Highlights:

– Chorus Warning PE Returns Will Come Down Grows
– PE AUM Predicted to Grow 81 percent by 2020
– The VC Firms Best at Spotting Unicorns
– A Top Unicorn Spotter Reveals Investing Strategy
– PE Partnerships with Brokerages Have Yet to Hit Their Stride



THE CHORUS WARNING THAT PE RETURNS WILL COME DOWN GROWS.
Thanks to quantitative easing and zero interest rate policies, “the past few years have been kind” to private equity firms, writes the Financial Times. But “the outlook” for PE managers “may not be as terrific.” “It is not apparent that their stock of portfolio companies can be replenished as attractively as it once could.” That’s because corporations “are under pressure to spend their idle cash” through share buybacks and mergers and acquisitions, contributing to record purchase prices relative to cash flows – at a time when earnings growth in many sectors is deteriorating. Meanwhile, PE Hub, covering the Chicago Buyouts conference, notes a warning from Thoma Bravo founder Carl Thoma: “If I was a limited partner, I would be trying to convince my board and investment committee that PE returns in the future are going to come down. Not in the short run. There’s a lot of profits in the pipeline, [but we need to] start to manage down expectations in our industry.”

FINANCIAL NEWS
PE HUB



PE ASSETS UNDER MANAGEMENT ARE PREDICTED TO GROW 81 PERCENT
over seven years, driven largely by Sovereign Wealth Fund demand, according to PWC’s report,“Alternative Asset Management 2020.” From $3.6 trillion at the end of 2013, PWC forecasts PE assets will grow to $6.5 trillion in 2020 under a “base case” assumption of a “rise of interest rates in the U.S. and Europe, coupled with a normal correction in the capital markets.“We clearly see sovereign investors as the catalyst for growth in alternative investment, with a particular emphasis on PE,” Mike Greenstein, PWC’s global alternative asset management leader, tells Private Equity International. Notes PEI’s story on the report: ““Within alternatives, SWFs have a preference for infrastructure and PE, largely due to their interest in less liquid but higher yield” investments.The report observes that SWFs “pay a great deal of attention to past performance regardless of the size” of the manager:“If long-term performance is outstanding, firms of any size can secure mandates.”

ALTERNATIVE ASSET MANAGEMENT
PEI



IF YOU’RE WONDERING WHICH VC FIRMS CAN SPOT EVENTUAL UNICORNS
– startups whose private market value eventually hits $1 billion – Quartz has ranked them by their success. “For investors with deep enough pockets, it’s easy to just go ‘logo shopping’ and invest in hot startups, solely to be associated with them. But getting in early is often where the biggest returns are.” It’s also difficult to do: early-stage startups “might have a barely working prototype – or perhaps just an idea.” Tracking early-stage investments in the U.S. – seed and series A rounds – from 2000 through June 10, 2015 the top three of 59 unicorn investors ranked by Quartz are Sequoia Capital with 17, SV Angel with nine and First Round Capital with eight. Yet when unicorns are looked at as a percentage of the total startups the VCs underwrote, the list changes, with Union Square Investors rising to the top with 8 percent, or 5 unicorns out of 62 early stage investments. That’s considerably better than Sequoia’s still impressive 5.5 percent and third-ranked Benchmark Capital’s 4.5 percent.

QUARTZ



A TOP UNICORN SPOTTER REVEALS STRATEGY AMID RECORD VALUATIONS.
First Round Capital has taken the exceptional step of publishing its most recent quarterly letter to investors, eager to explain that though they “can’t forecast the future,” they “do have a calculator.” The rapid rise in unicorns – startups with a private market value of $1 billion or more – represents “a tremendous shift in the way startup companies get valued,” and some unicorns “will be exposed as nothing more than horses with sticks taped to their heads,” writes First Round. They are investing, but not expanding fund sizes amid the VC boom. Given price inflation, First Round has a correspondingly higher rate of conviction in its investments. “We believe that great companies can be started in any market, and we have tried to remain disciplined (in an undisciplined market) and focused on the two numbers that matter: entry price and exit price.”

FIRST ROUND CAPITAL



PE PARTNERSHIPS WITH BROKERAGES HAVE YET TO HIT THEIR STRIDE,
if recent figures from Carlyle are any guide. Private Equity International writes that Carlyle “has drawn in nearly $108 million for Carlyle Private Equity Access Fund 2014 since last November, as the firm reaches out to high net-worth individuals to broaden its investor base beyond big institutions.” The fairly modest sum belies the ambitious predictions of some industry pundits, particularly for firms like Carlyle, working in close cooperation with brokerages and their networks of advisers to the wealthy. “Carlyle is working with Raymond James and LPL Financial to target investors through the respective firms’ wealth channels.” Carlyle’s vehicle targets “people with at least $5 million in investable assets.”

PRIVATE EQUITY INTERNATIONAL