– Is Late-Stage Funding Fueling Tech Investment Bubble?
– SEC PE Speech is A Laundry List of the Regulator’s Concerns
– EMPEA Annual Investor Survey Shows Big Jump for India
– Impact Investing Grows in Importance
– A Bellwether Investor Plans to Increase Direct Investment
“PEOPLE SEE SHADES OF 2000” IN SILICON VALLEY’S “EYE-POPPING VALUATIONS,” notes the New York Times DealBook in a reference to the tech bubble that burst so dramatically at the turn of the century. The piece details the intensifying debate concerning the rationality of the prices venture capital firms are paying for tech companies – particularly in “late-stage” funding rounds. Tomasz Tunguz, a partner at Redpoint Ventures, who believes “investors are paying twice as much for stakes in private technology companies” as they are for those that are publicly traded, calls the phenomenon “a runaway train of late-stage fundraising.” The tension swirling around investment rationale is also a major theme in a lengthy New Yorker profile of Marc Andreessen and his aggressive VC firm Andreessen Horowitz. More traditional VCs are “disturbed” by Andreessen Horowitz’s focus on “later, costlier growth rounds” and the “lavish prices” it pays.
THE SEC SHARES “OBSERVATIONS” TO HELP PE “BOLSTER COMPLIANCE.” For a laundry list of the problems the U.S. Securities and Exchange Commission continues to find in private equity, read this speech, delivered two weeks ago at Private Equity International’s Private Fund Compliance Forum by Marc Wyatt, acting director of the SEC’s Office of Compliance and Examinations. While Wyatt noted that the industry “is reviewing and often changing” for the better practices and disclosure regarding fees and expenses, not enough has been done yet. “Here, I would encourage GPs to engage with their investors to obtain whatever consents are necessary” to reflect changes, says Wyatt. He also lists new “deficiencies” that have come to the SEC’s attention: Among them, “shifting expenses from parallel funds created for insiders, friends, family, and preferred investors to the main co-mingled flagship vehicles” and inadequate “co-investment allocation” disclosure. Wyatt says managers should have “a robust and detailed” co-investment policy “which is shared with all investors.”
THE EMPEA’S GLOBAL LIMITED PARTNERS SURVEY IS OUT. The Emerging Markets Private Equity Association’s annual survey of 141 investors notes that some 47 percent plan to increase emerging market PE investment over the next two years. That’s a healthy percentage, but it’s also the lowest in five years. The 16 percent intending to decrease commitments to emerging market PE over the same period is the highest in five years. Investors “view the difficulty of measuring performance and benchmarking” as the top investing challenge. Lack of transparency and “the cost and time required for due diligence” are the second and third biggest barriers. Latin America not including Brazil, Southeast Asia and Sub-Saharan Africa are the three most attractive markets, with Latin America and Sub-Saharan Africa “poised to see the largest influx of new capital.” “The biggest mover from 2014’s survey is India,” which rose to the fourth most popular market from eighth last year. India’s popularity is largely explained by the election of a reform-minded national government in May 2014.
THOUGH STILL SMALL, IMPACT INVESTING IS GROWING IN IMPORTANCE, reports the New York Times DealBook. Private equity firm First is “on track this year” to raise Brazil’s largest such fund “and it is being supported by some big players” including JPMorgan Chase, the World Bank and the Roman Catholic Church – the involvement of the latter “reflects the growing interest in the sector by Catholic groups worldwide.” In impact investing, “not only are investment gains important, but the fund also gauges whether its investments are providing social improvements” in areas like “education, healthcare or the environment.” Within a year, First is expected to hit its $125 million target – which “would be more than half of the cumulative $177 million raised by all other impact funds in Brazil from 2004 to 2013.” “Impact investing is growing globally,” with the number of organizations catering to interested investors” up 17 percent over last year and $12.2 billion likely to be invested via impact funds in 2015. Now that industry giants like Bain and Blackstone have announced impact investing initiatives, growth may well accelerate.
IF LPs FOLLOW THE CAISSE, A LOWER PERCENTAGE OF PE MONEY WILL GO TO GPs. The Caisse de dépôt et placement de Québec, a bellwether of private equity investing trends, is “trying to heavily increase” investments in illiquid asset classes, including PE, according to Private Equity International. That should be music to the ears of fund managers, but it is not as good as it sounds. The $13.9 billion the Caisse currently has invested directly into PE deals will increase to approximately $30.7 billion in four to five years, representing a gain of 121 percent, but the portion allocated to classic funds will rise by a much smaller amount, going from $7.4 billion to an estimated $10.7 billion. That means fund investments will drop to 26 percent of the Caisse’s PE portfolio from 35 percent today. More money is going to PE, but classic fund managers are increasingly competing tooth and nail with alternative forms of PE investment.