Private Equity and Venture Capital Environment from 2015 to Q3 2016

PRIVATE EQUITY AND

VENTURE CAPITAL
ENVIRONMENT
FROM END OF 2015 TO Q3 2016
EXECUTIVE SUMMARY
The success of 2014 excited LPs and enabled GPs to raise more capital in 2015. As
of June 2015, private capital assets under management (AUM) stood at $4.2 trillion.
Funds closed faster and the percentage that hit of exceeded their fund-raising
target was higher. With that, LPs expect PE firms to continue to exceed public
market returns. This expectation, coupled with the record amount of accumulated
cash on hands and increased competition from new players, creates pressure to GPs
to deployed capitals.
High valuation surpassed fundraising to become the largest concern from GPs
globally heading to 2016. (One exception is GPs in the Asia market, who still
struggled with fundraising most). Asset valuation in 2015 rose to 10.1 times EBITDA
(average among all asset class). Multiples in Europe dipped slightly but remained
near all-time highs.
Yet, both LPs and GPs are still looking to deploy more capital in 2016.
Despite much optimism in 2015, the year of 2016 is proving to be a rocky one. The
Brexit referendum caused many investors to hold back from making significant
investment. The U.S. election, potential increase in U.S. interest rates, an economic
slowdown in China, and slower growth globally also made investors more cautious.
As GPs are exercising more caution and scrutiny, the increase in deal value at the
end of 2015 comes to an end.
The cautious approach is strongly displayed in the slowdown in both number and
value of deals in 2016. However, there are strong indications that market activity
will rebound heading into the second half of 2016 and into 2017. Many investors
appear to be taking a wait-and-see approach to the VC market rather than
switching their investment focus entirely, ending the days of FOMO (fear of missing
out) but not abandoning venture funding altogether. Rather than reach for unicorn
status as soon as possible, companies are instead getting more realistic valuations.
PE dealmakers either continue to chase targets that have already displayed
significant and/or sustainable revenue growth, or have the operational prowess and
potential add-ons in mind to provide revenue lift sooner rather than later.

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Private Equity and Venture Capital Environment from 2015 to Q3 2016

Table of Contents
EXECUTIVE SUMMARY................................................................................................. 1
PRIVATE EQUITY & VENTURE CAPITAL IN 2015...........................................................3
OTHER FINDINGS..................................................................................................... 6
PRIVATE EQUITY IN 2016............................................................................................. 7
QUARTER 1.............................................................................................................. 7
QUARTER 2.............................................................................................................. 7
QUARTER 3.............................................................................................................. 7
VENTURE CAPITAL IN 2016......................................................................................... 8
QUARTER 1.............................................................................................................. 8
QUARTER 2.............................................................................................................. 8
QUARTER 3.............................................................................................................. 8
REFERENCES.............................................................................................................. 9

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Private Equity and Venture Capital Environment from 2015 to Q3 2016

PRIVATE EQUITY & VENTURE CAPITAL IN 2015

Despite challenges, PE turned in another surprisingly solid year. LPs enjoyed a
fifth consecutive year when distributions outpaced capital calls, generating
strong net positive cash flow. Exits in 2015 rode a tsunami of corporate merger and
acquisition (M&A) activity as cash rich strategic acquirers set out to buy growth. PE
returns once again began to widen their performance edge over the public markets,
reinforcing investor confidence. With LPs eagerness to recycle their cash
distribution into private equity investment vehicle, PE firms of just about all
sizes, areas of focus and performance track records were able to hit or exceed their
targets.

In 2015, GPs attracted $175 billion for commitments in new buyout funds, 11%
below the amount GPs had raised in 2014. However, PE funds closed faster, and
the percentage of funds that hit or exceeded their fund-raising targets
was higher in 2015 than at any time since the pre-crisis boom of 2007.

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Enjoying recent success (chart below), LPs become hungrier. Nearly one-half of LPs
expect PE will continue to exceed public market returns by more than 4
percentage points, and nearly 90% anticipate PE returns will outperform by at least
2 percentage points. They are willing to back up that confidence with capital, both
over the short and longer term. In a Preqin survey conducted last June, 42% of LPs
said they planned to increase their PE commitments over the coming year,
and 51% would raise their PE allocations over the long term.

Hence, pressures are building up on the GPs to make investments. The first
pressure point is the massive amount of dry powder. Standing at a record $1.31
trillion (including $460 billion dry powder for buyout funds), this pile of cash
increases the already sizable backlog of investible money waiting to be put to work.
The dry powder available for productive investments has further stoked already
intense bidding battles among GPs. Indeed, with more competition on every
deal and shorter time limits imposed by the banks that bring deals to market,
todays auctions often leave potential buyers with little alternative but to bid the
bookthat is, to accept on good faith the sellers assertions about a target
companys market position and growth potential.

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Second, PE firms also face a surge in competition from other formidable

rivalsdeep-pocketed strategic acquirers that are fueling a historic corporate M&A
boom. The crowding of GPs and corporations into the same space has resulted in a
big run-up in asset valuations, which were already hovering near record
highs.
Asset valuations, already high as 2015 began, rose to 10.1 times EBITDA in the US.
Multiples in Europe dipped slightly but remained near all-time highs.

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OTHER FINDINGS

Private capital assets under management (AUM) now stand at $4.2tn

as of June 2015 and the AUM of the core private equity strategies
encompassing buyout, venture capital and other closely related strategies
has expanded to $2.4tn of this total.
As a result of the record distribution levels seen in 2014, private equity
fundraising in 2015 was robust, with 689 vehicles raising money.
The trend of distributions significantly surpassing capital calls
continued in 2015. As of June 2015 (the latest data available) $189bn was
returned to investors compared with $117bn in capital calls, following on from
2014 when $475bn was distribute.
94% of the investors surveyed felt that the performance of their private
equity portfolios had met or exceeded expectations.
The strong performance of the asset class and positive investor outlook
means more capital will continue to flow into the asset class.
70% of LPs and 40% of GPs surveyed believe valuations to be the biggest
challenge facing the industry in 2016. Asia- and Rest of World-based
fund managers, while recognizing valuations as an important issue, in fact
appear more concerned about fundraising.
Venture capital funds also recorded the highest one-year horizon returns
(20.5%) of any strategy and venture capital deal activity reached a record
aggregate level with $136bn from 9,241 transactions.
Fundraising should remain strong due to investor demand, but the challenge
of identifying the best investment opportunities in a competitive
market remains for LPs.

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Overall, valuations are seen by fund managers as the most widespread issue
for private equity in 2016, with 40% of all respondents concerned about
the price of portfolio companies. This issue has seen an eight percentage
point rise from last year, and has overtaken fundraising to become the
greatest challenge that fund managers perceive as facing them in 2016
(Figure 7.3)
Preqins fund manager survey confirms that the majority of GPs are looking
to deploy more capital in 2016 than they did in 2015 despite concern over
valuations. (Figure 7.4)

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Private Equity and Venture Capital Environment from 2015 to Q3 2016

PRIVATE EQUITY IN 2016

QUARTER 1
The first quarter of the year typically sees a slowdown in private equity
fundraising levels after a crescendo of activity at the end of the year, and Q1 2016
was no exception: 150 funds held a final close raising an aggregate $66bn.
Global private equity-backed buyout deal and exit activity also slowed
noticeably, especially when compared with the levels seen in 2015. In Q1 2016, 874
deals worth a combined $44bn and 343 exits valued at $62bn were completed. Total
private equity dry powder is now at a record high ($775bn) and continues to
put pressure on entry prices for assets.
GPs are excising more caution and scrutiny, putting an end to the slump in
deal value at the end of last year.
QUARTER 2
Following reduced activity in Q1 2016, private equity fundraising recovered in
the second quarter, with funds closed securing $101bn only the fourth quarter
since Q1 2008 that fundraising has exceeded $100bn. This was achieved despite
only 180 funds reaching a final close, compared with a peak of 334 in Q4 2013
further evidence of the concentration of investor capital among a smaller
group of larger funds.
Fundraising remains competitive with a record 1,720 funds in market,
although the amount of capital ($447bn) these funds are seeking, is down from
$476bn at the start of last quarter. Due to private equity funds ongoing success in
fundraising, industry dry powder continues to grow, reaching a record $818bn
in June 2016.
Despite the large amounts of capital available to invest and concerns over pricing,
deal activity has recovered from the dip experienced in the first quarter of the
year, which has allowed fund managers to put some of their new capital to work.
The aggregate value of buyout deals was higher in Q2 at $89bn, compared with
$50bn in Q1; venture capital deal value reached $40bn, the second highest
quarterly aggregate deal value on record.
QUARTER 3
Preqins update on private equity-backed buyout deals in Q3 2016 finds that 919
deals were recorded in the quarter, worth an aggregate $90bn this figure is
expected to rise by a further 5-10% as more information becomes available. This
aggregate deal value is on par with the $89bn in deals seen through Q2 2016, but
the number of deals worldwide has declined 13% from the previous
quarter. Activity in Europe fell sharply: the region recorded 303 buyout deals
worth a combined $15bn, down from 371 deals worth $27bn that were seen in Q2.
Across the first three quarters of the year, there have been 981 deals in Europe, the

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highest Q1-3 total since 2007 (1048), but aggregate deal value has only reached
$53bn, the lowest Q1-3 figure seen since 2012 ($49bn).

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Private Equity and Venture Capital Environment from 2015 to Q3 2016

VENTURE CAPITAL IN 2016

QUARTER 1
The first quarter of 2016 extended the global decline in VC activity with both
total deal volume and deal value declining, further following a major dip in Q415.
Some of the factors driving VC investors to take a more measured investment
approach include; an economic slowdown in China, rising interest rates and an
approaching election in the US, and a June referendum over the UKs future in the
European Union.
While disconcerting to the VC community, the decline in VC activity is likely to
be a short-term trend given the amount of liquidity in the market around the
globe. In fact, in the US, Q116 was one of the highest quarters for raising VC
capital since the dot-com boom of 2000. These funds will likely be deployed over
the coming quarters as VC investors renew their focus on finding disruptive or
innovative companies in which to invest.
At the same time, future VC investments are poised to become even more targeted.
Given ongoing market uncertainties, investors are likely to focus on companies
with strong balance sheets or business models that show a strong plan to
achieve profitability. VC investors may also take a more involved approach to
their funding, asking for more input and control over how their invested capital is
deployed.
QUARTER 2
The second quarter of 2016 saw venture capital market activity rise slightly
following 2 quarters of declines. Large rounds by companies like Uber, Snapchat and
Didi Chuxing helped buoy investment despite the ongoing decline in the number of
deals.
While the Brexit referendum in the UK caused many investors to hold back from
making significant investments, over the quarter, specifically in the UK, the
upcoming US presidential election, the potential increase in US interest rates, and
slower growth globally also added to investor caution.
Despite the further drop in the number of VC deals, there are strong indications
that market activity will rebound heading into the second half of 2016 and
into 2017. Many investors appear to be taking a wait-and-see approach to the VC
market rather than switching their investment focus entirely, ending the days of
FOMO (fear of missing out).
In fact, many VC investors are using the current market climate as an impetus to
raise additional funds, rethink their portfolio of investments and focus more
diligently on identifying companies that have strong business models and plans to
achieve profitability. As market uncertainties resolve, these investors are
expected to be looking to deploy the significant amount of dry powder
they have accumulated over the past 6 months.

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QUARTER 3
Investor caution continued to dominate the venture capital market
globally in Q316, extending a trend that began in Q415, keeping investor
funds on the shelf or focused on deals with a significant degree of scrutiny
or investor protections.
Unicorns companies with a $1 billion+ valuation so prominent in Q315, have lost
their luster, with investors less interested in making sure they do not miss the boat
on specific VC trends. Rather than reach for unicorn status as soon as
possible, companies are instead getting more realistic valuations.
This trend toward more realistic valuations is positive. With Q416 set to
bring closure to a number of issues driving market uncertainty, at least in the
United States, the environment may be looking up for VC investment.
There has also been a renewed interest in IPO exits globally in the wake of
Twilios successful IPO in Q216. During the third quarter, a number of technology
companies also initiated IPOs, including Apptio and Trade Desk. In Europe, a region
that typically lags far behind North America in terms of IPO exits, Takeaway.com and
Nets A/S both held successful IPOs. If others in the IPO pipeline globally are also
successful in Q416, the number of IPO exits will be well positioned to rebound
heading into 2017.

REFERENCES

Global private equity report 2016 (Bain & Company)

2016 Preqin Global Private Equity & Venture Capital Report (Prequin)
The Q1 2016 Preqin Quarterly Update (Prequin)
The Q2 2016 Preqin Quarterly Update (Prequin)
The Q3 2016 Preqin Quarterly Update (Prequin)
Venture Pulse Q1 2016 (KPMG & CBInsights)
Venture Pulse Q2 2016 (KPMG & CBInsights)
Venture Pulse Q3 2016 (KPMG & CBInsights)
Private Equity Buyout Deals In Europe Falter In Q3 2016 (Value Walk)

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