Pitchbook is out with initial estimates on the number of venture capital exits via private equity buyouts in 2014. Perhaps surprisingly, the figures show some incredible strength.

Initial estimates put the number of private equity buyouts via venture capital exits at 138, an increase of about 25 percent from 2013. Private equity purchases via venture capital exits have been on a consistent growth path since bottoming in 2009 at around 40.

Since 2009, the sole year of weakness (on a year-over-year basis) occurred in 2013, with venture capital exits via private equity buyouts declining slightly from 2012.

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What’s Behind the Jump?

Pitchbook’s data showed a broad range of reasons for the strength, including reasonable valuations, sector-specific strength, low interest rates, and availability of investable capital.

Overall, based on early readings, private equity firms were somewhat shy of the rising valuations in 2014, which seemed to shift the industry’s focus more towards the lower to core middle market, a place where venture capital firms typically reside. With the strong growth trend from 2009 to 2014, the question arises – will it continue?

Initial indications are yes, although there is growing uncertainty about how the global economy is going to affect private equity’s desire to continue certain types of buyouts. There is also a concern that the industry may develop an expectation that valuations are too strong, and will therefore wait until valuations become more favorable.

With this as the background, projections for 2015 have the number of buyouts via venture capital exits expanding from the 138 to around 150. Most of the growth is anticipated to show up in the information technology and health care industries, the two areas with the greatest growth over the past five years.

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What Could Derail Continued Strength Beyond Simply Concern About the Economy?

It’s understood there is a lack of confidence in the strength of the global economy. What other risks are out there that could derail continued strength in the activity of private equity buyout firms?

Well, of the many potential surprises – including policymaking, war, and other geopolitical surprises – rising interest rates are probably the biggest risk to confidence. If interest rates start to rise – and they might if the Federal Reserve has its way – private equity buyouts via venture capital exits may become less profitable, which might push off dealmaking until there’s an expectation that interest rates are again close to bottom.

Conclusion

Overall, 2014 was a year of record private equity buyouts via venture capital exits, with total buyouts of this type up almost 350 percent since bottoming in 2009. Behind the strength is a growing economy and reasonable valuations in select sectors.

Initial indications are that 2015 will continue the upward momentum, although there is growing concern about how the global economy might affect private equity’s confidence in venture capital-backed businesses, particularly those in the lower to mid-tier.

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The private equity industry is, surprisingly, closely connected with movements in the oil market. Part of this certainly stems from macroeconomic forces and their effect of the private equity business as a whole. Another part stems from the massive involvement the private equity industry has in putting together deals for the oil and natural gas industry.

Given the importance of the oil and natural gas industry to the private equity industry, the question here is simple – when will the oil price drop show up in the labor market?

Background

The price of West Texas Intermediate Crude Oil peaked on June 20, 2014.

Since then, the world’s most influential commodity has been on a downward spiral, dropping over 50 percent in value, from $108 per barrel to under $50 per barrel.

West Texas Intermediate

Due to the volatility of crude oil, the drop initially had no immediate effect on the oil businesses – at least when measured by oil industry investment or rig count.

That began to change in October 2014, the month in which oil rig counts across the U.S. started to peak. The first graphic is a look at weekly oil rig counts across the U.S. from 1988 to the first week of 2015.

U.S. Rig Count
The next graphic is of oil rigs by state, with the first being all states excluding Texas and the second being just Texas. (Texas is broken out because of the size of the industry relative to every other state.) Businesses in most states started shutting down oil rigs around October 2014, with some a little before and some a little after.

State Rig Counts, Exluding TexasRig Counts, Texas

Overall, there was around a three and a half month lag between when the price of oil started declining and when rigs started being taken off line.

Effect on Labor Market and Private Equity

What does this mean for the labor market and the private equity industry? Well, unsurprisingly, this means there’s greater downside risk to employment growth in the Natural Resources industry and dealmaking in the broader energy sector.

When will the currently “theoretical” effects of the oil price drop show up in the labor market? The simple answer is any day now.

Here’s a look at employment in the Natural Resources industry since 2010. The bars represent the month-over-month growth in employment.  The gray horizontal lines represent the average for the quarter. Interestingly, except for perhaps the most recent November estimate, the oil price decline is not showing up in the employment figures (this is shown by the drop in the gray horizontal line from the previous quarter). This might change quickly and is certainly something to watch for in the coming months if you’re looking for signals on the strength of the economy to withstand the drop in the price of oil.

Employment Natural Resources

Conclusion

Oil prices started dropping in June 2014.  In October 2014, rigs in the U.S. started falling off.  Early indications are not yet indicating much of an effect on Natural Resource employment from the oil price drop.  Given the lagged effect, that could change quickly in the coming months.

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Job Search Digest recently released their 2015 Private Equity and Venture Capital Compensation Report.  In it is a great deal of detail about how firms reacted to the changing market conditions in 2013 and 2014.  Among the various interesting findings, here are three.

Job category with Highest Bonus as a Percentage of Total Compensation

Of the following 13 job categories, which would you guess has the highest percentage of total compensation from bonuses?

  1. Accountant/Controller
  2. Analyst
  3. Associate
  4. CFO
  5. Director
  6. Investment Manager
  7. Managing Director
  8. Managing Partner
  9. Partner
  10. Principal
  11. Senior Analyst
  12. Senior Associate
  13. Vice President

Interestingly, according to the data collected in this year’s survey, Managing Partners have the highest percentage of total compensation stemming from bonuses at 55 percent.  Rounding out the top 5 are Managing Directors at 41 percent, Vice Presidents at 41 percent, Directors at 40 percent, and Associates at 36 percent.

On the other end, the job categories with the least amount of compensation stemming from bonuses include Partners at 21 percent, Analysts at 22 percent, Senior Analysts at 26 percent, Accounts/Controllers at 26 percent, and CFOs at 27 percent.

Percentage of Total Pay from Bonuses

Does Pay Follow the Order of the Size of Bonuses?

Interestingly, the answer to this question is generally no, although there is some correlation. Here is what overall pay looks like for these job categories by base pay and bonus pay.

On top of the total compensation (base plus bonus) is Managing Directors at $477K, followed by Managing Partner at $460K, CFO at $382K, Partner at $334K, and Principal at $317K.

Perhaps unsurprisingly, only two of these five job categories – Managing Directors and Managing Partners – show up in the top 5 of job titles where a large portion of pay stems from bonuses. The job categories of CFO and Partner show up in the bottom 5 of positions with income stemming from bonuses, while Principals are in the middle of the bonus range.

On the bottom end of the private equity pay spectrum are Analysts, Senior Analysts, Associates, Accountants/Controllers, and Senior Associate.

Avg Total Comp by Job Title

Compensation by Firm Size

Which of the following would you guess has the highest average compensation?

  1. Up to 5 employees
  2. From 6 to 9 employees
  3. From 10 to 24 employees
  4. From 25 to 49 employees
  5. From 50 to 99 employees
  6. 100 or more employees

The answer: firms with an employment range from 50 to 99 employees (i.e. not the largest private equity employers!).  In second and third place are firms with 25 to 49 employees and firms with 10 to 24 employees respectively. Surprisingly, firms on the bottom end of the pay spectrum are firms with 6 to 9 employees, firms with up to 5 employees, and firms with 100 or more employees.

PE Comp by Firm Size 2015

Conclusion

Job Search Digest’s recent annual update of its Private Equity and Venture Capital Compensation Report contains some interesting insight into how firms are responding to market conditions and altering their compensation strategies. Readers will find this information helpful as they evaluate their own current pay or if seeking a new role, negotiating the pay when they receive an offer.

To purchase a copy of this year’s report, please visit www.privateequitycompensation.com.

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A 2015 Outlook for Private Equity Jobs

December 15, 2014

2014 is coming to an end.  With the year almost over, it seems fitting to review h ow private equity employment did through the year and what we can expect for the year ahead. A Look Back at 2014 – Actual Employment The following is a look at total private equity employment since 1990.  Overall, […]

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Recent Survey Results on Environmental and Social Governance of PE Firms

December 1, 2014

Pitchbook recently released some interesting results of its environmental and social governance survey of PE firm policies.  The following is a review of some of the more salient points. Existance of an Environmental and Social Governance (ESG) Policy First, Pitchbook asked the 104 general and limited partners whether their firm had an ESG policy. Unsurprisingly, from […]

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A Look at 3Q Private Equity Deal Flow to the IT Sector

November 17, 2014

Pitchbook is out with their third quarter numbers of private equity deal flow to the Information Technology (IT) sector.  Here’s a review. Private Equity Deal Flow by Capital Invested and Number of Deals The first graphic looks at private equity deal flow by capital invested and number of deals in the IT sector. In the third […]

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Does Federal Reserve Policy Affect Private Equity Employment?

November 3, 2014

The Federal Reserve officially announced the end of quantitative easing at its October 2014 meeting.  The announcement of the end of quantitative easing (known as QE) presents private equity professionals with the question: How will an increase in the Federal Funds rate affect private equity employment?  Does what the Fed do affect the private equity industry […]

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What Does the Recent Geography of VC Investments Look Like?

October 20, 2014

In recent years, the venture capital and private equity industries have gained some serious ground.  Although industry conditions have improved significantly in 2014, there’s still room to grow, at least if one thinks the technology boom is where the industry needs to be.  Of course, even if one thinks the technology period was too much […]

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What’s Up with Recent Revenue Trends and Enterprise Values?

October 6, 2014

The private equity world has been through some rough times in the past few years.  Judging by the recent revenue and enterprise value trends, those rough times are now gone. Revenue Trends Depending upon the industry, interested investors, and the state of the economy, revenue is a critical component in deal evaluations. Given the importance of […]

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A Year into Italian Crowdfunding: How is it Looking?

September 22, 2014

It’s been a year since Italian policymakers loosened bureaucratic control over the start-up world.  How have things gone during the first year of Italy’s crowdfunding? Background of Italy’s Crowdfunding As some history, Italian politicians are the first in the world to allow retail equity crowdfunding, with “no” limits on investment options.  The “no” limits statement […]

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