Investment in early and expansion stage companies seen as most promising; Marketplace Fairness Act poses significant challenges for venture-backed companies
The venture capital community expects continued momentum in the IPO market and M&A activity in the remaining half of 2013, according to the results of a recent poll conducted by KPMG LLP, the U.S. audit, tax and advisory services firm.
In polling more than 900 venture capitalists, investors, entrepreneurs and professional advisors globally, KPMG found that more than 60 percent of respondents expect IPO activity to increase in the balance of 2013. When asked which industries would experience the largest increase in IPO activity, respondents most frequently cited technology (40 percent), followed by healthcare and life sciences (25 percent), energy (12 percent), consumer markets (11 percent), financial services (9 percent), and industrials (3 percent).
According to the KPMG poll, respondents believe raising capital for organic growth (25 percent), raising capital for acquisitions (17 percent), increasing liquidity (14 percent), and repaying debt (9 percent) will be important motivators for companies to file an IPO in the remaining half of 2013.
“We saw strong momentum in the IPO market in the first half of 2013 as a result of the overall performance of the broader market, the economic outlook, and desire for PE and VC firms to monetize their investments,” said Brian Hughes, KPMG partner based in Philadelphia and co-leader of its Venture Capital Practice. “Investors have a healthy appetite for new offerings given the returns experienced year-to-date on certain existing IPOs. The diverse range of industries in the IPO pipeline coupled with strong investor appetite bodes well for the IPO market for the remainder of the year.”
M&A activity on the rebound
Despite lingering economic uncertainty, over 42 percent of respondents anticipate that their organization will be involved in a merger or acquisition in the remaining half of 2013, with 19 percent of companies involved as a buyer, 12 percent involved as a seller, and 11 percent involved as a buyer and seller. Nearly two-thirds (65 percent) of respondents believe that early and expansion-stage companies are the most promising for investment, start-up (15 percent), and later stage (14 percent).
“Abundance of available capital as a result of conservative spending in recent years, both on the strategic buyer side as well as the private equity side, continues to drive M&A activity,” said JP Ditty, a managing director in KPMG Corporate Finance LLC. “Significant pent-up demand for high-growth companies that are performing well is continuing the trend of investors and buyers paying up for high quality investments or acquisitions.
Packy Kelly, KPMG partner based in Silicon Valley and co-leader of its Venture Capital Practice added, “With respect to venture capital activity, earlier-stage investments continue to be more stable from a volume and investment amount perspective. Early-stage investors don’t want to be left out of blockbuster deals, so they’re spreading the seeds of investment around earlier and across a broader swath of companies.”
Marketplace Fairness Act concerns early and growth-stage companies
Venture-backed companies that have a limited nexus footprint under current laws are concerned about the potential impact of the Marketplace Fairness Act (MFA) or Senate Bill 743, which passed in the Senate in May and is sitting in the House Judiciary Committee presently. If passed in the House, the MFA would grant certain states the authority to require remote sellers to collect and remit sales tax on sales into the state.
According to the poll, 34 percent of respondents believe the compliance costs and resources required to comply with the MFA would have the greatest impact on their business. Twenty-one percent said the requirement to understand the taxability of each product and service offering would have the greatest impact, followed by the technology and processes required to enable application of tax on invoices (17 percent), and customer reaction to charging sales tax (11 percent).
“If passed, the Marketplace Fairness Act would create serious compliance challenges and additional administrative and resource costs for venture-backed companies that would need to determine the taxability requirements of products and services in multiple states under different rules, which is no small task,” said Jennifer Petersen, a partner in KPMG’s State and Local Tax Practice. “Companies are realizing that finding the resources and technology systems to properly collect and remit tax would be a significant challenge given the multiple competing priorities for resources, and they worry about losing business if they start charging sales tax on products and services.”
The KPMG Venture Capital Practice held its Semi-Annual IPO Webcast to discuss the current state of the IPO market in August. During the webcast, a poll was conducted to gauge market sentiment. The results reflect responses from more than 900 venture capitalists, investors, entrepreneurs and professional advisors globally who self-selected to participate in the poll. A replay of the webcast can be found at this link, and an infographic of the poll results can be found at this link.
About KPMG’s Venture Capital Practice
KPMG’s Venture Capital practice offers audit, tax and advisory services tailored for venture-backed companies at each stage of development. Our global network of VC professionals helps simplify the complex marketplace challenges facing entrepreneurial clients. Our mindset matches the companies we serve: entrepreneurial, hands-on, proactive, visionary and dedicated. To learn more, visit KPMG’s Venture Capital practice.
About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 152,000 professionals, including more than 8,600 partners, in 156 countries.
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