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 good when valuations are dipping lower than what investors bought in earlier?  Others are less convinced, seeing the recent movements as just a healthy “reversion to the mean” in the valuation world.

The Data

What exactly are they looking at?  Here’s one view of the data, provided by Pitchbook.  The figure shows the number of companies with an exit value less than the prior financing round’s post-money valuation.  The measure has been on an upward trend since bottoming at 15 in 2008.  Pitchbook’s most recent count is at 37 for 2016 (2 so far in 2017 through March 1, 2017).

pb1 Source: Pitchbook

The Positive Spin on the Trend

Some analysts spin the trend in exit valuations as simply a healthy reversion to normal valuation.  Some point to charts like the following, which show that in recent years there’s been a fairly healthy rise in post-money valuations.  This can’t go on forever, and, some analysts argue, a small cooling right now is better for the long-term valuation picture.

pb2 Source: Pitchbook

The “Negative” Spin on the Trend

A competing interpretation of the valuation trend is that the cooling is only the tip of the iceberg of what’s ahead. Analysts with this view generally see valuations as not just a little out of whack, but in “bubble” territory.

Some may point to charts like the following, which show a potentially disturbing trend in the use of debt in early-stage financing rounds.  The use of debt in early-stage financing rounds has the potential to be damaging to the future health of a company.

Overall, if the early indications for 2017 are anywhere correct, the use of debt-based financing may cool off in 2017 compared to 2016, although the actual amount of debt-based financing is still quite high by historical standards.

pb3 Source: Pitchbook


Overall, recent data suggests some cooling in the venture capital financing market.  An interesting trend that’s emerged recently is that there’s a growing number of companies with an exit valuation lower than their most recently completed post-money financing round.

Whether this trend is a signal of bad things to come for the industry, or just a healthy cooling off, is a matter of intense debate among venture capital investors, economists, owners of early stage companies, and the various other interested parties.


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 healthy strengthening from the 2.2 percent in 2015 and around 2.1 percent in 2014.  Overall, the picture looks to be improving for the American worker.

How does the financial industry compare?  Here’s a look.

Setting the Backdrop

First, before going into the detailed employment comparisons, here’s a reminder of the financial industry’s employment picture by economic cycle.  In the following graphic, each line is labeled by the peak in an economic cycle’s employment measure.  The x-axis is the number of months since the prior cycle’s peak; the y-axis is the percentage change since the prior cycle’s peak.  For example, the 2008 line means that US employment peaked in 2008, that we’re 109 months beyond the pre-housing bubble bursting (January 2008), and that the financial industry employment count is about 1.6 percent higher now than it was in January 2008.

Perhaps the most apt word to describe this picture is – sobering.  The bursting of the housing bubble hurt the financial industry hard, and it’s taken a long time to get back all those jobs that were lost.  But, the industry is back – the industry now has 1.6 percent more employees now than it did back then.

Financial Employment Source: BLS, Econometric Studios

The Jobs Picture by Sector

With the sobering picture behind us, here’s a look at the jobs picture by sector from 2015 through the first couple months of 2017.

Of the broad industry classifications reported by the Bureau of Labor Statistics (BLS), the top job gaining industry – on average – in 2016 was Financial Activities, with an average monthly employment of 162,417 higher than in 2015.  So far through the first couple months of 2017, employment in the Financial Sector is up 114,667.  Healthy, but not bubbly (i.e. not housing bubble type of growth).

How does the financial industry compare?

Well, not too bad.  Of the 8 industries shown, job growth in the Financial Activities sector comes in fourth at about 2 percent year-over-year growth.  The 3 industries to best the financial sector were Leisure and Hospitality (3.0 percent), Education and Health Services (2.7 percent), and Professional and Business Services (2.6 percent).  Not bad, not bad at all.  And, so far in 2017, job growth in the financial industry is up to third (1.4 percent), behind Mining and Construction (up 1.9 percent), and Professional and Business Services (1.7 percent).


emp by sector Source: BLS, Econometric Studios


The 2017 Picture

What does this picture mean for 2017?  Well, with wages accelerating to healthy levels and month over month job growth still strong, the financial sector appears poised to be a leading job gainer for the remainder of 2017.


Overall, job growth in 2016 was healthy, and all indications of 2017 so far suggest the US labor market will continue to be kind to the American worker in 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.

ma Source: IMF

Why is there so much M&A activity happening when there is potentially little to no financial gain?  Well, one answer might be that virtually all of the academic studies on the topic rely on data reported by public acquirers versus data from both public and private acquirers.

What do the results look like when a distinction is made between private acquirers and public acquirers?  In an interesting new study, a couple of professors provide some answers.  Here is a look at a fascinating recent study from a couple of professors out of the University of Toronto and the Shanghai Jiao Tong University (Andrey Golubov and Nan Xiong).

The Data

The authors employ data on U.S.-based firms’ M&A activity from the Capital IQ database.  In a bit of uniqueness, in the U.S., private firms that have $10 million or more in total assets and 500 or more shareholders must file with government regulators.  Private companies may also list their securities with the U.S. Securities and Exchange Commission.

The authors collected data on leveraged buyouts by public and private firms from 1997 to 2010.  A summary of their results follow.

The Findings

In the following table are the results.  Interestingly, there is a large difference between the financial returns of private companies compared to public companies.  The Return on Assets (ROA) difference is an astonishing 5.77% compared to -0.88% from one year before acquisition to two years thereafter.  Many of the results are statistically significant to at least the 95% level.

table3 Source: Golubov and Xiong

Why Would This Outcome Show Up?

A number of possible reasons might explain the difference in returns between private acquirers and public acquirers.  Perhaps the strongest reasons might be that private firms lack the problem of dispersed ownership and posses a lower challenge on the connection between ownership and management.


The interesting results – still to be confirmed by other studies – suggest that there is certainly something to the long-debated issue on concentrated ownership and dispersed ownership. We will be watching to see whether future research will corroborate  Golubov’s and Xiong’s results.  If substantiated, it suggests the private equity world perhaps has some adjustments to make.


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