To get a quick snapshot of the venture capital sector right now, check out “Business Exits in the Current Economic Environment.” It’s a summary of a panel discussion sponsored recently by the Wharton Entrepreneurial Program.
Wharton management professor Raphael (Raffi) Amit highlighted the major shifts in the sector. No surprise in the steep decline in the number of IPOs by venture-backed companies in the U.S. The number of IPOs plummeted from 260 in 2000 to 13 in 2009, and VC-backed M&A transactions dropped to 260 deals worth $12 billion (as compared to 462 deals worth $99 billion in 1999). Amit also said that investors have reduced their commitment to the industry, from $41 billion in 2007 to $15 billion in 2009 in the U.S.
This crash has been deeper, broader, and much more global than the dot.com debacle of 2000 to 2003, according to Frank Quattrone, co-founder and CEO of Qatalyst Partners, a technology-focused investment bank in San Francisco. And the near-disappearance of credit is putting a further damper on IPOs, particularly for mid-size and smaller cap start-ups. “It’s going to take a longer time to come back…. We’re going to need to get the credit flowing in the economy again before things really open up,” Quattrone said.
The playing field among banks has changed dramatically, too. In the 1980s and 1990s, big investment banks such as Morgan Stanley and Goldman Sachs handled between 5% and 10% of the key technology IPOs. The remainder, including what turned out to be high-profile IPOs for firms such as Sun Microsystems and Adobe, was handled by smaller boutique firms.
“Today, it seems like the feeling is if Morgan and Goldman won’t take your company public, it’s not worth it. It’s like saying, if you can’t get your kids into Wharton or Stanford, they might as well work in the coal mines,” said Quattrone.
What do you think? Is the VC industry “broken” or on the mend? Add your comments below.
What is carried interest? And who earns it? Carried interest, also known as “incentive allocation” or simply “carry,” is the percentage of fund profits charged to the investors as an incentive fee (on top of management fees). Carried interest is the proverbial “carrot” that keeps PE fund general partners striving for better performance.
Most funds typically allocate around 20 percent of the funds profits for carried interest. But the recent turmoil in the markets and less-than-stellar performance figures have put downward pressure on this benchmark over the past two years.
How is carried interest distributed among PE fund professionals? Unlike the hedge fund industry, where 70 percent of a fund’s staff may not receive any upside on performance, 52 percent of private equity professionals reported that they received some level of carry. That’s according to the 2010 Private Equity Compensation Report, published by JobSearchDigest.com
How is carry shared?
27 percent of Associates and 48 percent of Senior Associates reported receiving some carry, although typically at a level of 2 percent or less. Those with carry reported having a holding period of roughly 4 years before they were fully vested in their carried interest.
Perhaps the greatest indicator of whether you will receive carry at a PE firm is how much work experience you have. More experience translates into more senior positions, thus greater carry. The majority of private equity professionals with 10 years or more of work experience have some level of carry as part of their compensation package.
You can read the full 2010 Private Equity Compensation Report at
www.PrivateEquityCompensation.com
Concerns about their job security are almost evenly split among venture capitalists, between “somewhat concerned” at 40 percent and “not concerned” at 47 percent, according to the recently-released 2010 JobSearchDigest PEVC Compensation Report.
Those who were somewhat concerned mentioned fund raising concerns, the risk of being downsized, and the future of the VC industry overall as topping their list of worries. Many worried about their firm’s ability to raise the next fund and the lack of deal flow.
Those who were less concerned often noted that their firm had secured the next round of funding. Others mentioned that they were in the right market (often reported as Asia), could easily find a new job if necessary, or that they were a key to running a particular fund. Managing Partners take note: in good markets and bad, top talent knows they can make a move anytime.
The PEVC Compensation Report is based on a survey conducted in October and November 2009. The date comes from hundreds of private equity and venture capital partners and employees from firms, both large and small. The PEVC Compensation Report is a useful tool to help job seekers better manage their pay expectations and fund managers better establish compensation package benchmarks. You can find the full report at www.PrivateEquityCompensation.com
