Reuters’ Simon Meads in London reports that private equity firms are using investors’ disappointments with low returns from buyouts to their advantage. They plan on getting more funding to make arrangements with entrepreneurs, and lessen their activity with debt-laden controlling stakes. 

The 3i Group has decided to initiate a growth fund devoted to investors want for less risky investment even with lower returns. Funds such as these receive low returns during peak times, but during economic downturns these funds outperform due to their lower rate of volatility.

It’s questionable as to whether this strategy will be successful as the private equity market remains in flux and many investors have suffered from illiquidity in the marketplace from both buyout and growth strategies.

If you would like more information of this topic click on this link: http://bit.ly/a4xiZR.
 

********  IvyPlus April 13th Commercial Real Estate Deal Summit, http://bit.ly/cwHZx9 *******

Venture Capital Funds (VC) continue to see their fortunes slide. They are at a severe disadvantage vs. other alternative investment funds due to the extent of their lockups, lack of liquidity, high risk, and present regulatory environment which diminishes the value of exits.  8.2% VC return on 10 year lockups are incredibly damaging from the eyes of the investor class who have a wide array of risk free options and better risk adjusted options with far higher returns such as hedge funds with 20%  targets and monthly liquidity.  On a risk adjusted basis, VC should outstrip hedge fund returns dramatically but they don’t.   Regulation will continue to increase as regulators see VC as another form of private equity with similar risks of over-leverage, speculation, etc .  Moreover, for funds that depend on capital calls, there is more LP resistance to fulfill obligations. 

The NVCA has published a widely quoted study stating Venture-backed companies employ 11% of all Americans in the private sector. Yet this empty metric doesn’t differentiate between the jobs created by VC backed firms vs. those acquired by the same firm. Nor does it differentiate between the age of the VC backed firms or whether they are public companies.  According to this study, HP and other firms that have grown dramatically through acquisitions of major competitors lump together acquired jobs and "created" VC jobs for a nonsensical metric.  Reviewing the study in more detail shows that VC backed firms peaked in creation and backing at the time the internet bubble burst and are now operating at 33% of where they were. VC backed firms and job creation since their nadir in  2003 barely track the U.S. population increase.  It is questionable that the formal VC industry needs to remain at its current size as the golden era of VC may be looked back upon as the time when VC was 5% the size of it’s peak yet churned out winners like Apple Computer and Hewlett Packard.  It is really a question of what have you done for me lately.

An argument for reducing the size of VC is (1) the cost of software startups have broadly diminished due to the availability of global sourcing for cheap software and project management talent and micro marketing capability for customers created by the internet.  One well known VC has said that the cost of marketing niche products in the ’80s could be as much as $15 million to 50,000 potential customers, today that cost is 10% of what it was BEFORE INFLATION ADJUSTMENT.  (2)  Likewise, the need for clean tech is diminished due to the global warming crackup.  With many state coffers empty, it will not be surprising if states roll back their tax incentives for clean tech as happened in the late ’70s and early ’80s with alternative energy.  The empty statement that VCs provide 11% of all jobs is similar to pre-global meltdown statements of real estate and the stock market values always go up.  Clearly changes will come and hopefully government will focus on ways to make credit cheap for job creators and emerging companies reducing their overall cost of capital and the need to sell equity at a dear price.

You can find the link to the NVCA study here, http://bit.ly/9ZGaNM

The Wall Street Journal reports that VC syndicate failure is increasing.  Again, LP cash is diminishing with resistance to capital calls as more LPs see the risk in litigation and penalties as more rewarding than the chance of losing all their capital in funds where the dynamic for success is diminished i.e. lack of leverage in the marketplace and side to side stock market performance. " of the 9,267 closely held companies in the U.S. backed by venture-capital firms, 59% have an investment syndicate. Such alliances, which aren’t new, allow venture-capital firms to spread the risk of investing in a start-up, though some firms demand at least a 20% stake."

More info here, http://bit.ly/9C9cq1

 ********  IvyPlus March 23rd  Fund Business Development Event, http://bit.ly/bW0DIt ******

Stanford University may be signaling a return to secondaries for university endowments.  Bloomberg reports " Stanford University is seeking to sell $1 billion in private investments, including stakes in venture capital funds run by Sequoia Capital and Kleiner Perkins Caufield & Byers.  Stanford, is also offering stakes in Accel Partners, and Abingworth LLP ; buyout investors Bain Capital LLC , Hellman & Friedman LLC  and Madison Dearborn Partners LLC; and  Moorfield Group, "  and "Stanford, with an endowment of $12.6 billion, fourth among U.S. schools, is gauging investor interest after its investments lost 26 percent in the year ended June 30."  "Secondary-market trades on some private-equity funds were as low as 10 cents to 40 cents on the dollar earlier this year, according to Laurence Allen, managing member of Nyppex, which advises endowments. Potential buyers were waiting to see yearend statements from private-equity managers that show the value of fund assets."

More from Bloomberg here, http://bit.ly/CYEPz

The Stanford Daily reports that the endowment will be taking bids from investors and secondaries firms until the end of the month. Stanford is not aiming to offload entire investments, but partial interests of ten to 20 per cent across its private equity portfolio.  More here, http://bit.ly/1Tstuu

 Harvard and other university endowments have made substantial efforts to unload portfolio holdings with little success since last year as mentioned in prior IvyPlus blog posts,  http://bit.ly/1MWqJ

 ********  Next  IvyPlus Nov 10th Event – Managing Limited Partner Funds:  Acquisitions and Secondaries.  http://bit.ly/3Ci1B2  *******

Many new fund launches in the last few weeks.  This will be covered in a post on Wednesday.  

Here is a quick run down on  trends in fund raising.  You can find out more on October 6th at our Fund Business Development Seminar/Cram Session.

FinAlternatives announces that hedge fund capital inflows are up $20 billion last month.  As a result of investment gains industry assets are near $1.9 trillion.   http://bit.ly/1H5RJW

The Wall Street Journal announces that Deutsche Bank and Credit Suisse Bank are increasing their staff in servicing Asia Hedge Funds and new U.S. launches.  http://bit.ly/Jjesb

 Hedge Fund Research (HFR) reports that the number of funds closing down has slowed, though we expect a spike at the end of 2009 / beginning of 2010.   Almost 300 firms shut down in the second quarter.  There were 182 new fund launches in the same period as the gap between closing and new funds is closing.  http://bit.ly/3bzdjE

The Wall Street Journal reports that second quarter hedge fund outflows fell 61% from the first quarter .   http://bit.ly/neiAP

 Meanwhile, DE Shaw has announced that it is opening offices in Dubai to help with its capital raising efforts.  http://bit.ly/l1uVN

 Likewise, Martin Currie hedge fund claims that hedge fund inflows are accelerating.  http://bit.ly/jkdEh

***** Quick Reminder, Next IvyPlus Fund Business Development Seminar is October 6th in midtown Manhattan.  http://bit.ly/nUGvs  *********

http://bit.ly/K4crD

Altassets reports that investors have interest in secondary markets because "Some of the advantages of secondary-market investments include: extremely favourable purchase prices now available because of depressed valuations as well as acute liquidity needs among institutional investors; attractive risk-return profiles; and relatively short lock-in periods of around four years. “ ,  You can find more here,

http://bit.ly/9XHNK

Blogger Zero Hedge reports on parallel opportunities on the secondary markets for Hedge funds, from Hedgebay.  Firms such as Laurus have $8 billion of stake on the market.  Other firms that are available are ESL and Ackman.  More info here, 

http://zerohedge.blogspot.com/2009/06/hedge-fund-diversified-portfolio.html

Though there are many discussions about the number of buyers available, there may be some circularity attached to the secondaries as 30% of LPs are saying they may want to purchase secondaries .  Even more circularity is that more than 40% of LPs and institutions would consider buying in the secondary markets but only 10% are considering selling.  A Preqin report noted that most Institutions that are considering secondaries are looking primarily at receiving stakes in buyout funds and fewer are looking at Venture or growth oriented funds.  Most of these investors favor North American or European funds while fewer are considering Asian or emerging markets. 

http://www.eurekaprivateequity.com/All_News.asp?id=9013

The Thunderbird quarterly reports that as bid-ask spreads widened dramatically, secondary market activity slowed.  It expects NAV to decline in 2009 and the markets to pickup more.  Capital raised by secondary funds is still not close to the $15 billion in it’s banner year of 2007, though we are only halfway through the year.  In the Probitas Partners survey, 58% of LPs expected 2009 vintage buyout funds to be highly successful with 42% expecting secondary funds to have great success. 

http://bit.ly/9WXkd

Altassets in a pre meltdown article writes that some secondary Funds of Funds (FOF) have a history of developing first rate relationships with ongoing PE and Venture funds and have advantages of established relationships and liquidity to delivery competitive bids quickly to those funds,

http://bit.ly/Q1BYd.  

Many of those funds have been most active during this period.  We have written about MTVLP’s success in buying shares of emerging technology companies such as facebook on the secondary market at deep discounts. 

http://www.mtvlp.com/article.php?id=76

A recent study out of the University of Maryland claims that business plans do not matter when seeking investors.  This is mostly a numbers game as the average VC looks at 2,000 deals a year which is about 40 a week.  Beyond analysts who are hired to find the best opportunities, senior partners will infrequently review a business plan focusing more on the people running the business and the opportunity. 

"“In general, business plans don’t matter,” said Brent Goldfarb, an associate professor of management and entrepreneurship at the Robert H. Smith School of Business, who wrote the study with David A, Kirsch, also an associate professor at the school, and Azi Gera, a doctoral student. “Nobody is going to read them.”"

Though the study seems to have some basis in reality, we are not sure the NY Times go it right when it claimed the following.

"That means, the study said, that they pay little attention to the documentation from entrepreneurs about their academic credentials, work or start-up experience, previous success in raising equity capital, ability to form a top-notch management team or even how much money they want."

Comments are welcome.

You can find out more here, http://www.nytimes.com/2009/05/14/business/smallbusiness/14hunt.html?_r=1&dbk