A survey by consulting firm Deloitte says 57 per cent of venture capital funds have said activity in the Initial Public Offer equity market in India was low and hurting their business.
Deloitte conducted the survey, an annual one, last month in conjunction with the Venture Capital Associations of India, Brazil, Canada, China, France, Germany, Israel, the US and the UK. Responses from 347 VC funds were received.
In India, 81 per cent of India VCs deemed the domestic IPO market a critical element for the industry. In contrast to the global trend of 49 per cent, only 33 per cent of Indian VCs said the IPO markets in other regions were essential for their success.
Nearly 90 per cent of Indian respondents selected the US’ Nasdaq as one of the three most promising stock exchanges for venture-backed IPOs. Around 57 per cent selected Mumbai-based National Stock Exchange of India and 48 per cent voted for Bombay Stock Exchange as a promising exchange for VC-backed IPOs. A vast majority of venture capitalists around the world still look towards US exchanges to provide a healthy and vibrant market.
Venture funds around the world also feel IPO activities were low and affecting the health of the VC industry. About 80 per cent of global VCs surveyed stated IPO activity levels in their home countries were too low. The survey reveals 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 US, China, Brazil, India and France found it most important to have an active IPO market in their home countries, followed closely by the UK, Canada, Germany and Israel.
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“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 US national managing partner for VC 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 VC ecosystem driving much of that innovation,” said Jensen.
Adding to this, Rajiv Sundar, senior director for Deloitte in India, said: “The need for a healthy IPO market is driven primarily by the aspiration to provide superior returns on investments. And, there is heightened interest in innovative companies that cater to growing consumer demands.”
Mahendra Swarup, president of the India Private Equity and Venture Capital Association, said: “PE funds looking to sell in 2010 were able to choose from among several healthy exit-route options, including sales to strategic buyers and through a growing secondary sale market. Public market sales were—and will continue to be—the most important exit option, chiefly because the IPO market is expected to be buoyant, despite a short-term correction.”
The slowing 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 per cent), the need for a stable economic environment (52 per cent), and the need for more adequate stock analyst coverage (32 per cent).
In India, venture capitalists also cited the need for companies that appeal to the general public and mainstream media (38 per cent) and a competitive investment banking community for IPOs (29 per cent).
CAUSE FOR OPTIMISM Despite capital markets’ challenges, tremendous promise remains for the VC industry in India and globally. Of the Indian venture capitalists investing outside their home countries, about 33 per cent plan to increase this activity during the next five years and 24 per cent to maintain their level of investment. However, only 19 per cent of Indian respondents stated they were 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 information technology, healthcare services and clean tech innovation globally.
Approximately 69 per cent of respondents cited a surge in investment in cloud computing, while 65 per cent plan to increase investment in social and new media. The survey also reveals clean technology maintained its attractiveness, with 62 per cent of respondents planning to make increases in this area and an additional 26 per cent 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 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 had a multinational focus from the beginning - leveraging R&D in Israel, manufacturing in China, services in India, and partnerships in the US — and this is driving investors to increase their global coverage.”