Preqin, the investment intelligence data provider, recently released their special report on the state of private equity funds of funds across the world.  Here’s a look.

Where are the Private Equity Fund of Funds Managers?

First, a question – where would you guess the most managers of private equity fund of funds are located?  The United States?  Europe?  China?

Unsurprisingly, almost half of the private equity fund of funds managers are headquartered in the United States (141 out of 293).  Is the second place surprising?  Interestingly, in second place is not a European country, but rather China at 33.  Finance is moving full steam ahead in the Communist country.  The rounding out the top five are Germany at 21, the United Kingdom at 18, and Switzerland at 15.

Other members of the top 10 include France at 13, Spain at 6, and a host of countries at 5 (Denmark, Italy, Japan, Luxembourg, Norway, and South Africa).

by Country Source: Preqin

 

Are Private Equity Funds of Funds Gaining or Losing Ground?

Perhaps the question everyone wants answered is if private equity funds of funds are increasing as a proportion of the total private equity investment universe.  Before looking, take a guess.  Would you think investors are looking to spread out risk among private equity managers, and thereby opting for funds of funds?  Or, perhaps would you guess investors have fees on their minds, and therefore look to minimize allocations to assets with higher management fees, which includes private equity funds of funds.  Here’s the answer.

Interestingly, private equity funds of funds fundraising as a proportion of all private equity fundraising is generally on a downward trend.  Since peaking in 2007 at around 15 percent of all aggregate private equity capital raised, the percentage of total private equity investments allocated to funds of funds has declined precipitously to 4 percent.

A similar trend emerges for the number of funds closed. After peaking in 2007 at around 18 percent, the number of funds of funds closed has declined to about 9 percent of all private equity funds.  Hmm.  Not pretty.

PE fund of funds proportion Source: Preqin

 

What about Investors’ Views of the Key Issues Facing Private Equity?

Shifting now to the reason behind the previous two trends – investors’ perceptions of the private equity industry.  What would you guess is the top concern of investors considering putting money into private equity funds?  Return?  Fees?  Liquidity?  Here are the responses.

Interestingly, the top concern among investors in private equity is the pricing/valuations picture (86 percent).  Apparently, investors are concerned that private equity funds are overpriced.  Intriguing given the relative pricing nature of publicly traded equities and other asset classes.  This concern likely shows up in investors’ concerns about the state of other asset classes.

Are you surprised by the second view – deal flow?  Apparently investors appear keyed in on what the deal flow environment looks like (51 percent).

Other concerns on the list include exit environment (41 percent), fees (38 percent), performance (32 percent), regulation (16 percent), ongoing uncertainty in global markets (11 percent), availability/pricing of debt financing (11 percent), and transparency (10 percent).  It’s an interesting time to be considering private equity.

pe views Source: Preqin

 

Conclusion

Overall, in an interesting review of the state of funds of funds within the private equity universe, investors have a host of concerns and interesting trends to consider.

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In an interesting piece out of CB Insights, Dan Mindus and Max Wessel pose the question – “Do Ex-Startup Founders Make the Best Venture Capitals?”  What would be your guess?  The “intuitive” answer, at least among entrepreneurs, is that ex-startup founders do make for better VC partners.  Why?  Because successful ex-startup founders have walked the walk, and thereby can more successfully invest funds.  That doesn’t appear to be the case.  Here’s a look.

The Evidence

What does the evidence proffered by Mindus and Wessel show?

Mindus and Wessel went through CB Insights’ top 100 VCs in the U.S.  list and correlated this with whether the investment firm was headed by an individual with prior entrepreneurial experience.  Their chart follows.

On the horizontal axis is CB Insights’ rank of VC investors (from 1 to 100).  On the vertical axis is years as a venture capitalists.  Each dot represents a company.  The chart is color-coded, with an orange dot representing firms founded with non-founder investors (non-successful entrepreneurs).  The blue dots are investment firms founded by former successful entrepreneurs.

Notice anything?  Interestingly, no apparent correlation exists, meaning that the the myth among entrepreneurs that former successful entrepreneurs make for better venture capitalists might be wrong.  Hmm.

Capture Source: CB Insights

 

What Did Mindus and Wessel Actually Find?

In Mindus and Wessel’s results, they find that, of the top 100 VC firms, 38 founded or co-founded a company before becoming venture capital investors, while 62 had no such experience.  Perhaps it’s not so bad to be someone from, say, a large company background or from a number-crunching background.

So, Why Don’t Ex-Startup Founders Make for Better VC Partners?

With Mindus and Wessel’s data in the background, why don’t ex-startup founders make for better VC partners? Interestingly, the authors mention the most likely explanation behind why.

Mindus and Wessel mention that perhaps the most important thing venture capital investors can do to help a budding entrepreneur is to generate deal flow.  Although individuals with prior success as entrepreneurs might have ideas on how best to achieve this, they certainly don’t have a monopoly on successful deal flow.  Individuals from large companies or number-crunching backgrounds may be more open to ideas on generating deal flow.

Conclusion

Overall, in an interesting piece out of CB Insights, the authors find that there is little correlation between VC firms with successful ex-startup founders and VC partners with no such experience.  Although the possible explanations for such a finding are many, one potential explanation might be more accurate than any others – individuals with no prior entrepreneurial success may simply be just as good or better at generating deal flow, which is the most important job of an investor.

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Private equity data firm Pitchbook is out with their third quarter of 2017 report on trends in global private equity (PE) deal multiples and other interesting data points.  Among the many interesting findings in the report is a section on the trend in PE fees.  Without looking, what would you guess the trend in PE fees looks like?  Here’s the look.

The Transaction Fee

Of the two most common fees the private equity industry collects, the most common is the transaction fee.  Would you guess the transaction fee is trending higher or lower?  Take your guess now, because the answer follows.

Interestingly, the median transaction fee as a percentage of deal value is trending downward, at least for 2017.  According to Pitchbook figures as of September 18, 2017, the median transaction fee as a percentage of deal value declined to 2.0 percent in 2017, a 1 percent decline from the estimated 3.0 percent in 2016.  The current 2.0 percent is the lowest it’s been since at least 2013 and 2014, when the median fee also bottomed at 2 percent.  The year with the highest median fee was in 2016, at 3.0 percent.  Interesting.

transaction fee Source: Pitchbook

The Monitoring Fee

By far the less common fee imposed by private equity managers, monitoring fees are fees charged by the general partner to the portfolio company for its advisory and management services.  These are much rarer since the Security and Exchange Commission began issuing fines in 2015 to managers attempting to accelerate the monitoring fee.  Perhaps unsurprisingly, limited partners often demand fee offsets, which often allows limited partners to use the monitoring fee to offset the fund management fee.

In any event, would you guess the median monitoring fee is trending up or down?

Interestingly, the fee is generally trending up, and has been trending upwards for two years after bottoming out at about 2.3 percent in 2015.  The current estimated median monitoring fee as a percentage of earnings before income taxes, depreciation, and amoritization (EBITDA in the figure below) is about 4.0 percent.  Interestingly, the fee peaked recently at about 5.0 percent in 2013, and declined in 2014 and 2015 to 4.1 percent and 2.3 percent.

monitoring fee Source: Pitchbook

The Transaction and Monitoring Fees Together

With a picture of the two fees now established, here’s a look at the percentage of transactions with each type of fee.  Before looking, which fee – transaction or monitoring fee – would you guess dominates the other?

Completely unsurprisingly, the percentage of transactions with transaction fees is trending up, currently estimated at 78 percent.  On the other end, the proportion of transactions with monitoring fees is trending downward, currently estimated at 19 percent.

proportion Source: Pitchbook

Conclusion

In an interesting look at the picture of private equity fees, one picture emerges.  Private equity managers are relying more heavily on transaction fees and much less on monitoring fees.  If the recent trend is any indication, it will be that way for a long time more.

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Is Private Equity Headed for a New Buyout Boom?

October 2, 2017

By most measures, the global economy is continuing on a healthy, expansionary path.  Leading the way is the American economy, with the most recent growth figure coming in at a 3.1 percent annualized pace.  The healthy state of the global economy begs the question: is private equity headed for a new buyout boom? Here’s what the […]

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Which Firms Back the Most Unicorns?

September 18, 2017

The question here is simple – which financial firms have the largest exposure to unicorn companies?  Take a guess, because the answer follows shortly.  But, before getting into the list, a review of the top unicorn companies follows. The List of Unicorns First, what is a unicorn?  A unicorn is a company with a private […]

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Looking at the League Tables – Who’s on Top?

September 10, 2017

Every now and then, we like to take a look at Pitchbook’s league tables.  Before taking a look, which entity would you guess is the most active, when measured by deal count?  Which deals were the most significant in the second quarter of 2017?  Which U.S.-based private equity funds raised the most capital in the […]

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Who Is In the New Class of Unicorn Startups?

August 21, 2017

CB Insights, the financial data tracking firm, recently put out a list of a new US-based companies on the “unicorn” startup list (a unicorn is a privately-held company with a valuation of at least $1 billion).  Who’s on it? Just a Little Background Before getting into the list of companies with newly minted valuations of […]

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A Look at the Private Equity Fund Manager Outlook

August 7, 2017

Every half of the year Preqin, the private equity and venture capital research group, does a “Private Equity Fund Manager Outlook”.  They’re out with their second half of 2017 picture.  Here’s a look at what private equity fund mangers think on deal flow and competition, investor appetite, and outlook and future plans. Deal Flow and […]

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Where Are 2017 Private Equity-Backed Deals Heading?

July 25, 2017

We’re a little over half way through 2017, and so far it’s been as an interesting year as expected.  We’ve seen equity markets explode through the roof, home prices continuing to rise, a seemingly never ending investigation into potential Russian meddling in the 2016 Presidential election, rumors of war with North Korea, and a host […]

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Private Equity in Europe

July 10, 2017

Europe is known for a lot of things – good food, amazing vacation locations, obsessive regulations, slow economic growth, densely packed housing, and a host of others. Finance is also something Europe generally does well.  This led us to wonder which European country  has the largest private equity investments as a percentage of Gross Domestic […]

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