Third-Annual Survey Finds Reduced Confidence in Access to Capital, Valuations Led Entrepreneurs to Extend Exit Timeframe, Hesitate to Identify Exit Strategy.
Concerns Regarding Junk Bond Market Exceed ‘Credit Crunch’ Worries.
Emerging companies are experiencing greater uncertainty in the current private equity and venture capital market, but are not panicked or pessimistic about market conditions, according to respondents of a national survey conducted by Foley & Lardner LLP. Due to predictions of less growth in emerging company valuations and decreased access to capital over the next two years, more entrepreneurs are uncertain of their exit strategy and have extended their exit timeframe, compared to surveys conducted in previous years.
The survey, measuring the attitudes and perspectives of top executives, advisors, outside consultants and investors in the emerging technology industry, found that respondents are slightly more realistic and less bullish than previous years. The number of emerging company executives citing a merger or sale as their likely exit strategy has decreased consistently from 2005 (74%) to 2007 (56%). At the same time, 72% of executives indicated they are three or more years away from a planned exit and a significant number (18%) do not know their exit strategy.
However, a large number of investors (40%) have raised capital within the past year, and several (81%) expect to do it again within the next two years.
“Although uncertainty in the market is an emerging trend, more realistic and less bullish predictions about the marketplace have not led to pessimism about market conditions,” said Gabor Garai, chair of the firm’s Private Equity and Venture Capital Practice. While respondents have told us that they are concerned about emerging company valuations and access to capital and that they are hesitant to plan an exit, respondents as a whole are still cautiously optimistic regarding market conditions and the majority of investors are still raising capital for new funds.
“It will be interesting to see if this downward trend becomes more pronounced and respondents express more pessimism in next year’s survey due to market conditions,” Garai continued.
The survey also found that the hype surrounding the credit crunch appears to have overshadowed the reality. The majority of respondents (61%) indicated the credit crunch has not affected the way emerging companies do business or their M&A plans. At the same time, the health of the junk bond market appears to be an emerging issue as 51% of respondents expressed concern over the current state of junk bonds.
“Although the credit crunch may make it a bit more difficult to raise money, there is still a fair sense of market confidence and emerging companies are not changing the way they operate their businesses,” Garai explained. “However, there was some underlying concern among respondents related to the health and performance of the junk bond market. Investors, executives and advisors responding to our survey all seem to be monitoring the junk bond market and the related economic trends with interest and concern.”
Consistent with previous surveys, very few entrepreneurs (6%) cited an IPO as a likely exit strategy. The continued lack of belief in the IPO market provides further evidence of market uncertainty.
Visit www.foley.com/emergingtech for a full analysis of the survey and its results.
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