitalists surveyed stated that the current IPO activity levels in their home countries are too low. The survey, conducted annually, reveals that venture capitalists believe high returns generated by IPOs are critical in providing superior returns to limited partners and growth capital to developing portfolio companies.

Venture capitalists in the United States, China, Brazil, India and France found it most important to have an active IPO market in their home countries, followed closely by the United Kingdom, Canada, Germany, and Israel. In India, where the venture capital and entrepreneurial community continues to evolve, 81 percent of India venture capitalists deemed the India IPO market a critical element of the India venture capital industry.

In contrast to the global trend of 49 percent, only 33 percent of India venture capitalists said that IPO markets in other geographies were essential to the success of the India venture capital industry.

90 percent of India respondents selected NASDAQ as one of the three most promising stock exchanges for venture-backed IPOs; 57 percent selected the National Stock Exchange of India and 48 percent cited the Bombay Stock Exchange.

A vast majority of venture capitalists around the world still look to the U.S. exchanges to provide a healthy and vibrant market, yet 87 percent of U.S. venture capitalists believe that the current level of IPO activity is too low.

"Clearly the industry continues to feel the ripple effects of the global economic downturn -- most notably in the form of limited exit opportunities," said Mark Jensen, partner, Deloitte & Touche LLP and United States national managing partner for venture capital services.

"However, with signs of improvement in the economy and easing of the liquidity crisis, the tide may be turning. Innovation continues to be an important driver in our economic health and a strong exit marketplace is critical to the venture capital ecosystem driving much of that innovation."

The slowdown in IPO activity is attributed to a lack of several key drivers necessary for a vibrant capital markets system. According to survey respondents the most important factors are a strong investor appetite for equity in public companies (83 percent), the need for a stable economic environment (52 percent), and the need for more adequate stock analyst coverage (32 percent).

In India, venture capitalists also cited the need for Companies that appeal to general public and mainstream media (38 percent) and a competitive investment banking community for IPOs (29 percent).

Despite capital markets challenges, tremendous promise remains for the venture capital industry in India and globally. Of the Indian venture capitalists who are investing outside their home countries, about 33 percent plan to increase this activity during the next five years and 24 percent plan to maintain their level of investment.

However, only 19 percent of the Indian respondents stated that they are investing currently outside of India with the majority investing only in the Indian markets.

The survey also showed that globally there is a tremendous amount of excitement around IT, healthcare services and clean tech innovation globally. Approximately sixty nine percent of respondents cited a surge in investment in cloud computing, while 65 percent plan to increase investment in social and new media.

The survey also reveals clean technology maintained its attractiveness with 62 percent of respondents planning to make increases in this area and an additional 26 percent planning to maintain their levels of clean tech investment. In India, the interest is higher in the aforesaid sectors and there is also considerable interest in biopharmaceuticals, healthcare services, medical devices and equipment, and consumer business.

"The recent run of global IPOs shows that innovative companies can come from anywhere," said Deepak Kamra, general partner of Canaan Partners. "Some of the companies with the strongest potential to become profitable global leaders have a multinational focus from the beginning - leveraging R&D in Israel, manufacturing in China, services in India, and partnerships in the U.S. -- and this is driving investors to increase their global coverage."

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