– Power Shifts to Venture Capitalists from Entrepreneurs
– Sovereign Wealth Funds Change PE’s Dynamics
– Branding is Crucial to Fundraising
– PE’s Succession Dilemma
– CALPERS’ Widely Awaited Performance Report
– PE KeyTrends Quick Question Results
POWER SHIFTS TO VCs FROM ENTREPRENEURS. In the wake of stock market volatility and worries about tech values, “the balance of power is shifting” in “startup land,” with venture capitalists, not entrepreneurs, holding the reins, observes the New York Times. From an investor’s perspective, that’s no bad thing. VCs are “asking more questions” and “taking more time to invest.” Most importantly, VCs “are no longer paying any price to invest.” Year-to-date, some 30 companies have settled for lower valuations than in their most recent funding round. That’s just short of the figure for all of last year. While a top-tier of companies continue to raise capital at ever higher levels, most valuations this year range from unchanged to 20 percent less compared with 2015’s first quarter, notes Ben Ling, partner at Khosla Ventures. That’s lead to an 11 percent year-on-year drop to $12.1 billion for first-quarter startup funding in the U.S. – still a strong figure. Many entrepreneurs are getting capital, just less than before, and they’re working harder for it.
BLAME SOVEREIGN WEALTH FUNDS FOR PE’S CHANGING DYNAMICS, particularly lower returns. That was the message delivered by a panel of “PE titans” at the Milken Institute Global Conference early this month. The participants, Apollo founder Leon Black, Carlyle co-founder David Rubenstein and Robert Smith, founder of Vista, all agreed that the demands of SWFs – the asset class’ fastest growing category of investor – increasingly dominate private equity. Among the panelists’ key observations as reported by Pensions & Investments: SWFs want longer-life funds and are willing to settle for lower returns than has traditionally been the case. Additionally, Smith noted that SWFs “want to embed” their own officials within PE firms “to learn the business.” As they get their private equity sea legs, SWFs will increasingly compete directly with PE funds. That may put even more pressure on average returns, increasing the appeal of niche funds specializing in less crowded strategies.
BRANDING IS CRUCIAL TO FUNDRAISING. This is “especially” true as investors commit more capital to fewer managers, notes Financial News. FN reports that Bain & Company’s 2016 Global Private Equity Report lists 17 ways PE firms can stand out through branding in areas like “risk appetite, geography, company culture, talent management and incentive structure.” Says Julie Sieger, a marketing manager at PE firm Sovereign Capital: “Without doubt, the websites and messages in PE are way ahead of what they were 10 years ago, however, compared to other sectors, branding and marketing…is still behind the curve.” Strong branding can also help PE firms as they compete to acquire companies, and it’s a catalyst behind the steadily growing number of mergers and acquisitions between PE fund managers. M&A can create the diversified, high profile one-stop shopping platforms that PE investors find attractive today.
PE’S SUCCESSION DILEMMA, THROUGH THE LENS OF COLLER CAPITAL, is the subject of a quirky, refreshing story in the Wall Street Journal. After naming leading secondary specialist Coller Capital after himself in 1990, and ensuring his status as its only ‘key man,’ all, in his own words, to “make it tougher for colleagues to oust him,” Jeremy Coller is today trying to find a successor. Investors are increasingly reluctant to commit capital to groups where success is too closely tied to one individual. This is something that Coller – chairman and sole shareholder of his eponymous firm – implicitly recognizes. Coller Capital’s recent announcement that the founder’s only plausible successor, CEO Tim Jones, left for “compelling personal reasons” came just after the firm closed on $7.2 billion for its latest fund. “Investors are waiting to be told what will happen next.” Coller’s response: “The graveyard is littered with dead PE firms. We’ve got a chance to find the right model” for succession. Many are hoping details will follow shortly.
CALPERS’ WIDELY AWAITED SEMI-ANNUAL REPORT IS HERE. As of end-December 2015, the private equity investments of the U.S.’s largest pension fund beat performance benchmarks over three, five and ten years, racking up respective average annual returns of 12.9 percent, 12.7 percent and 11.2 percent. Arguably the report’s most intriguing revelation is that secondaries – stakes in closed PE funds purchased from other investors – produced stellar one-year, three-year and five-year average annual returns of respectively 73.3 percent, 40.2 percent and 27.8 percent. Secondaries only amount to 1 percent of the group’s $27.6 billion PE portfolio. Yet whatever the temptation might be, expanding CALPERS’ secondaries exposure carries the risk of bringing down the returns of those holdings. Possibly reflecting PE’s growing difficulty exiting investments, CALPERS’ quarterly net cash from distributions fell to $395 million in the final three months of 2015, “marking only the second sub-$1 billion quarter since Q2 2012.”