Venture capital seeking exits for 1.2 trillion assets

The IPO market showed signs of recovery in the first half of the year, but the trend is still insufficient for closed-end funds to be a solution to ageing portfolios without viable exit options. The venture capital industry in particular has grown rapidly over the past decade, outperforming other asset classes. However, the scale of investment now requires equally intense divestment activity in order to provide investors with the expected returns.

The sagnals in this respect are far from reassuring, as distribution to investors by venture capital funds is at a very low level. The figure for 2023, according to the latest PitchBook-NVCA Venture Monitor, indicates that only 5.1 per cent of the net asset value of US venture capital firms has been redistributed by funds, down sharply from over 30 per cent in 2021. Over the past ten years, the distribution rate on the Nav of US VC portfolio companies has averaged 17.1%. According to the report, therefore, nearly $1.2 trillion in assets remained in US fund portfolios at the end of last year.

The numbers are positive, but still do not indicate a decisive turnaround of the IPO market, despite the increased visibility of interest rate developments in the near future. In the first half of 2024, the number of US IPOs was up 30 per cent compared to the same period in 2023 in terms of number of deals, while when taking into account capital raised the increase was 83 per cent, thanks to some large deals, according to EY data. "The first half of the year saw a moderate recovery in the US IPO market with a continued focus on pricing and profitability. Cautious optimism remains for the second half of the year, with the upcoming election and other factors potentially impacting the IPO windows. Many issuers are selectively considering the near-term calendar and others are focusing on the 2025 windows as they prepare portfolio companies for a listing," notes Mark Schwartz, EY Americas Ipo and Spac advisory leader.

Tom Swerling, global head of equity capital markets at Barclays, comments along the same lines: 'With entry in the second half of 2024, investors will have more confidence in interest rate cuts in Europe and the US. In turn, this will facilitate a further opening of the IPO market. We expect the private equity community to be a key driver of this activity, both in the second half of 2024 and in 2025. Private equity funds have a number of portfolio companies that are absolutely ready to debut in the public market and are eager to accelerate exits to redistribute capital that they could then raise for new funds'. And what is true for private equity is even more true for venture capital.

The IPOs of unicorns, such as Astera Labs ($712.8 million raised) and Reddit ($748 million raised), were a positive sign but not enough to completely revive the market.