If there’s any sector of the global economy that’s changed since the onset of the global financial crisis in 2008, it’s the financial industry.  The industry, often blamed as part of the root cause of the global malaise, has grown and shifted attention (sometimes) quite dramatically over the past eights years.

Of the many sectors within the financial industry, perhaps no sector has gone through such large shifts as the private equity industry.  In recent years, we’ve seen a flurry of activity of private equity companies into areas that traditionally have received little attention from the prestigious investment firms.  Here’s a look.

pe1 Source: Quandl, GraphIQ

Water

Suppose one warm summer afternoon you get thirsty, and decide to take a drink out of the faucet in your home.  Surprisingly, this water – traditionally provided by your local government – could be from a private equity company, such as is the case in Apple Valley.

Essentially, private equity firms are clever bargain hunters.  Money is made by buying businesses considered to be under-performing, then looking to maximize profits and eventually sell the business off at a profit.

Roads, Bridges, and Highways

Up until recently, private equity has traditionally stayed clear of services, instead opting for companies doing technology or operating in hard industry.  That’s shifted in recent years.  Now, in addition to the traditional sectors, private equity is looking for bargains in the service arena, including areas typically dominated by local governments.

Water delivery is one of many areas private equity is looking into.  Another is roads, bridges, and highways.

As an example, consider the Port of Miami tunnel in Florida.  The tunnel is designed to avoid downtown Miami.  Instead of bonding for the project through a potentially controversial bond issue, the State of Florida opted to hire Bouygues Civil Works to incur the upfront financing and building risks.  The State only pays once certain milestones are accomplished.

Prisons

It is, of course, not just water and transportation that’s getting attention from the private equity industry.  Such things as prisons are drawing interest.

Case in point is the Public-Private partnership pioneered in Virginia two decades ago.  The prison, costing $42 million to construct, was built more efficiently and less costly because of the State’s decision to use private money for a public project.

According to Virginia officials, the State saved 15 to 20 percent by using a public-private partnership as opposed to building the prison themselves.

Other Areas

The foray of private equity into traditionally public goods doesn’t stop at water, roads, highways, and prisons.  Private equity is moving into such things as parking garages, trains, and various other potentially profitable endeavors.

For instance, a very large private equity firm, Fortress Investment Group, is promising to build a rail line that can transport people from Miami to Orlando faster than anything currently available.  The line plans to operate 32 trains per day, making four stops each day.

Conclusion

A lot has happened over the past eight years.  In the financial world, one of the bigger shifts is the massive expansion of private equity into our daily lives.  From water, to toilet paper, to trains, to roads, and many other facets of our lives, private equity has begun to wedge itself into the equation.

The industry sees profit to be made from previously under-performing companies (or governments).  Whether that turns out to be the case is yet to be seen.

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Previously, we reviewed the March 2016 event that brought together academics and practitioners to discuss the state of the European venture capital market. We continue that review here…

Reflecting a cautious approach to Europe, Magnus Goodlad, Chief of Staff to Lord Rothschild, believes there is ‘a sort of macro risk that people committing to European ventures are being asked to take’. Limited partners (LPs) are deterred by the lack of well-developed ecosystems such as the ones in Israel and the U.S. and also believe it is more difficult to attain “unicorn” level in Europe – a private company valued at US $1 billion or more.

Saul Klein, a well-known serial entrepreneur, is more optimistic. He thinks it’s important to invest through cycles. Europe has had bad years but since 2011, there have been many successes such as Skype, Element 14 (a community for engineers), Criteo (the ad outfit), and Spotify. He thinks the best years for European VC are ahead and that success will breed success.

Klein was part of the original executive team at Skype and co-founded Lovefilm, which is a type of U.K. Netflix. He also founded The Accelerator Group (TAG) in 1999, Seedcamp in 2007, and later became a partner at Index Ventures. Klein and his father, Robin, have recently raised £45 million and launched LocalGlobe, a new seed fund.

Byron Deeter of BVP is hopeful too, although expressing caveats, “…the breadth of exits is starting to increase but the depth doesn’t feel like it’s here yet…  when you look at scale of outcomes… the new word in the valley is decacorn… the multiples with ten billion dollar outcomes. It now takes a Facebook or a Baidu in China or an Uber in the private markets to rattle industries. Then entire collections of funds and hundreds or potentially thousands of entrepreneurs make life-changing economics off some of these companies. That’s the ripple effect that really creates an ecosystem and I think that’s one of the material things that’s still been lacking in Europe. Europe doesn’t yet have the scale to really send those kinds of shock waves around the world.”

Professor Axelson brushes off most of the complaints against European VC but admits that exit opportunities in Europe are decidedly less than in America. Europe’s entrepreneurs are just as willing to take risks as their American counterparts are. And as European VCs do more deals, their success rate is converging to the U.S. rate. Deal experience has proven to be a good predictor of success.

The point was made that about half of VC deals now have an element of venture debt in them. The pioneer in this field has been Silicon Valley Bank, which in 2004, obtained a charter to operate in Europe. It is very likely that, in the future, more European deals will incorporate venture debt

Since the discussion’s audience included students, the inevitable question was asked, “How do I break into venture capital?” Byron Deeter explained how he did it. “I started as the most junior professional doing cold calling and got exposure to the industry for a couple of years … then went out and started a business because I wanted to get that experience both as an entrepreneur, but also to understand both sides of the equation… but there’s no one answer. The more visible you are to people that you want to work with, the more likely you are to have all sorts of options.”

The consensus was that if you want to work in VC, you must have the entrepreneurial spirit. You must demonstrate your ability to overcome obstacles.

Don’t wait for an open door. If you want to work in VC, break the wall down to get in. As Felda Hardymon puts it, “anybody will talk to you if you come through the wall rather than the door”.

A podcast and video of the discussion is available here.

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Part One of a Two Part Series

It’s been almost six years now since Arif Naqvi’s Abraaj Group provided £4 million to fund the first Master’s program in private equity in the world. It was a bold endeavor. In September 2010, when the MSc Finance & Private Equity program was launched at the London School of Economics and Political Science (LSE), Naqvi’s alma mater, the world was still in the grips of the Great Recession.

In a recent discussion Professor Ulf Axelson, the inaugural Chair of that MSc program, who is also Director of the LSE’s Financial Markets Group, mused on the state of the venture capital industry in Europe with four leading practitioners. The event was chaired by Felda Hardymon, a senior partner at Bessemer Venture Partners (BVP), the venerable VC firm founded in 1911 who, in his opening remarks, reminded the audience, consisting of practitioners, academics and students, of VC’s momentousness.  “In the U.S., eleven percent of all private sector jobs are in venture-backed companies. That’s an astonishing number. What’s more astonishing is that twenty-one percent of U.S. GDP comes from venture-backed companies… So the only job creating machine in our economy that has been reliable over the last forty years is venture capital dollars… a thriving innovation economy financed by venture capitalists makes a difference.”  Notably, some of BVP’s top exits include LinkedIn, Skype, Yelp, Veritas and Staples.

Prof Axelson followed up on Mr. Hardymon’s preamble, observing that the spillover effects of innovative firms is truly enormous. Every dollar that an innovative firm captures in profits results in five dollars to other firms. Groundbreaking enterprises must naturally spend to sustain their operations. In addition, other firms imitate the leader by either getting into the same business or applying the knowledge to another line of business. And most amplifying of all, is the economic ecosystem that develops around innovative firms as they become bigger.

There are three levels to a successful VC industry, opined Prof Axelson. There is, firstly, a need for entrepreneurs with good ideas who dare to act on those ideas and ‘start companies and actually know how to grow those companies’. Secondly, there is a need for VCs with expertise in measuring risk; that is, VCs who can pick winners and who can, in addition, provide effective monitoring to ensure fledgling companies get the nurturing to develop. Thirdly, there must be exit opportunities, either through the capital markets or by a trade sale to a larger company.

At all three levels, the European VC industry has been indicted. The first charge is an old and imputed one. By singling out the spirit of enterprise exhibited by Northeastern Americans in the 19th century, Alexis de Tocqueville in his seminal On Democracy in America was suggesting Europe’s dearth thereof. The reproach persists today. It has been suggested that the entrepreneurial spirit is lacking in Europe, that Europeans are more risk-averse than Americans, that in Europe there is more stigma attached to failure and, therefore, less tolerance for it.

However, part of this perception may stem from the tendency of European entrepreneurs to hold on to their businesses. They are less likely to sell and start again. Therefore, the ‘serial entrepreneur’ as a class has not emerged in Europe as it has in the Silicon Valley. This community of serial, or experienced entrepreneurs, in America forms a valuable resource into which VCs can tap for expertise and contacts. Just as importantly, serial entrepreneurs become heroes, role models and mentors to others. And as expected, any community of successful people emanates an aura of elitism which attracts aspirants and causes the community to multiply.

The battery of allegations is rounded out by the claim that European VCs are staffed by banking and finance types who lack the entrepreneurial mindset and are therefore unable to assess either the risks or the entrepreneurs.

…to be continued…

A podcast and video of the discussion is available here.

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It’s Certainly Not Even Across the Financial Industry, but Financial Employment is Coming Back

July 12, 2016

Friday’s employment report out of the Bureau of Labor Statistics (BLS) showed a white-hot American labor market.  June’s employment growth jumped +287K, a gigantic jump from the +38K of the prior month. In looking at financial industry employment, the picture is certainly strengthening as well.  During June, financial industry employment gained 16,000; for the year […]

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Anyone Notice the Change in Venture Capital on Banks’ Balance Sheets?

June 27, 2016

The venture capital industry is connected with many edges of the global economy. One area that’s experienced a shift in venture capital’s importance is banking. Question: Would you guess that revenue from venture capital investments is growing or declining in relevance on banks’ balance sheets?  Here’s the look. Savings Institutions Savings institutions are entities that simply […]

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Which President Was the Best for Venture Capital?

June 14, 2016

It’s presidential election season.  What better time than now to ask which president since 1985 has seen the strongest venture capital performance during his administration? (Note: the choice of 1985 is based purely on availability of reliable data.  If further historical were readily available, it would have been included in this article.) Within this period are […]

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Can You Guess the Top 10 Venture Investors and Accelerators?

May 30, 2016

If there’s anything the venture capital and private equity world is for sure, it’s that at the sectors are competitive, uber competitive. Can you guess which entities come out as the most active?  Here’s a look. Accelerators First, a look at the top accelerators.  The first graph is a look at the top 10 accelerators since […]

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What Does the Recent IPO Weakness Mean for 2016 Bonus Pay?

May 16, 2016

Last year was a relatively rough year for IPOs.  According to Renaissance Capital, IPOs in 2015 were down over 30% from their 2014 level. The start of 2016 doesn’t appear to be offering any sort of relief anytime soon.  The IPO market is in a deep freeze. The question here is – what does the […]

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Looking at the Private Equity Compensation Picture

May 3, 2016

Every now and then (perhaps more often if you work in the financial industry), one should take a look at the compensation picture and compare how one is doing to others working in the same universe. Each year, Job Search Digest conducts a comprehensive survey of private equity and venture capital professionals to reveal insights into […]

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SEC Thinks Its Valuations Are Better than Private Equity Professionals’

April 25, 2016

If you pay fairly close attention to financial regulation news, one topic showed up frequently last week.  The topic – private equity and venture capital valuations and the SEC’s chair Mary Joe White’s belief that valuations may be approaching bubble territory. Her comment, while speaking at Stanford University: “In the unicorn context, there is a […]

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