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Why Venture Capital Will Out Perform PE Over The Next 5 Years

Why Venture Capital Will Out Perform PE Over The Next 5 Years Why Has PE done so well this decade? PE Salad Days of 2000-2007… Massive liquidity in the economy 17 rate cuts by the fed 2000 to 2004 Low equity risk premium Attractive public market valuations post bubble

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Why Venture Capital Will Out Perform PE Over The Next 5 Years

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  1. Why Venture Capital Will Out Perform PE Over The Next 5 Years

  2. Why Has PE done so well this decade?

  3. PE Salad Days of 2000-2007… • Massive liquidity in the economy • 17 rate cuts by the fed 2000 to 2004 • Low equity risk premium • Attractive public market valuations post bubble • Permissive lending environment • Smaller PE funds, less capital available…. and less competition

  4. Buyout Mezzanine Environment2000 Economic Situation Confidential 4

  5. What are the conditions in early 2008?

  6. PE Environment Today • Debt markets virtually shut down…. • Will eventually re-open but…. • ultra favorable conditions of recent years will not return soon • Massive un-invested capital overhang….

  7. Buyout & Mezzanine Fundraising Has Increased 8x Since 2003 Buyout & Mezzanine fundraising up 29% through 3Q07, versus 2006 *2007 figures are based on actuals through 3Q07 and estimates for 4Q07 Source: DowJones VentureSource, Buyouts Magazine, Clearstone analysis Confidential 7

  8. VC Fundraising – and Performance Dropped Significantly After Similar 8X Increase Source: DowJones VentureSource, NVCA Confidential 8

  9. Buyout Mezzanine Environment2008….Troubling Economic Situation Confidential 9

  10. Signs of Problems Ahead… • Leveraged buyouts require robust credit markets • That existed the past 7 years…but no longer • Banking regulators giving greater scrutiny to leveraged lending practices • No takers for leverage loan participations • Banks hold nearly $300B of debt needing to be sold!

  11. Classic Buyout Candidates Under Pressure…. • Mature companies in mature markets • Retail, Manufacturing, Materials, Financials • Don’t do we well in slowing economy…signs already evident • Shrinking cash flows restrict leverage potential…. • Defaults rising….driving lenders to demand higher risk compensation

  12. PE Firm Behaviors Driving Returns Lower…. • Large increases in # and size of PE funds • Aggressive deal pricing • From 5X to 8-10X cash flow multiples • Strong incentives to deploy capital rather than return it • Rising % of exits from inter-firm sales • 2007: 60% of PE exits done through sale to another PE firm

  13. So What is Going On In The Venture Markets?

  14. The decade began on a high note… but quickly evolved into extraordinary difficult times

  15. Venture Capital Environment2000 Economic Situation Confidential 15

  16. Conditions have improved considerably helped by a reduction in capital and firms…..

  17. Venture Capital Fundraising Venture Capital fundraising down 11% through 3Q07, versus 2006 *2007 figures are based on actuals through 3Q07 and estimates for 4Q07 Source: DowJones VentureSource, Buyouts Magazine, Clearstone analysis Confidential 17

  18. Only The Strongest Firms Survived The Post-Bubble Shake-Out Median Fund Size increased 2x – $100MM in 2000 versus $200MM in 2006 Source: DowJones Venture Capital Industry Report 2007 Confidential 18

  19. Attractive Conditions Ahead… • Venture capital fund commitments flat for past 3 years • contra-indicator • Early stage valuations stable… • while late stage and IPO valuations growing • Strong public market appetite for growth stories • Recent IPOs in the enterprise and consumer services sectors well received

  20. Venture Capital Environment2008 Economic Situation Confidential 20

  21. More so than earlier tech cycles, private investors are being rewarded for potential break out value at IPO….

  22. More Value Accruing to Venture Investors at IPO - $ Billions - Earlier Tech Cycles New Tech Cycle *Facebook Pre-Money IPO valuation rumored to be greater than $50B Confidential 22

  23. Why Are Early Stage Companies Capturing More Value? • Companies are able to hit critical mass faster • Impact of Internet, new communication technologies, leveraging managed services • Addressing global opportunities earlier in their life cycle • From 300M to 2.5 billion consumers • Sourcing gains from China and India • Capital markets much better informed • More willing to factor in growth potential

  24. It’s a very attractive market for early stage investing….particularly in the enterprise and consumer markets….

  25. Extremely Favorable Trends in the Enterprise Sector • Post bubble IT austerity has reached practical limits • Major upgrades needed to replace outdated computing and communication systems • Wireless networks – Meru, Divitas • Digital archival and storage – Kazeon, Mimosa • Web and digital media opportunities require new technology investments • Content monitization – eForce, Rubicon

  26. Compelling Enterprise 2.0 Venture Opportunities • Managed services • Unified communications monitoring – Communicado • Mobile network access - SoonR • Predicative analytics and decision support systems • Real time analytics for IT networks - Integrien

  27. Appendix Slides

  28. Venture Capital Environment2000 Versus 2008 Confidential 28

  29. Buyout Mezzanine Environment2000 Versus 2008 Confidential 29

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