Recently, chatter has focused on whether the technology industry is in a bubble.  Is it?

Individuals following say, home prices in San Francisco, one might get the impression that it is.  Since bottoming in January 2012 at about $621K, the median home price in the Bay Area is now approaching $1.1 million, a growth of about 75% in just 3 years.

Median Home Price in San FranciscoValuations

Others point to the enormous valuations some of the “rockstars” of the tech industry are getting for their companies as a signal that things are getting a little frothy.

As examples of frothiness, just look at what the valuations of some tech industry companies are getting.  Uber, the ride sharing service, recently raised $1 billion on an enormous $40 billion valuation.  Snapchat, the more private way to share pictures and texts, is purportedly raising money on a $19 billion valuation.  And Pintrest, the site where mostly women comment and post about the niceties in their lives, is raising funds at an incredible $11 billion valuation.

How could there not be a bubble with such unproven valuations?

The One Chart That Answers the Question

But, are these indicators really reliable signals that the technology industry is in another bubble phase – 15 years after the internet stock bubble exploded in 20o1? Here’s the one chart that should answer this question.

On the left axis and in blue is the amount invested in IT industry startups, as measured by Price Waterhouse Coopers’ MoneyTree survey. On the right axis and in orange is the number of deals in IT industry startups, again, as measured by Price Waterhouse Coopers’ MoneyTree survey. It’s impossible to miss the “bubble” that occurred in 1999 and 2000.

The dollar volume of deals exploded from $9 billion in the first quarter of 1999 to a peak of $41 billion in the second quarter of 2000. Simultaneously, the number of deals expanded from 1,306 in the first quarter of 1999 to 3,087 at the peak in the second quarter of 2000.

How does this “bubble” experience compare to today? Simply put, today’s strong technology industry startup scene is simply experiencing a “boom.”

It’s easy to see the booms and busts since 1995, but one thing is fairly clear – bubbles are much less common and current conditions in the IT industry startup world are, right now, nowhere near bubbly territory.

IT Industry.fwConclusion

Overall, the chatter that the startup scene in the IT industry is probably overblown. When looking at the history of the number of deals and the amount invested, there’s a clear distinction between “bubble” territory and simply strong growth that’s likely to experience some bust in the next year or so.

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This Friday is the 14th annual Beecken Petty O’Keefe & Company Private Equity Conference. Each year, the private equity conference focuses on a unique theme through a series of fireside chat and panel sessions with various industry experts.

This year, the conference’s theme is “Return Realization: Positioning and Timing the Ideal Exit.” The conference will kick off with a morning fireside chat featuring Phil Canfield, ’96, managing director of GTCR, and Dan Caruso, ’89, chairman and CEO of Zayo Group. Later in the day, Tony Pritzker, ’87, managing partner of Pritzker Group, and Joe Neubauer, ’65, chairman of the board of ARAMARK Corp., will lead keynote sessions on various related topics.

The Chicago Booth Private Equity Conference provides a unique opportunity for investors, entrepreneurs, academic thought leaders and other industry professionals to network and share insights from their experiences in the marketplace.

This year’s conference features a number of exciting panels in support of the overall theme. First, panelists will discuss various operational and strategic enhancements that private equity funds can employ in order to enhance returns. The panelists will focus on different methods of working with management teams at portfolio companies to create and capture value throughout the life of an investment hold.

Another panel, featuring a broad range of constituents, will discuss the current trends and conditions in the fundraising market. Other panels will highlight other areas of interest including exit timing and strategies for working with existing management teams throughout a sale process.

The event is taking place at the Westin Chicago River North on Friday, February 20, 2015. Please visit the conference website to find a full agenda and more detailed information.

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Pay and Performance in 2014

February 9, 2015

In the financial sector, pay is, unsurprisingly, a big factor in employees’ satisfaction. What does Job Search Digest’s recent compensation report indicate happened with pay changes in the past year? Here’s a look.

Change in Pay from 2013 to 2014

The first measure compares the growth in pay from 2013 to 2014 among firms operating in the private equity and venture capital space. Fascinatingly, pay grew much quicker among venture capital firms than it did among private equity firms. Overall, combining base and bonus pay, compensation grew about 21 percent for employees of venture capital firms, while pay only expanded about 9 percent for employees of private equity firms.

What’s behind the large differential? Bonuses.

Base pay at private equity and venture capital firms increased at about the same rate (private equity up about 6 percent and venture capital firms up about 7 percent).

Bonus pay, on the other hand, exploded for venture capital firms.  Bonus pay was up about 17 percent for the earlier stage professional investors, while bonuses were only up about 7 percent among private equity firms.

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Performance

If you talk to any financial economist, they’ll mention that pay is only one half of the story. The other half is performance. Here is a look at how funds performed last year according to Job Search Digest’s survey.

Interestingly, most of the respondents’ funds performed quite well, with about 48 percent of all funds up between 10 percent and 24 percent. Perhaps a little surprising given the 13 percent return of the S&P 500 in 2014, almost a quarter of all venture capital and private equity funds returned more than 25 percent, soundly beating the popular index.

Also interesting is the observation that only 2 percent lost money, 9 percent were even, and 20 percent gained between 1 percent and 9 percent in value.

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Did the Managers’ Performance Warrant the Bonuses Paid?

Now to the question that really matters – were the managers of the private equity and venture capital firms worth the bonuses paid?  Or would it have been better for investors to simply have put their money in passively managed index funds?

With the caveat that Job Search Digest’s surveys are for compensation comparison purposes only, one could certainly do some back of the envelope calculations on if they think the management fees were worth it. In doing a weighted average of return, the private equity/venture capital industry returned on a fee-adjusted basis 16 percent. The 16 percent certainly beats the S&P 500’s 13 percent.

Additionally, the 16 percent implies that about 60 percent of private equity/venture capital funds beat the S&P 500 index.

Conclusion

Overall, Job Search Digest’s recent indications on pay changes from 2013 to 2014 provide an interesting contrast in the state of the two industries. The results found that pay grew much quicker in the venture capital industry than in the private equity industry, a differential of about 12 percent.

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A Record Year for Private Equity Buyouts

January 26, 2015

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 […]

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When Will the Oil Price Drop Show Up in the Labor Market?

January 12, 2015

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 […]

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Some Highlights on Job Search Digest’s Private Equity and Venture Capital 2015 Compensation Report

December 29, 2014

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 […]

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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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