– PE-Backed Purchases and Exits Fall in Q1
– VCs Make Fewer Bets, but Investment Level Holds
– PE Fund Life Drops for the First Time Since 2007
– Negative Implications of Not Sharing Carry Fairly
– An Overview of Yale’s VC Home-Runs
– PE KeyTrends Quick Question Results
PRIVATE EQUITY-BACKED PURCHASES AND EXITS FALL IN Q1. Difficulty settling on pricing agreeable to both buyers and sellers amid volatile public markets took its toll on transactions in PE’s core buyout sector in the first quarter. The Financial Times reports global buyout exits fell to $62 billion in the first three months of 2016, down $10 billion from 2015’s last quarter, and some 50 percent less than the post-financial crisis high of $125 billion, achieved in Q2 of last year. Meanwhile, LBO Wire notes that the U.S. PE market – the largest in the world – saw “the quietest first quarter on the investment front since 2010.” There were 145 U.S. private equity-backed purchases valued at $14.98 billion in Q1, versus values of $11.82 billion in the same period in 2010 and $21.33 billion in the first three months of 2015. In a sign that the slowdown in exits and investments may be short-lived, debt markets have bounced back to health in recent weeks with Q1 leveraged debt issuance for PE-backed transactions standing at $38.8 billion, up from $37.4 billion a year earlier.
VCs ARE MAKING FEWER BETS, BUT THE VALUE OF INVESTMENT HOLDS. Bloomberg notes that while the first quarter in the key U.S. venture capital market had “the fewest number of deals in four years,” investment volume held steady. At $17.7 billion, investment was “flat” compared with Q4 2015. Notably, more than half the money raised in Q1 went to larger, “late-stage companies,” including unicorns – private firms worth at least $1 billion. The numbers would seem to support the thesis that given current concerns about startup value inflation, venture capitalists are not cutting back on investing – they’re just investing more with fewer companies. As respected venture capitalist Josh Kopelman of First Round Capital says, “we understand that our conviction in our decisions needs to be meaningfully higher in order to invest at meaningfully higher valuations.” All this implies that unicorns will continue to stay private for longer, with the best using increased funds to eliminate competition, and dominate their sector long before a public market listing.
PE FUND LIFE DROPS FOR THE FIRST TIME SINCE 2007. Based on a Palico analysis of funds dissolved in 2015, the median private equity fund lifespan is 12.9 years. That’s down from 2014’s unprecedented 13.2 years and compares to 11.3 years for 2007, the last time fund life declined. A bigger proportion of funds are winding down within a decade – 14 percent in 2015 versus 12 percent in 2014 – yet most managers continue to miss the standard 10-year target. Meanwhile, LBO Wire notes buyout funds launched between 2005 and 2008 hold $527 billion in unrealized investments. That’s more than half of the value still held in vehicles that began investing this century. “Many PE funds investing in the run-up” to the 2008 financial crisis “overpaid” and “were swept up in the turbulent years” that followed. “Some may not be able to wind down in time.” Today’s record $1.3 trillion in uninvested capital “should keep competition for assets intense, deployment pace relatively slow and any long-term shortening of fund life modest,” notes Palico.
THE FOUNDERS OF PE FIRMS SHOULD BE MORE GENEROUS. That’s the conclusion of a Harvard Business School study of 717 private equity partnerships by Josh Lerner and Victoria Ivashina that examines how “inequality” in the “allocation of fund economics” between founders and their partners negatively impacts their investors. While both the average founder and the average senior partner own 21 percent of their management firm, only the former takes home an equivalent portion of the firm’s carried interest – the capital gains investors share with management companies. Senior partners take home a lower 15 percent of the carried interest. Average junior partners own 3 percent of management firms, yet most receive no portion of carried interest. Summarizing the study, Private Equity International notes that when compensation “bias” is tilted towards founders, staff turnover rises significantly. This is “not in the interest” of investors, “who want to build long-term relationships with stable, high-performing funds.”
YALE PROVIDES AN “UNPRECEDENTED GLIMPSE INTO ITS VC PROGRAM.” That’s LBO Wire’s description of the standout feature in the Yale Endowment’s latest annual report – an exploration of Yale’s venture capital investments and the alumni connections tying it to top performing VC funds and VC-backed startups. VC accounts for 16.3 percent of Yale’s $25.6 billion in assets, and makes up its second highest allocation after 20.5 percent invested in “absolute return” strategies – essentially hedge funds. But returns generated by VC easily top the asset class list, coming in at a stunning 92.7 percent per annum over the past 20 years. The next best performer is leveraged buyouts, posting a 20-year annualized return of 16.4 percent. Yale began VC investing in 1976 and its managers have held lucrative stakes in an array of top performers, including Compaq, Oracle, Dell, Cisco, Amazon, Google, Facebook, Linkedin, Twitter, Uber and AirBnB. The good times could roll on for another 40 years, given Yale’s connections.