Highlights:

– European Fundraising Hits a Post-Financial Crisis High
– US VC Investment is On Pace to Match 2015’s Record
– First Half Secondary Volume is Down 20 Percent
– Brace for Lower Returns From PE
– Calpers’ New CEO May Boost PE Allocation
– PE KeyTrends Quick Question Results



EUROPEAN FUNDRAISING HITS A POST-FINANCIAL CRISIS HIGH
in the first half of 2016, reports Financial News. Europe-focused private equity funds centered on buyouts, venture capital, mezzanine finance, secondaries and co-investments raised $67.13 billion in the first six months of the year, “the strongest overall half” since 2008. Though uncertainty over the macroeconomic repercussions of the UK’s June vote to leave the European Union could slow fundraising in Europe in the second half of the year, the impact – particularly outside of the UK – is likely to be muted. According to Palico’s Summer 2016 Global Private Equity Compass, 70 percent of investors are increasing their allocations to PE relative to other assets this year, despite a slowdown in distributions. Long-term euro-denominated PE investments are also attractive for US-based investors, given the historically favorable exchange rate for the dollar.

FINANCIAL NEWS



US VENTURE CAPITAL FUNDING IS ON PACE TO MATCH 2015’s RECORD,
notes Bloomberg. Venture capitalists invested $40 billion in US startups in the first half of 2016, “on track to match” the all-time annual high of $79 billion invested in 2015. Most of the money is going to larger, later-stage startups – in particular to unicorns, private companies valued at $1 billion or more, usually with ambitions to totally dominate their sector. “With just 990 angel and seed stage” investments in the first half of the year, “the volume of new startups getting funded is hovering around 2012 levels.” While “still triple the number backed in 2010,” that represents a “come down from the ‘back everything’ mentality” that characterized VC investing in the last few years.

BLOOMBERG



FIRST HALF SECONDARY VOLUME IS DOWN 20 PERCENT,
according to a report from Greenhill Cogent. Private Equity International observes in its coverage of the report that the decline in crude oil prices, stock market volatility, the UK referendum on whether or not to leave the European Union and concern about economic slowdown in China, “all contributed to the drop in trading” of closed private equity funds on the secondary market. Greenhill Cogent writes that “the lower level of volume” – some $12 billion in H1 – “is not surprising given the unusual number of macro events causing uncertainty.” Greenhill Cogent nonetheless expects deal making to accelerate rapidly in the second half and predicts total 2016 volume of $35-$45 billion. Specialist secondary funds are under pressure to invest record levels of committed but uninvested capital and, as Greenhill Cogent observes, “the second half of the year is typically busier than the first half.”

GREENHILL COGENT
PRIVATE EQUITY INTERNATIONAL



“DON’T COUNT ON THE KINDS OF RETURNS WE ONCE EARNED”
That was the principal message from the “leaders of one of the world’s largest private equity firms” – Carlyle group co-founders William Conway and David Rubenstein – on their recent quarterly earnings call, according to the Wall Street Journal. “Competition for deals from corporate buyers and fellow PE firms have made bargains harder to come by.” “Right now, it is tough to earn returns of 20 percent or more in the PE business,” said Conway, “referring to the returns historically achieved by the industry’s top-performing funds.” Rubenstein chimed in: Nonetheless investors are “willing to take lower rates of return than the kinds that we’ve averaged over our history. It’s just so difficult now with low interest rates and low equity market appreciation to get” relatively high returns with any investment other than private equity.

WALL STREET JOURNAL



CALPERS’ NEW CEO MAY BOOST PRIVATE EQUITY ALLOCATION.
Marcie Frost, named CEO of the California Public Employees’ Retirement System, the largest US pension fund, after Anne Stausboll retired in June, may increase the bellwether pension fund’s commitments to private equity, notes Bloomberg. “When you’re looking at the low rate of return environment in the public markets, I don’t think you can ignore PE,” she said in a phone call with journalists. “This could be a low-rate environment for a period of time and we have to factor that in when we do our allocation homework.” Frost, executive director of the Washington State Department of Retirement Systems since 2013, will start at Calpers in October. The Washington public pension fund has modestly higher PE allocations and returns from PE than Calpers.

BLOOMBERG


AND NOW THE RESULTS OF SOME OF OUR RECENT KEYTRENDS QUICK QUESTIONS:

  • 79 percent of responding GPs say it is significantly harder in the US to find cheaply priced bank debt for PE-backed acquisitions valued at less than $1 billion than it was a year ago.
  • 63 percent of respondents say the broad adoption of the Institutional Limited Partners Association’s new template for fee and cost disclosure would bring a satisfactory level of transparency to private equity investing.
  • 50 percent of LPs say that they are paying fees to GPs more often than not for co-investments.



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