“Show me the money!” - Rod Tidwell, Jerry Maguire
Only if it was so easy for Venture Capital and Private Equity managers to raise Capital Commitments.
Last week, I ran across a comprehensive report published by Campton Private Equity Advisors, which provided, amongst many other things, 2012 fundraising data for Venture Capital and Private Equity. I won’t bore you with the raw data, but the report did highlight some interesting market themes.
Theme 1: Contraction within Venture Capital is continuing, but it is SLOW process:
Domestically, there were 923 firms that did at least 1 deal in 2012 (follow-on or new), but only 430 firms had funds that did at least one new deal in 2012, vs. 1300 and 990 in 2000. The fact remains that funds, no matter how poor the performance, have an extremely long tail. According to the NVCA, 73% of funds end up with a life of >13 years. Perhaps the JOBS act or the hope of a private exchange like the one recently announced by Sharespost/NASDAQ will help remedy the long-term illiquidity problem, but it’s likely not enough to significantly truncate time to liquidity for most companies.
Of the roughly 500 or so firms that are not making new investments, I’m guessing that the majority are likely in wind down phase, or as many call them, the “walking dead” That said, It’s virtually impossible to say how many firms fall into this realm, as firms don’t exactly openly announce that they will be closing their doors.
My best guess is of these 500 firms, 300 of these firms will be gone, at least in current form, within 5-7 years, 100 are likely to raise again, and another 100 fall in the TBD zone, reliant upon a successful reformation or a few fortunate exits to remain viable.
Theme 2: Bifurcation within Venture is continuing and is becoming more pronounced:
Sub theme 1: Venture Fundraising remains extremely top-heavy.
In 2012, 9 firms (Andreeson, Seqouia, IVP, Lightspeed, Bain VC, NEA, Caanan, KP, GGV), across 10 funds, closed on 50% of the total capital raised in 2012. Expand this to the top 15 firms, and the number rises to ~65% of total capital raised. Contrast this figure with 2007-2008, when the top ten funds accounted for only 25% of total capital raised. What does this mean? Quite simply, a continued flight to quality. Expect this trend to continue, particularly when accounting for the fact that top Quartile Funds have a 10 year avg. return of 9% over the median fund manager.
Sub theme 2: On the other end of the Barbell, the proliferation of capital into new firms continues.
Over the last 2 years, over 115 first time funds have successfully closed. The ratio of follow on funds to first time funds in 2012 was roughly 2:1 ,compared to pre-2009 levels of 4:1 – And this doesn’t take into the account that many follow on funds in this ratio were raised by relatively nascent firms such as OATV, Felicis, and Floodgate.
The broadening landscape of smaller first time funds appears to be a conflation of a few factors including the 1) Viability of smaller fund sizes given current economies of building IT companies and 2) Partners from established shops leaving to start their own firms, a byproduct of dissolving partnerships, poor economics, and the desire to create his/her’s own franchise.
Sub theme 3: Those firms that find themselves in the middle part of the barbell will likely need to pivot to remain viable.
As noted in Theme 1, funds have a long tail which on the bright side do provide firms with ample time to repurpose themselves to remain a going concern. Some of these firms may benefit from a bluebird event, but most will have to internally re-tool to have any chance of remaining alive. Be it a change in the partnership, tightening of sector focus, or a dramatic reduction in fund size, many established firms will have to do something they haven’t in a long time – Innovate. No longer exist the days where successive funds generating huge management fees can be raised without demonstrable performance.
Theme 3 – Private Equity still rules the Limited Partner wallet in a big way:
$144B was raised by 285 PE funds in 2012, nearly twice what was raised by PE managers in 2010, or 7X that was raised by Venture in 2012. No surprise on either one of those numbers as leverage has come back in a big way since 2009 and 10 year PE returns have been nearly 2x that of Venture (in fact the top 3 funds in 2012, Advent, Warburg, and Accel-KKR Asia closed on more capital than the entire Venture Industry.
Other various themes:
Global investing by US VC’s is way down: 76% of VC Funding by US VC’s went into companies located domestically. Investing into China dropped 73% from 2012 to 2011, and represented only 6% of total US Venture investments. Europe dropped 39% during the same period and accounted for only 13% of venture dollars deployed.
Venture returns over the past 13 years as a whole haven’t been great, but they are not catastrophic: Although the class has a whole had done poorly relative to the risk profile, the reality is that only 5 vintage class years in the last 15 have negative median IRR’s, and only 4 vintage years in the last 15 had a TVPI under 1.00x. That said, distributions are admittedly disappointing, which is ultimately what matters right?
That’s right….”Show me the Money”