This is Erin filling in for Dan while he’s at the Columbia PE/VC Conference. Direct any comments/corrections/compliments here.
Déjà Vu: How the PE Bubble Mirrors the VC Bubble
It’s only natural to compare and contrast the dotcom bubble of the late ‘90s and the PE bubble of recent years, especially since the latter has more than officially burst.
So, with some input help from Dan, I’ve broken down a few of the similarities. It’s anecdotal, it’s unscientific, it’s subjective, and it’s full of sweeping generalizations, but something tells me it’s not too far off the mark.
Venture capital wasn’t invented in the late ‘90s, much like private equity wasn’t invented in the mid ‘00s, but neither industry got much attention from the mainstream media before their respective bubbles. Think Bob Davoli of Sigma Partners on the cover of BusinessWeek, or Steve Schwarzman as Fortune’s “Wall Street’s man of the moment.”
Fund Sizes, Valuations and Pace of Investments Increased
The size of funds, and therefore, the size of investments, grew exponentially. Or maybe it was the other way around…
They Each Dabbled
Plenty of PE firms lusted after startups in the late 90s, when venture capital was all the rage. And most of them lost their shirts (or shingles). It’s comparable to the rash of venture firms that have crept up into the land of buyouts in recent years, doing recaps, carveouts, and traditional LBOs. I don’t think the VC firms will retreat nearly so fast, however…
The Crappy Returns and Toxic Portfolios
In both up cycles, VCs and PE firms had a few years of massive returns, often from deals with short investment cycles. VC firms taking two-year-olds public in an “irrationally exuberant” market, and PE firms making hay with dividend recaps or sponsor-to-sponsor sales. But, since then, it’s been downhill. As of last year, the average return on 1999 vintage VC funds is about $0.95 on the dollar, according to a peHUB post by Bill Burnham (and that doesn’t even take into account the miserable post-bubble years). Its too early to tell what 2006 vintage PE firms will look like, but judging by last year’s spike in LBO-backed bankruptcies, and discounts to the public debt of those st! ill in business, it won’t be pretty. Talk to me in two years when the debt on ’06 deals hits maturity.
Deep Discounts on Secondary Market as LPs Flee the Asset Class
For proof that history is repeating itself, look no further than this NY Times article from 2001, which quotes David Park of Paul Capital saying, ”This is the largest opportunity the secondary market has seen in a decade.” Sound familiar?
In Need of Some LP Relations
When VCs realized their funds weren’t going to post a return, they tried to salvage relationships with their LPs. They shrunk away from two and 20, and firms like Battery Ventures issued voluntary, pre-emptive clawbacks on carry taken from early wins. Many firms also shrunk their fund sizes and allowed LP to take back commitments. It remains one of the differences between the two bubbles. At the PEA conference an LP remarked, “LPs in the venture bubble hated their GPs. That hasn’t happened in private equity…. Yet.”
In the aftermath of the venture bubble, VC funds talked a lot about “returning to our knitting,” going “back to basics,” and raising “intentionally more disciplined” funds of smaller sizes. It should be no surprise that pundits predict private equity will emerge from this bubble smaller and with less players. Firms are already cutting fundraising targets left and right. One LP put it, “If you aren’t one of the big players, or a true niche player, there’s a good chance you won’t survive.”
The Real Question
Will PE survive, and in what form? It can be argued that VC has never really recovered from the bubble, and that the model is fundamentally broken. Dan recently brought it up in a column titled, “Radically Reinventing Venture Capital,” where he suggests LPs “create a series of loosely-affiliated evergreen “funds,” with each fund to contain just a single VC. In other words, cherrypick the cream of the crop.” (Click here to read the many detailed responses.)
I think it’s safe to say this kind of model simply does not translate to even a middle market private equity-sized scale, much less a mega-buyout one. In fact, I’d say most PE firms are relatively lean as it is (moreso as layoffs continue). They work on fewer, larger deals, and therefore have less zeros that allow the blame to be passed around.
So are there other ways to fundamentally change the model of private equity? We’re already seeing the asset class evolve away from financial engineering and toward that whole “operational expertise” thing (I know, you never really left, blah blah blah)… But so many people pay lip service to the idea that it’s hard to tell how many can actually do it. (Adding the word “real” in front of “operational expertise” doesn’t make your argument any stronger. I’m talking to you, Cerberus.) And anyways, Ebitda growth has always been a fundamental part of a LBO, which you can now just refer to as “BO.” It remains to be seen if private equity and venture capital come up with anything more revolutionary.
Purewire, Inc., a SaaS-based vendor based in Atlanta, acquired Opinity, an online reputation management company. Purewire is backed by $1 million from Intersouth Partners and State of Georgia Seed Fund. Opinity has received money from Korea Investment, SoftBank Ventures Korea, Solborn Venture Investment and Valmore Partners.
3i Group announced that Cressida Hogg will succeed Michael Queen as the head of its infrastructure group. Queen has been tapped to replace Philip Yea as CEO of the UK buyout firm. The company also said it has purchased more junior debt and has sold a stake in Infrastructure Investors.
First Reserve, a Texas-based energy buyout firm, has delayed the closing for its twelfth fund until March, LBO Wire reported. The close, which was slated for January, has raised $9 billion. It’s original target was $12 billion.
AdMob, a San Mateo, Calif.-based mobile advertising marketplace, has raised $12.5 million in additional Series C funding. The firm had closed on an initial $15.7 million last fall, for a round total of $28.2 million. The new money was provided by DFJ Growth Fund and Northgate Capital, while the initial tranche was sponsored by Sequoia Capital’s Growth Fund and Accel Partners. It has now raised $46.8 million in overall venture capital.
Ballast Point Ventures, a St. Petersburg, Fla., firm affiliated with Raymond James Financial, Inc. closed a $3 million growth equity investment in MolecularMD Corporation, a West Palm Beach, Fla., molecular diagnostic company. BPV was the only investor in the financing.
Tripwolf, a Vienna-based online travel guide, raised $2.5 million from The MairDumont Group, a European publisher of travel information. This marks the group’s second investment in Tripwolf.
SocialMedia, an online advertiser based in San Francisco, has raised $6 million in a round led by IDG Ventures and previous backer Charles River Ventures. The round brings SocialMedia’s total funds raised to $9.5 million.
Vasogenix Pharmaceuticals, a heart failure treatment developer, will be awarded $400,000 from the Kansas Bioscience Authority. KBA previously awarded VasoGenix $200,000 in 2008.
Diagnosoft, a Morrisville, N.C.-based medical software developer, raised $4 million in Series B financing led by Technology Development Fund (TDF) of Cairo, Egypt.
Arcxis Biotechnologies, a biomedical device firm based in Pleasanton, Calif., completed the first close of its undisclosed Series B round. Claremont Creek Ventures, who led the round, was joined by Kaiser Permanente Ventures and Alafi Capital.
Permira has said it will hold off on the sale of its German specialty chemicals company Cognis until the economic crisis passes. The ideal exit would be an IPO.
TPG Capital has dropped out of an auction for American International Group Inc’s aircraft leasing unit, International Lease Finance Corp, sources familiar with the matter said. TPG was one of several private equity firms and sovereign wealth funds from several countries that put in initial bids for ILFC, according to Reuters.
Crest Nicholson, company backed by Tom Hunter and Bank of Scotland, has seen creditors to scheduled a court hearing to review a deal on the UK housebuilder’s debt.
Brysam Global Partners, a New York-based private equity firm, acquired an 18.8% interest in BCSC, a leading Colombian financial institution based in Bogotá. Brysam was founded in 2007 Marge Magner and Bob Willumstad to invest in consumer financial services in the emerging markets.
Polaroid Holding Co, the bankrupt camera maker, has entered a stalking horse agreement with Luxembourg PE firm Genii Capital.
Lex, Britain’s biggest car leasing company, approached private equity firms about a multibillion pound buyout, according to news reports.
Nova Capital Mangement, sold German based nuclitec GmbH and its French and US based sister companies to Eckert & Ziegler Strahlen-und Medizintechnik AG for an undisclosed amount. The firm is in the market for a $300 million first fund.
Radialpoint, an Internet security company based in Montreal, has purchased HiWired, a Needham, Mass.-based remote tech support company. Radialpoint received a C$98 million investment from TA Associates in September of 2008. HiWired has raised a total og $12.6 million from venture firms including North Hill Ventures, Kodiak Venture Partners and Sigma Partners.
Firms & Funds
Z Capital Partners has held a $100 million first close on its debut fund, which is targeting a total of $500 million, peHUB has learned. The New York-based firm plans to make control investments in middle-market distressed companies, operational turnarounds and special situations. It’s run by Jim Zenni, former president and co-founder of Black Diamond Capital Management. www.zcap.net
Resolution, a listed, UK buyout firm, has skipped its quarterly dividend after posting a fourth quarter loss.
Forsyth Capital Investors, a private equity fund based in St. Louis, has launched with the backing of $100 million from Barry-Wehmiller Cos. The firm is led by Chet Walker, formerly with the investment arm of Bank of America.
vSpring Partners, a venture firm based in Salt Lake City, is nearing a close on its $200 million target for its third early stage venture fund according to VentureWire. The firm had accumulated $120 million in commitments in May of 2008.
Primus Capital Funds has promoted Scott Harper to managing director. He joined the firm in 1994 from Goldman Sachs.