August 3rd, 2017
– Fund Collapse Underlines PE’s Low Risk
– Fund Restructurings Have Lost Their Negative Image
– Softbank’s Huge Vision Fund Unveils Investments
– The LBO that Never Happened May Portend the Future
– VCs Seeking Dressing Tips, Look No Further
– PE KeyTrends Quick Question Results
A FUND COLLAPSE HIGHLIGHTS THE LOW RISK OF PE. The Wall Street Journal’s coverage of the spectacular collapse of Enervest Energy Institutional Fund XIII is remarkable both for the tale and for the spotlight it shines on just how rarely private equity funds lose money for investors. To “juice returns” Enervest borrowed money at the fund level rather than borrowing separately against each of its portfolio holdings – a collection of producing oil and gas wells. Financing each investment independently, a fundamental tenet at most private equity funds, ring fences risk and ensures that bad deals don’t affect good ones. Enervest didn’t follow the principle and lenders are now “negotiating to take control of the fund’s assets.” The result “will leave investors with, at most, pennies for every dollar they invested.” Because PE funds almost always ring fence, “only seven [vehicles] with more than $1 billion in assets have ever lost money for investors,” notes the WSJ, citing statistics from Cambridge Associates.
FUND RESTRUCTURINGS HAVE LOST THEIR NEGATIVE IMAGE. That’s certainly the implication of a WSJ Pro article detailing the restructuring plans of top-tier fund manager Warburg Pincus for its flagship Warburg Pincus Private Equity XI vehicle. To provide liquidity for investors in the fund, which had an 11.9 percent annual return as of December 2016, according to Palico performance data, Warburg Pincus proposes stripping out and selling some 30 Asian holdings worth about $1 billion. If the deal finds buyers at a price acceptable to Warburg Pincus and its limited partners, the assets would be moved into a new fund that WP would also manage. Fund restructurings, rare just a few years ago, but now 22 percent of volume in the secondary market for fund stakes, have seen their reputation improve dramatically as rollover and cash-out options at par or better for existing investors have become commonplace.
SOFTBANK’S VISION FUND UNVEILS NEARLY $500 BILLION IN INVESTMENTS, notes the Financial Times. The precedent-setting Vision Fund, which raised a stunning $93 billion this year (more than four times as much as the previous record fundraising for private equity) is endeavoring to deliver on its promise to “think big” and invest in many companies that are part of what its founder Masayoshi Son calls the “information revolution.” The recently announced investments include Plenty, a high-tech producer of vertically grown food that uses no pesticides or GMOs “while cutting water consumption by 99 percent;” Brain, which hopes to create “a standard operating system for autonomous robots in the same way that Android did in smart phones;” and Nauto, an autonomous driving startup whose device is installed in existing vehicles. Vision Fund’s corporate parent SoftBank is also expected to sell it stakes in chip designer Arm, graphics chipmaker Nvidia, satellite startup OneWeb and simulation technology provider Improbable.
THE BIGGEST BUYOUT THAT NEVER HAPPENED MAY PORTEND THE FUTURE. To mark the August 2nd 10th anniversary of the announcement of the $48.5 billion leveraged buyout of Bell Canada by Ontario Teacher’s Plan, Providence Equity Partners and Madison Dearborn, Bloomberg devotes a fascinating 4,000 word piece to the deal’s genesis, its seemingly successful conclusion and its ultimate collapse in December 2008 – amid the worst financial crisis that the world has seen since 1929. Following the same playbook as the bidders, and even hiring the managers they’d chosen, Bell Canada’s shares are up 150 percent “from the day the deal collapsed.” “It didn’t beat what we had projected – it crushed what we projected,” declares one of the participants. With private equity fundraisings breaking a series of records this year, don’t be too surprised if it isn’t too long before we see a buyout that tops the deal that never happened.
IF YOU’RE A VC SEEKING DRESSING TIPS, LOOK NO FURTHER than this Financial Times story. In the piece, leading venture capitalists offer their advice on how both peers and startup entrepreneurs should dress for success. One theme: “it’s harder for VCs to dress appropriately than for entrepreneurs.” Notes Mitchell Kertzman, managing director of VC firm Hummer Winblad: for entrepreneurs, “what they say is overwhelmingly more important than how they look.” VCs, on the other hand, should probably keep wardrobes in their offices and be ready for quick changes. This would have helped Suranga Chandratillake, a general partner at Balderton Capital. “I once had a meeting with some young entrepreneurs straight after a more formal meeting, so I was wearing a suit and felt out of place,” he says. Chandratillake doesn’t specify if he closed the deal.