DealMarket Digest - 04

DIGEST

04

SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 04

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Technology VCs: Who’s Hot and Why

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PE fund universe shrinking

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Fundraising rebounds in Q1

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• Forbes Midas Men lists technology’s top 100 Investors • Technology companies outperform

• Number of fund managers decreasing • Falling at fastest rate in ten years

• Large closings drive growth • Fundraising success driven by exits

Energy Deals: PE Favor Oil&Gas • Several PE deals in recent weeks for oil&gas • Renewable energy deals, particularly solar, turn to strategic investors

April 14, 2011

TECHNOLOGY’S HOT SHOTS Forbes published its Midas List of technology’s, “Midas Men”, with Accel Partners’ Jim Breyer in the number one spot. The other names that made the top five will be no surprise to Dealmarket Digest readers, Mike Moritz of Sequoia, Reid Hoffman of Greylock, Peter Fenton of Benchmark Capital, and Scott Sandell of NEA. The list was compiled in partnership with TrueBridge Capital and Dow Jones’ Venture Source.

These VC investors made the list because of their ability to not only spot and invest in hot new technology startups at the early stage, but also to be able to sell them at good multiples, repeatedly, as well as their ability raise new VC funds.

The companies themselves have actually been doing quite well as the economy returns to a healthier state, according to the latest data from SVB Analytics.

The data shows that technology companies are outpacing mainstream economic expansion and are hiring faster, according to SVB. However, there are significant differences between the various technology sectors as the chart here shows. Software, hardware and life sciences sectors did well in the fourth quarter, but the cleantech sector struggles due to uncertain political and

One aspect of the feature article is that the Forbes editor’s express the view that technology investing in the years 2000 to 2010 delivered “mostly mediocre” results for venture capital funds because they underperformed the private equity asset class, and over the last 10 years “merely” kept pace with the Nasdaq.

It may be interesting to contrast the performance of venture capital as described by Forbes with the recent financial performance of emerging companies in the information technology, life sciences and cleantech sectors. .

economic environment, says SVB. Solid growth rates were seen in the software, hardware, life sciences and cleantech sectors, “substantially above general economic growth for the fourth quarter”. Except for cleantech, all sectors grew at rates of 20‐plus percent and margins improved significantly last year, and a large number of companies achieved cash flow positive status compared to the year before, according the report.

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PE FUND UNIVERSE SHRINKING A rising number of private equity fund manager became inactive in the last year, according to Private Equity News (PEN). Fund “run-off” progressed at a rate of 5 percent last year, the fastest rate since records began 10 years ago.

The source of the data and statistics is Preqin, which counts a fund manager “out of business” if it last raised a fund in 2001 and has not raised another one since. According to the same article, another 150 firms are forecast to become inactive this year. But there is little to fear that there is going to be a shortage of funds to invest in, as there are still at least 4,146 private equity managers still in business. PEN took the news to heart, it seems, and is currently conducting a poll to find out if readers think this is a growing trend. The graphic here shows the results of the poll as of 13.04, where more than 60 percent of readers are predicting that the number of private equity firms going out of business will increase over the next few years.

Some 20 percent believe that a continued annual decrease of 5 will be the case.

LP SOURCE: FUNDRAISING REBOUNDS Dow Jones LP Source reports that private equity funds raised USD 31.6 Billion in U.S, and USD8.2 billion in Europe during first quarter 2011. The amount raised compared to the same period last year, has LP source analysts calling a “rebound”. European funds raised almost 50 percent more than in 2010 and US funds doubled the amount raised in the same quarter in 2010. The pattern of fundraising suggest a “flight to quality”, because it is a small number of large funds that achieved closings in the last quarter, as opposed to a large number of smaller sized funds achieving their targets. The news item also contains information on the types of funds that were successful with useful comparisons to previous years. All sectors except Mezzanine raised more capital than the same period last year. The improvement in fundraising ability was attributed to exits. “In 2010, many private equity firms focused on trying to return capital and those efforts are starting to bring their investors back to the party,” said Laura Kreutzer, managing editor of Dow Jones Private Equity Analyst. “But limited partners are still like bouncers at an exclusive night club. They’re only letting the best looking groups behind the velvet rope. Everyone else still has to struggle for their attention.”

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YES TO OIL, AND NO TO SOLAR Recent dealmaking suggests that PE managers see potential in Oil & Gas exploration. Two rather large investments were announced this week involving oil and gas exploration outfits and PE investors, as reported by AltAssets.com. US firm Warburg Pincus, along with Canada Pension Plan Investment Board and KERN Partners are to invest USD364 million in Black Swan Energy, a privately-held Canadian oil and gas exploration and production company that plans to explore and develop hydrocarbon resources in Western Canada. The other transaction reported is Blackstone’s entering into a joint venture with Houston’s Alta Resources to explore “unconventional” oil and gas assets in North America. The new company will be known as Alta Energy Partners. It will invest up to USD1 billion in the acquisition and development of oil and gas resources that may be harder to reach than conventional sources.

At the same time as these deals are being done, reports are emerging that another energy sector, renewable energy, has had to turn to strategic investors, because PE and VC shy away from the sheer volume of capital required, with solar power plants in particularly being difficult to finance over the long haul. According to a report on Reuters, a good number of solar photovoltaic technology startups, as well as solar plant developers, are turning to strategic investors, such as BP and Alstom, due to a need for very large sums of capital. Industry insiders are quoted as saying the deals are too large for buyout or venture funds. Several examples are given in the report, such as US-based Brightsource, a developer of a promising new kind of solar thermal power plant, which has so far raised a whopping USD530 million in five rounds of fundraising.

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The Dealmarket Digest empowers members of Dealmarket by providing up-to-date and high-quality content. Each week our in-house editor sifts through scores of industry and academic sources to find the most noteworthy news items, scoping trends and currents events in the global private equity sector. The links to the sources are provided, as well as an editorialized abstract that discusses the significance of the articles selected. It is a free service that embodies the values of the Dealmarket platform delivers: Professional, Accessible, Transparent, Simple, Efficient, Effective, and Global.

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Editor: Valerie Thompson, Zurich

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