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– Unicorns are Marked Down by Fidelity
– PE Firms Get Creative to Spend Dry Powder
– New Study Makes the Case for Co-Investment
– Pantheon Launches a Retail PE Fund
– Manager-Led Secondary Sales On the Rise
– PE KeyTrends Quick Question Results
UNICORNS ARE MARKED DOWN BY MONEY MANAGER FIDELITY. The revised estimates “come amid growing uncertainty around the valuations of private tech startups,” writes the Wall Street Journal. “A recent dearth of successful initial public offerings for tech companies has cast doubt over how public-market investors will view” some 150 startups known as ‘unicorns’ – private companies valued at $1 billion or more. The estimated value of Fidelity’s stake in ephemeral-chat startup Snapchat was cut by 25 percent September 30 in the mutual fund manager’s first revision to the company’s value since it invested in May “at a valuation of $16 billion.” Writes Fortune: “Snapchat is hardly the only” private tech start-up “to receive a serious markdown” by Fidelity. “In fact, others have fared worse, including Blue Bottle Coffee Co, Zenefits, “a popular HR automation platform” and Dataminr, “a big data startup that analyzes social media.” Lists of Fidelity’s private holdings and the valuations the firm assigns them are in two Fortune stories.
“FIRMS GET CREATIVE TO SPEND DRY POWDER,” observes the Wall Street Journal. “Dry powder, the unspent capital that private equity firms have available globally, has risen from $1.2 trillion in December 2014 to $1.34 trillion as of October 26.” In late 2012 dry powder amounted to a more manageable $940 billion. Lots of dry powder means lots of competition, causing problems for PE firms looking for reasonably priced acquisitions. The average PE purchase price multiple reached a record 11.2 times corporate cash flow in the third quarter according to Standard & Poor’s Capital IQ. To get a bigger bang for the buck, PE is doing more complex deals “such as ‘buy-and-build’ strategies where various companies are bought and merged together.” Funds are also opting for smaller deals, since purchase price multiples tend to shrink further down market. And increasingly PE is “teaming up” with strategic investors in order “to deploy larger amounts of capital on bigger transactions” offering greater synergies.
A NEW STUDY MAKES THE CASE FOR CO-INVESTMENT. “A vast majority of investors are making more money off their co-investments than from private equity funds,” writes Real Deals. “According to the results of a survey conducted by Preqin, 80 percent of limited partners’ co-investments have outperformed their funds. The survey’s respondents consisted of 320 fund managers and 222 institutional investors. What’s more, 46 percent of investors reported their co-investments outperformed by a margin of five percent.” Nearly half – 49 percent – of fund managers “charge no management fee on co-investments,” while “48 percent charge no carried interest. A quarter of managers maintain the same carried interest rate for co-investments as in their commingled funds,” but “only 16 percent charge the same level of management fees.” Relatively low fees and the possibility of outperformance “helps to explain why co-investments are becoming more popular in PE.”
PANTHEON AND ITS PARENT AMG ARE LAUNCHING A RETAIL PE FUND, reports Private Equity International. “The AMG Pantheon Fund ‘is designed to be a one-stop shopping experience for the individual investor who can put up as little as $25,000,’ Pantheon managing director Kevin Albert says. The fund’s portfolio will be composed of investments in primaries, secondaries and co-investments across geographies, managers, sectors, stages and vintages.” The same 70-person Pantheon investment team that works for the group’s institutional clients, will allocate the new retail fund. “It’s important to stress that investors in the fund are getting access to the same exact deals as institutional clients,” says David Carlson,” an AMG Funds senior vice president. The new fund has a management fee of 70 basis points, is housed in an evergreen structure and will provide regular redemptions to investors. Watch for other PE firms to copy Pantheon’s efforts to tap retail.
“MANAGER-LED” SECONDARY SALES ARE “ON THE RISE,” writes Financial News. “Sales of second-hand private equity fund stakes that are initiated by fund managers, including staples and restructurings, have increased sixfold since 2012 and are expected to reach $10 billion this year.” The transactions are estimated to account for 25 percent of 2015 secondary volume, which is on pace to end the year at an annual record of about $40 billion. “Growth in the manager-led area could push the total size of the secondaries market to between $50 billion and $60 billion by 2017.” “Such deals include restructurings, which are often pursued when a PE fund is nearing the end of its life” and the manager wants “more time to create value in the underlying portfolio.” They also include “stapled secondaries, in which fund managers tempt new investors to commit to their next fund by giving the same investors the chance to buy second-hand stakes in their existing funds.”