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 of other economic and political news.

With the state of the world as it stands now, where would you guess the dollar value of private equity-backed deals is heading in 2017?

The Background

Before getting into some speculation, here’s a look at the value of private-equity backed deals from 2007 to 2016, according to Prequin.

The high-point over the past ten years is 2007, with a massive amount of about $700 billion in private equity-backed deals.

Since peaking in 2007, the dollar value of private equity-backed deals has never gotten close to $700 billion again.  In 2008, the dollar value of deals declined to about $206 billion.

Things didn’t improve in 2009, with the value of private equity-backed deals declining further to a ten year low of just $116 billion, a massive drop from $696 billion just two years prior.

The picture improved somewhat following the end of the global recession in 2009.  The following year, 2010, saw private equity-backed deals gain more than double of the prior year, to $239 billion.

Values continued to climb in 2011, to $279 billion, and stayed there in 2012 at about $278 billion.

In 2013, deal value rose again, to $313 billion, and then jumped again to$363 billion in 2014 and $424 billion in 2015.

Interestingly, although the global economy continued to accelerate in 2016, private equity-backed deal value didn’t.  Instead, private equity-backed deal value declined by about $105 billion to just $319 billion.  OK, but nowhere near the 2007 heydays.

pe deals Source: Statista, Prequin

Some Speculation on 2017

So, with the past ten years’ worth of experience as the background, where is 2017 private equity-backed deal value heading?

Obviouisly there are only two directions the figure can go – up or down.  Presuming the global economy doesn’t deteriorate into a recession, private equity-backed deals probably don’t have a huge downside risk.  Perhaps the lowest private equity-backed deal value could reach is maybe $250 billion.  What about the high end?  Well, given that the global economy also doesn’t look like it’s headed for a euphoric bubble, the high end might be somewhere around $450 billion.

These two figures – between $250 billion and $450 billion – represent a huge range, a range that will either leave billions on the table or billions made.  Ahh, the lovely game of private equity.

Conclusion

Overall, private equity-backed deal value sharply declined during the 2008 and 2009 global financial recession.  Since then, private equity-backed deal values have moderately recovered, reaching $319 billion in 2016.

The question now is: Where is deal value heading?  Will private equity-backed deal values rise again, perhaps to above $400 billion or are deal values due for another lackluster year in 2017?  The answer to this question largely depends on how expectations for the future of the global economy for the remainder of 2017 and through 2018 play out in the minds of private equity investors.

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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 Product (GDP).

Take a Guess

Before looking at the data, take a guess at which country you think is the top place – as a percentage of GDP – for private equity investments – and which country is the worst.

Perhaps Germany, the strongest country, perhaps the only country keeping the Eurozone together.  Perhaps France, with its well-known technology sector.  Perhaps Spain, a large country in the center of Europe with strong ties to the less developed countries of South America.  Perhaps the Baltic countries because of their ties to Mother Russia?  Perhaps a small country, where a few big private equity investments could move a country up the list very quickly?  Take your guess.

The Top Ten

Here’s a look at the list.  Fascinatingly, on top of all other European countries is Luxemboug, at 1.25 percent.  Luxembourg comes up as the only country above 1 percent.

The remaining members of the top 10 include Denmark at 0.65 percent, the Netherlands at 0.50 percent, Finland at 0.50 percent, the United Kingdom at 0.48 percent, Norway at 0.45 percent, France at 0.38 percent, Sweden at 0.38 percent, Belgium at 0.34 percent, and Austria at 0.32 percent.

peeurope Source: Statista

The Bottom Ten

What about the bottom ten?  Interestingly, the worst country for private equity investments as a percentage of GDP is the Czech Republic at 0.01 percent.  Other bottom dwellers include Romania at 0.09 percent, Portugal at 0.09 percent, Other CEE at 0.12 percent, the Baltic countries at 0.13 percent, Spain at 0.14 percent, Hungary at 0.15 percent, Italy at 0.16 percent, and Poland at 0.19 percent.

The Middle Group

Three countries that fell in the middle are somewhat surprising.  These are Ireland at 0.31 percent, Switzerland at 0.22 percent, and Germany at 0.22 percent.

Conclusion

In looking at the most recently available data on private equity investments as a percentage of GDP in Europe, some surprising findings emerge.  Countries we might have expected to see at the top, or the bottom, were not there, but rather, fell in the middle of the pack.

Of all the countries in Europe, Luxembourg came in with the highest private equity activity – the only country above 1 percent. The other top countries for private equity investments ranged from 0.63 percent to 0.32 percent.  That rounds out the top ten.

The bottom ten started their lows at 0.01 percent.  The other nine then ran the gamut from 0.06 percent up to 0.19 percent.

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This past week the Fed announced another quarter point rate hike.  The Federal Funds target rate will soon range from 1% to 1.25%, a full 1% higher than the when the Fed began its so-called “tightening” cycle in December 2015.

Question: How might the upcoming Fed tightening moves affect the venture capital markets?  Here’s some speculation.

The Federal Funds Rate

First, a look at the Federal Funds rate, from the 1970s to today.  Over the past 30 years, the Federal Funds rate has varied widely.  In the early 1980s, the rate briefly surpassed 20% – the period known as American hyperinflation.

Since that experience, inflation has been more in control.  Throughout most of the 1980s, the Federal Funds rate generally declined, almost reaching 5% by the end of the decade.

The 1990s also saw a generally sanguine Federal Reserve, moderately lowering or increase the Federal Funds target rate as the economy – or politics – permitted.

Recently, the Fed began another tightening cycle, begun in December 2015.  Given the already incredibly low rate, the question here is whether the Fed’s new attention to raising interest rates will have an effect on private markets, in particular the venture capital markets.

ff Source: Federal Reserve

The Venture Capital Markets

Now, to the venture capital view.  Here’s a look at venture capital deals from 1995 to the first quarter of 2016.

The number of deals generally follows the business cycle, although the sector has some historical nuances.

As any market observer well knows, the dot-com bubble saw massive growth in the number of venture capital deals, an experience that has yet to be repeated almost 20 years later.  The number of venture capital deals over the past 20 years hasn’t even gotten close.

Consistent with the general economy, activity in the venture capital industry dropped off after the financial crisis of 2008/2009, and has since gingerly recovered, although recent estimates have the industry cooling off again.

vc

Putting the Two Together

So, is there a connection?  The simple answer is – kind of.  To any venture capital financier, it’s well known that the interest rate can affect the value of deals, although the current tightening cycle is still so low that the interest rate is likely to have only a very small impact on the attractiveness of venture capital deals.

What seems to be more present in the data is the overall economic conditions rather than the state of the Federal Funds rate.  Should economic conditions continue to improve, then venture capital markets will likely continue to expand regardless of what the Federal Reserve decides to do with the Federal Funds rate.

Conclusion

Overall, in looking at the Federal Funds rate and the historical performance of the number of venture capital deals, it’s unlikely that further tightening by the Federal Reserve in the coming year will have any measurable impact on the state of the venture capital markets.  Instead, the overall economic growth picture will likely have the larger effect.

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The Jobs Report Stunk. What Does the Financial Jobs Picture Portend for the Latter Half of 2017?

June 12, 2017

Friday’s jobs report could aptly be described as a stinker.  Month-over-month employment growth came in at +138K, a fair bit below analysts’ expectations.  Early month’s growth figures for 2017 were also revised lower, to +50K for March and +174K for April.  The May results beg the question – is the economy header for a recession, […]

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Who’s #1? Looking at the Global League Tables

May 17, 2017

We always find it interesting to see which private equity and venture capital firms are on top of Pitchbook’s Global League Tables.  Here’s a look. Private Equity Firms The U.S. Before looking, which private equity firms would you guess would be on top in the first quarter of 2017?  The firms on top of the […]

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Looking at the State of Venture Capital in 2017 So Far

May 2, 2017

Pitchbook, the private equity and venture capital data collection firm, is out with a look at the state of venture capital industry in the United States so far in 2017.  Here’s a look at what we find to be the 4 most interesting findings. #1 – A Slow Start to the Year First off, activity […]

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What’s Going On With Exit Value and Post-Money Valuation?

April 17, 2017

In the past few quarters, we’ve seen an interesting trend in the venture capital exit markets. This trend is that there’s a growing number of deals where the exit value is less than the most recent round of post-money valuation. Some say it might be a disturbing trend – after all, how could it be […]

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Looking Back – and then Forward – on the Financial Industry Jobs Picture

April 3, 2017

The jobs market looks good.  In 2016, the U.S. economy created about 2.2 million jobs.  That’s slightly lower than the 2.7 million in 2015 and 3.0 million in 2014. Wages, a laggard in the current economic boom, are also starting to show up stronger.  Wages accelerated to 2.8 percent year-over-year growth in 2016, a fairly […]

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Private Acquirers vs Public Acquirers – Who Performs Best?

March 20, 2017

Mergers and acquisitions (M&A) are a massive component in global financial activity, amounting to perhaps $5 trillion in activity in 2015 alone.  With such a large dollar volume, some analysts (mostly academics) wonder why a large portion of studies on M&A activity show very little financial gain to the acquiring firm from their M&A activity. […]

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A Look at What Happened to Private Equity Cash Compensation in 2016

March 6, 2017

Every year Job Search Digest reviews what happened with private equity cash compensation.  Would you guess cash earnings went up or down in 2016?  What percentage of earners made more than $1 million?  How many made less than $50,000?  Here’s a look. The 2015 Picture Before going into the 2016 results (the report’s entire results […]

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