In March’s edition of Private Equity Spotlight, we look at investor appetite for private equity in the year ahead, including:
2016 Hedge Fund Letters:
- Satisfaction with returns.
- Target allocations for the year ahead.
- Strategies and regions targeted.
- Key issues cited by investors.
Venture Capital Fundraising
Also this month, we examine venture capital fundraising in 2016 by region and fund type, and look at the prospects for the strategy in 2017.
ValueWalk’s March 2021 Hedge Fund Update: Klarman, Loeb, Reddit And Much More
Welcome to our latest issue of issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring Seth Klarman and Dan Loeb's investment in Intel, losses and profits from Reddit's frenzy, and an analysis of hedge fund pay. Q4 Read More
Our industry news round-up brings you the latest news from the venture capital industry, including first-time funds in market and recently closed venture capital funds.
Latest Trends and Statistics
- Analysis of assets under management and dry powder.
- Venture capital investors to watch.
- An overview of venture capital fund managers.
- Details of upcoming private equity conferences.
Investor Outlook For Private Equity In 2017
Using data from the recently released Preqin Investor Outlook: Alternative Assets, H1 2017, we take a look at investor appetite for private equity in the year ahead, including allocations, strategies and geographies targeted, key issues and more.
Satisfaction With Private Equity
Institutional investors surveyed by Preqin in December 2016 expressed a high level of satisfaction with private equity: 84% of investors reported a positive view of the asset class at present, up from 59% two years earlier (Fig. 1).
Ninety-five percent of investors reported that their private equity fund investments had met or exceeded expectations in 2016, including 24% for which they had exceeded expectations (Fig. 2). The 5% that felt that their investments had fallen short of expectations was the smallest proportion in the past six years.
In terms of longer-term performance, investors are even more positive: 40% reported that their private equity investments had exceeded expectations over the past three years, second only to private real estate (42%). Despite this, the proportion of investors that reported that their confidence in the ability of private equity to achieve portfolio objectives had fallen over the past year increased from 9% to 14% (Fig. 3), possibly due to concerns about whether fund managers can continue to deliver strong returns at a time of high valuations. Nevertheless, the vast majority (86%) of fund managers reported that their confidence in the ability of private equity to achieve portfolio objectives was unchanged or had increased over the past 12 months.
Investor satisfaction with private equity is driving larger sums of capital to the asset class as investors look to maintain and increase their allocations. Over the longer term, almost half (48%) of respondents plan to increase their allocations to private equity, while a further 46% will maintain their allocations – these are some of the highest levels seen over the past six years (Fig. 4).
Investor Activity In 2017
Positive investor sentiment towards private equity is set to lead to further investment in the asset class in the year ahead, as 40% of investors plan to commit more capital to private equity funds in the next 12 months than they did over the past 12 months (Fig. 5). Although this represents a small decrease from 43% in December 2015, the proportion that plan to invest less capital over the next 12 months has also fallen over the same period, from 13% to 11%.
With 89% of investors looking to invest the same amount or more capital in private equity in the next year, over three-quarters (76%) plan to make their next commitment in Q1 2017 and 7% intend to do so in Q2 (Fig. 6). A further 11% plan to invest in the second half of the year, with only 6% expecting to wait until 2018 or later for their next commitment.
Investors are increasingly spreading their investment across a number of funds, with the proportion of investors that plan to commit to fi ve or more funds over the next 12 months increasing from 43% in the H2 2016 Investor Outlook to 51% at present (Fig. 7). Similarly, the proportion that intend to make just one or two investments has fallen from 34% to 26% over the same period.
However, despite investing across a larger number of vehicles, for the majority of investors, the intended capital commitment to the asset class remains small: 52% of investors plan to invest less than $50mn in private equity over the next 12 months (Fig. 8). Nevertheless, a small but important group of investors will be making large commitments over the coming year: 13% of investors plan to invest $500mn or more in the asset class.
Strategies And Geographies Targeted
As investors seek to commit greater sums of capital to private equity over the coming year, they continue to identify small to mid-market buyout funds as the most attractive fund type, with 58% of investors believing they present the best opportunities (Fig. 9). This is up from 50% in the H2 2016 Investor Outlook, but remains below the figure for H1 2016 (61%). Venture capital followed, cited by 28% of respondents, although this has fallen from 36% in June 2016, possibly due to investor concerns about overinflated prices for venture capital companies and their potential impact on future returns.
North America is considered the most promising region for private equity investment: 61% of investors believe it presents the best opportunities at present, followed by Europe (44%, Fig. 10). In terms of allocations, however, a greater proportion of LPs plan to increase their allocation to Europe (31%) than North America (25%) over the coming year, with 4% and 7% planning to reduce their allocations to these regions respectively (Fig. 11).
Outside the established private equity markets of North America and Europe, 21% of investors saw Asia as among the most favourable regions for private equity investment. Eighteen percent of investors plan to increase their allocation to the region over the coming year, compared with only 5% that plan to decrease it.
Emerging markets and the Rest of World region were seen as offering the best opportunities by 19% and 7% of investors respectively. According to investors currently active in emerging markets, the most promising countries/regions are Emerging Asia (41%), China (39%) and India (20%, Fig. 12).
While investor sentiment towards private equity is positive, there remain a number of challenges facing investors in the asset class. High valuations for portfolio companies remain the number one concern, cited by 70% of respondents (Fig. 13). Combined with record levels of dry powder and stiff competition for assets, investors are increasingly concerned about the impact high pricing will have on returns in future.
With valuations high, the exit environment has also become a key issue for the industry, with investors concerned that it may become more difficult for fund managers to realize their investments at current valuations. The proportion of investors citing the exit environment as a concern increased to 51% from 24% the previous year.
Deal fl ow was also cited by 41% of investors, up from 34% in December 2015. Forty-five percent of investors reported that it has become harder to find attractive investment opportunities over the past year, compared with only 5% that are finding it easier (Fig. 14).
In terms of broader macroeconomic developments affecting performance, the key factors that investors believe will affect their private equity portfolios in the year ahead are stock market volatility (49%), low interest rates (41%) and the geopolitical landscape (26%, Fig. 15).
All of these issues may pose a challenge to investors as they become more ambitious in their return targets for their private equity portfolios. Just under half (49%) of investors reported that they are targeting returns of 4.1% or more above public markets for their private equity portfolios, up from 37% in December 2014 (Fig. 16).
Venture Capital Fundraising In 2016
We examine venture capital fundraising in 2016 by region and fund type, and look at the prospects for the strategy in 2017.
For the third consecutive year, annual venture capital fundraising has topped $50bn. Strong performance by post-GFC vintage funds, as well as steady growth in deal volume and value, has put venture capital on the radar of institutional investors and increased commitments to venture capital funds.
- In 2016, 382 funds reached a final close, securing $55bn. While this capital is on par with the previous record in 2015 (from 442 funds), as more information becomes available, the 2016 figure is likely to surpass 2015 (Fig. 1).
- Consequently, average fund size reached a record high of $166mn in 2016, an increase of 16% from 2015.
- Generalist venture capital funds had the greatest interest from investors: 40% of venture capital funds closed in 2016 invested across all stages and raised 45% ($24bn) of total venture capital (Fig. 2).
- Information technology remains the most prominent industry; 57% ($31bn) of all capital raised in 2016 targets the sector.
- Technology Crossover Ventures IX was the largest venture capital fund closed in 2016, securing $2.5bn in capital commitments, and seeks to make late stage investments in the technology sector – including internet, financial services, communications and software – across North America.
North America continues to dominate the venture capital fundraising market, largely due to the high concentration of GPs in and around Silicon Valley. Proportionally, regional market share has remained relatively unchanged from 2014, with funds focused on North America, Europe, Asia and all other regions securing 62%, 11%, 24% and 3% of the capital raised in 2016 respectively.
The regional breakdown is as follows:
- North America: 222 funds focused on the region closed in 2016, raising an aggregate $34bn. California-based GPs managed $21bn (61%) of all North America-focused venture capital raised.
- Europe: 53 Europe-focused funds raised a combined $6.1bn in 2016.
- Asia: 80 Asia-focused funds secured $13bn, with China-focused funds accounting for 64% ($8.4bn) of all Asia-focused capital raised in 2016.
- Rest of World: 27 funds secured $1.8bn for investment outside North America, Europe and Asia in 2016, led by Israel- and Australia-focused venture capital: eight Israel-focused vehicles secured $0.8bn, while six Australia-focused funds raised $0.5bn.
Venture capital is likely to remain an important part of private equity fundraising over 2017, with a record 940 funds currently seeking capital and $16bn already committed to funds that have held an interim close. Although the number of funds reaching a final close was lower in 2016 than the year before, the aggregate capital raised remained strong. With record numbers of funds in market, managers face the challenge of convincing LPs that they can identify breakout potential among companies in order to secure institutional commitments in a competitive fundraising market.
More than a quarter (28%) of investors surveyed by Preqin see venture capital as providing the best opportunities for investment, second only to small to midmarket buyout funds (58%). Additionally, 18% of investors expect to commit more capital to the asset class in the next 12 months than they did in the previous year, and 30% of investors also plan to increase their allocation over the longer term.
First-Time Funds In Market
There are currently 416 first-time venture capital funds being raised, collectively targeting $41bn in commitments. The 10 largest funds in market account for roughly 34% of aggregate capital targeted by first-time venture capital funds, with the top four funds focused on Asia and all managers based in China. The largest first-time fund currently raising capital is Guangxi Beibu Gulf Industrial Investment Fund, managed by Guangxi Xijiang Venture Investment (a subsidiary of Guangxi Xijiang Development & Investment Group), which focuses on investing across all venture capital strategies, specifically China-based companies related to Beibu Gulf and West River Economic Belt. The fund is targeting $3.2bn to invest in environmental services, energy and resource-based sectors. Rounding out the five largest funds is US-based Breakthrough Energy Ventures Fund I, managed by Breakthrough Energy Ventures. This generalist venture capital fund is seeking $1bn and focuses on innovations in the cleantech sector specifically to reduce greenhouse-gas emissions in areas including electricity generation, storage, transportation, industrial processes, agriculture and energy-system efficiency. The fund has a 20-year duration and a global geographic focus.
Of the 25 largest first-time funds in market, only two primarily focus on Europe. EMH Digital Growth Fund is managed by EMH Partners and invests in IT, technology and communication start-ups. Spirit Ventures I is managed by Spirit Ventures and aims to provide early stage start-up investments in mainly Northwestern European companies, focusing on key enabling technologies such as nanotechnology, semiconductor-related businesses and communications. Each fund is seeking $320mn.
Chart Of The Month
The edition’s Chart of the Month, taken from the recently launched 2017 Preqin Global Private Equity & Venture Capital Report, looks at the make-up of investors in venture capital funds closed from 2013 to 2016.
On average, private equity funds closed in 2016 had 39 investors, a slight increase from 38 LPs per fund in 2015. This number remains in line with recent years despite average fund size reaching a record $471mn in 2016. However, diff ering trends can be seen among diff erent fund strategies in recent years. The proportion of buyout funds with 25 or fewer investors increased from 35% in 2013-2014 to 48% in 2015-2016, while the proportion with greater than 50 investors has fallen from 33% to 24%. On the other hand, the proportion of venture capital funds with 25 LPs or fewer has fallen from 59% to 48% over the same period, while the proportion with between 26 and 50 has increased from 16% to 32%.
Recently Closed Funds
As at 22 February, 48 venture capital funds have reached a final close in 2017, raising an aggregate $6.6bn. The majority (60%) follow an early stage strategy, while 33% are generalist venture capital funds; the remaining 7% are expansion/late stage funds.
The largest venture capital fund closed in 2017 so far is Rocket Internet’s early stage Rocket Internet Capital Partners Fund. Berlin-based Rocket Internet reached its initial target ($1bn) for its debut fund in January, which makes early stage and growth investments in companies focused on software, e-commerce, fintech, marketplaces and travel. Mithril II, managed by Mithril Capital Management in California, surpassed its initial target by $250mn to achieve a final close of $850mn. Together, these two funds account for 28% of the capital raised by venture capital funds closed so far this year.
Assets Under Management And Dry Powder
We analyze private equity assets under management and dry powder by fund type, vintage year and more.
Investors To Watch
We provide examples of prominent investors in venture capital funds that are looking to make new commitments in the next 12 months.
Venture Capital Fund Managers
We take a look at venture capital fund managers by number of funds raised, location, investment preferences and more.
Article by Preqin
See the full PDF below.