The model of venture capital funds is based on exiting assets after a short holding period. In an uncertain macroeconomic environment and following the rise in interest rates, they are now finding it more difficult to exit their positions. Here is an overview and analysis from the experts at AURIS Finance, a consultancy specialising in mergers and acquisitions.
Venture capital funds invest mainly in unlisted, innovative companies with high growth potential. The aim is to increase the value of these investments over the long term before selling them at a significant capital gain through an initial public offering (IPO) or on to another investor. This investor may be another fund or a large group. While the average holding period used to be between three and seven years, there is now a trend towards significantly shorter holding periods. Technology companies, with their huge growth potential, have led to faster valuations and therefore earlier exits.
A downturn in IPOs
After an exceptional 2022, IPOs dried up in 2023. We expect the number of IPOs to fall again in 2024. According to EY’s French venture capital barometer, FrenchTech companies completed only 5 IPOs in 2023, raising a total of €280 million. This compares with 12 IPOs by FrenchTech companies in 2022, raising a total of €1.1 billion. In 2021, 21 IPOs were successfully completed in France, raising €3.7 billion.
The risk of lower valuations
If a company does not end up going public, the second solution available to companies and venture capital funds is to sell. In this complex and often uncertain arena, venture capital funds currently face many difficulties in selling their positions in a profitable way. This situation is particularly critical for organisations that acquired stakes in companies in 2020 and 2021. These were times of favourable market conditions and historically low interest rates. But the situation has changed dramatically with the recent rise in interest rates. This trend has made the divestment process much more difficult, making transactions less attractive to potential buyers and limiting exit opportunities.
Dedicated secondary funds
Venture capital funds are now looking for new ways to sell their assets. In the absence of a sufficiently high price, some funds are opting for partial disposals. Others are setting up dedicated funds and maintaining their position in a secondary category. This is the case with OneRagtime, a fund originally focused on early-stage companies. For these funds, the aim is to avoid a valuation loss at the time of sale, even if this means holding on to their positions for longer.
Our experts at your side
In an uncertain macroeconomic climate, venture capital funds may be forced to sell their positions quickly. Others may seek financial partners that will allow them to extend their holding periods. These approaches are now real sources of opportunity for investors looking to engage with growth companies. AURIS Finance experts are specialised in different sectors and will support you in your acquisition activities, from target identification to final closing.
