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– 2015 Record Distributions Mask a Complex Reality
– An Old VC Adage Debunked
– Watch for Leveraged Lending Partnerships between Banks and GPs
– Fundraising Demonstrates the Strong Appeal of Secondaries
– Ring in the New Year with First Round Capital’s Video
– PE KeyTrends Quick Question Results
RECORD DISTRIBUTIONS IN 2015 MASK A COMPLEX REALITY. In a Privcap roundtable that “dissects the distribution boom,” Andrea Auerbach, managing director of Cambridge Associates notes that an all-time high of $147 billion was distributed to investors from U.S. private equity managers in 2015. While “a lot of that is getting plowed right back into the [PE] space” Auerbach adds that “a lot of managers are simply unable to raise the capital they want to raise in a formal, traditional fund, so they may be seeking it through co-investment or in other ways.” Meanwhile, Luca Salvato, a partner at Coller Capital observes that despite four years of record distributions, managers still have “a long way to go” clearing out older portfolios. “The net asset value that is still captured within” funds from 2005 to 2008 “is enormous”- some $800 billion, according to Salvato. “It’s hard to see” managers releasing “all of that through just natural distributions and selling of companies.” The logical conclusion: PE faces a major increase in fund restructurings that in many instances will crystalize lower returns and losses for investors.
AN OLD VENTURE CAPITAL ADAGE IS DEBUNKED. “The widely held belief that 90 percent of venture industry performance is generated by just the top ten firms” is no longer true, according to a Cambridge Associates study. The study found that “in the post-1999 (i.e. post-bubble) period, the majority of value creation” has been “generated by deals outside the top 10.” Moreover, since 2005, “new and emerging firms have consistently” accounted “for 40 percent to 70 percent” of “value creation.” Writing in Business Insider, Alan Patricof and and Ian Sigalow, both co-founders of Greycroft Partners, call this “the new normal.” They add that since 2005, “managers with less than $500 million have accounted for a majority” of VC returns, “despite investing less money on average than the larger funds.” Cambridge concludes that if investors don’t take account of the democratization of venture capital, “they may miss attractive opportunities” to significantly boost returns.
WATCH FOR MORE LEVERAGED LENDING PARTNERSHIPS between banks and PE firms. Bloomberg reports that in tandem with a deal in which Barclays bank is selling £500 million of “private equity-backed U.K. leveraged loans” to PE firm Ares Management, the two are entering a “partnership to provide financing to junk-rated U.K. mid-market companies.” “The deal follows a similar PE financing arrangement” Royal Bank of Scotland made in December with AIG Asset Management, Hermes Investment Management and M&G Investments. Other deals that allow banks to indirectly profit from leveraged finance as originators – but not as lenders – are probably in the works. Banks are increasingly finding their ability to finance highly leveraged transactions restricted by new capital requirements and regulatory guidance, while PE firms are taking advantage of the situation to expand or create direct lending operations.
FUNDRAISING DEMONSTRATES THE STRONG APPEAL OF SECONDARIES. Private Equity International reports that Coller Capital has held a final close for its seventh vehicle dedicated to buying stakes in closed private equity funds on the so-called secondaries market. The bulk of the oversubscribed fund – which passed it’s $6.5 billion hardcap with a $650 million commitment from partners and staff – was raised “in about 6 months,” says Jeremy Coller, founder and chief investment officer. The fund invests “in a broad range of secondary transactions, targeting assets and sellers located anywhere in the world and making individual investments ranging in size from $1 million to over $1 billion.” Its 170 investors come from 27 different countries. All Coller secondary funds have generated between 1.4 and 1.6 times investment with net annual returns of between 10 percent and 25 percent. Although pricing in the secondary market is near par today, in a sector where funds have often been available at substantial discounts to net asset value, investors like the lower risk and quicker returns associated with buying mature PE funds.
TO RING IN THE NEW YEAR, CHECK OUT FIRST ROUND CAPITAL’S VIDEO. Parodying Mark Ronson’s “Uptown Funk!” and Silentó’s viral YouTube hit “Watch Me (Whip/Nae Nae)” and covering everything from seed financing to bridge loans (for when “things get rough”), the note accompanying the video carries instructions for venture capitalists, investors and start-up entrepreneurs: “ignore those Fidelity mark downs – there’s no bubble here; just enjoy the show…and have a happy New Year!”