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PE & VC News

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.

IPOs, U.S.

The question here is – what does the IPO slow down through at least the first half of 2016 mean for Wall Street bonus pay?

Here is a look.

Bonus Pay

First, here’s a look at the history of Wall Street bonus pay by year.

The hottest bonus year occurred in 2006 at about $34 billion, representing an average bonus of about $191,000.

Following 2006′s high mark, bonus pay has experienced some massive volatility, with the bottom occurring in 2008 at a low of $101,000.

Bonus pay has recently been on a downward trend after reaching a recent peak in 2013.  Should 2016 see another drop in bonus pay, and it appears that’s likely to be the case, 2016 would make for the third consecutive year of dropping bonus pay.

Wall Street Bonuses ($billions)

Average Wall Street Bonus

The Connection

The previous section was simply speculation on what might happen to bonus pay in 2016.  Here’s an empirical look (although this here is also really just speculation on what financial executives will do with their cash later in the year).

Average Wall Street Bonuses and IPOs in the U.S.

Does it look like there’s a connection?  To the in-the-know, of course there’s a connection.  By definition, in a direct manner, the IPO business is part of a certain financial firms’ bottom lines.

How strong is the connection?

A Scatterplot View

Here’s a scatterplot view and the linear regression correlation of IPOs with average Wall Street bonuses.  Interestingly, the connection isn’t that strong.  The correlation coefficient (measure of association) is $129.  The $129 means that for every new IPO, the average Wall Street bonus rises by $129.  The constant is $112,484.

Perhaps even more interesting that the simple linear correlation is which years saw average bonus pay come in higher than the IPO figures would predict.

Perhaps unsurprisingly, 2015 was an “outperform” year for average bonus pay.  Average bonus pay came in at about $146,000.  Given the weak IPO market in 2015, the model presented below would have predicted only $130,000.

Either way, it was good to be a financial professional working on Wall Street in 2015.

The Correlation Between Wall Street Bonuses and IPOs

Conclusion

Overall, 2016 appears to be set for a very weak year for IPOs.  The weak IPO picture affects lots of industries and individuals.  Among the entities affected are financial professionals counting on bonus pay.  This year has the potential to see another weak year for Wall Street bonus pay, possibly dropping for the third consecutive year after peaking in 2013 at about $28 billion.

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There is perhaps no more contentious issue that compensation.  The contentiousness becomes even more heated when discussing CEO pay. Question – which industry has the highest paid CEOs?

Here’s a look at average CEO pay and CEO pay growth by industry according to recently released figures by Pitchbook. Before looking, which industry would you guess wins?  Finance?  Perhaps Chemicals or another hard industry?

Average CEO Pay by Industry

The following graphic is CEO pay by industry in 2014 (publicly traded companies or estimated privately held companies), as estimated by Econometric Studios, the Wall Street Journal, or the AFL-CIO (click on the zoom button to get a better view). The overall average is about $5.6 million.

Interestingly, on the bottom is Agriculture production at $1.1 million.  Other members of the bottom 10 include Miscellaneous Repair Services at $1.3 million, Social Services at $2.0 million, Agriculture Production Crops at $2.1 million, Depository Institutions at $2.2 million (does the depository institutions finding surprise you?), State Commercial Banks at $2.2 million, Holding and Other Investment Offices at $2.4 million, Metal Mining at $2.5 million, Legal Services at $2.8 million, and Educational Services at $2.9 million.

On the other end, tenth place belongs to Securities Brokers, Dealers, Exchanges and Services at $8.2 million.  The ninth through sixth spots belong to General Merchandise Stores at $8.7 million, Insurance Carriers at $9.6 million, Motion Pictures at $9.7 million, and Hotels, Rooming Houses, Camps, and Other Lodging Places at $10.1 million respectively

Now to the top 5.  In fifth place is Communications at $11.0 million.  Fourth, third, and second place belong to Petroleum Refining and Related Industries at $12.5 million, Railroad Transportation at $12.5 million, and Tobacco Products at $13.1 million.

And the top spot – Private Equity|Venture Capital.  The average CEO pay is about $15 million.

Average CEO Pay by Industry

Where is Pay Heading?

With the current overall picture established, where is pay heading? Early indications are positive for the managers of companies. As an example, a recent survey by Stanford University concluded that corporate directors give CEOs considerable credit for corporate success.  Pay, obviously, follows perceived contribution to success. The Stanford study is one of many that agree with the view, indicating that CEO pay is likely to continue to grow quickly in the coming years.

Conclusion

In looking at CEO pay by industry, some interest details emerge. The financial industry comes out fairly well, with two financial sectors – Securities and Private Equity|Venture Capital – coming in in the top 10.

Yet it’s not all top spot for the financial industry.  Depository Institutions (banks), State Commercial Banks, and Holding|Investment Offices are in the bottom 10.

It appears that it pays, literally, to be in the risky section of the financial industry.

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The 2015 year is now a month behind us.  How did venture capital do in 2015?  Here’s a look.

Total Capital Invested

The first look is venture capital invested and number of rounds closed by year.

Interestingly, on a total volume basis, 2015 was a banner year for total capital invested.  Total capital invested reached $77.3 billion, well above 2014′s already high $68 billion.

On number of rounds closed, the number of rounds surprisingly declined by a fairly hefty amount, going from 9,381 to 8,097.  The drop in the number of deals was more reminiscent of the dot-com crash than simply a mid-cycle slowdown in funding of smaller companies.

Capital Invested Source: Pitchbook

A Breakdown by Quarter and Round

What’s was behind the decline in the number of rounds closed an rise in valuations? Perhaps completely unsurprising, the number of rounds dropped by the most amount for very early stage, angel rounds.

The decline in early stage, angel round investing started a precipitous drop in the second half of 2015, dropping from 2,256 in the second quarter to 1,923 in the third quarter.  The decline continued into the fourth quarter, declining from the 1,923 to 1,675.

Of course, the drop wasn’t solely the sphere of angel rounds.  Early stage venture capital rounds also dropped, although the early stage drop was more gradual and started much earlier.  The early stage decline began in the second half of 2014, and continuously dropped from 836 in the second quarter of 2014 to 536 in the final quarter of 2015.

Interestingly, the number of rounds also dropped for later stage venture capital investments, although the drop in the number of later stage venture capital rounds was quite marginal.

by round Source: Pitchbook

The Industries

With the broad macro view established, what industries are behind the figures?  An industry detailed look follows.

Unsurprisingly, Commercial Services far outpaced all other sectors, largely because Commercial Services captures such a broad swath of activity.  In 2015, the number of Commercial Services deals dropped to 2,940 from 2014′s 3,646.

In a distant second was Energy at 1,889, a slight increase from the 1,859 in 2014.  Given the weakness in oil prices and other natural resources, the continued strength in Energy is somewhat surprising.  Then again, the Energy sector includes alternative energy, a sector yet to be deterred by cheap oil.

On the other end of the deal spectrum, the smallest 3 sectors including Pharma & Biotech (150 in 2015), IT Hardware (251 in 2015), and Software (320 in 2015).

vc by sector Source: Pitchbook

The Dollars Behind the Sector Look

Lastly, here’s a look at the dollars behind the sector level deals. A generally similar view to the number of deals look materializes.

On top is Commercial Services at just over $31 billion, followed by Energy at $13 billion, Consumer Goods & Recreation at $9 billion, and Media at $8 billion. On the other end, smaller dollar volume sectors included Pharma & Biotech at about $1.5 billion, IT Hardware at $2.4 billion, and Software and Healthcare each at about $3 billion.

dollar deals Source: Pitchbook

Conclusion

2015 was an amazing year for venture capital.  According to Pitchbook, venture capital managers invested $77.3 billion in companies, well above 2014′s incredibly high $68 billion.

On a sector look, Commercial Services dominated the deal flow, as has been the case for some time. Overall, comparatively speaking, the venture capital industry is doing quite well.

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Looks Like Base Salary Is Taking a Larger Bite of the Compensation Pie

January 25, 2016

Two interesting movements occurred in the most recent Bureau of Labor Statistics’ release of employee compensation in the finance and insurance industries. First is the percentage of total compensation devoted towards wages and salaries and second, average compensation per hour. Which direction would you guess the two are heading?  Are wages and salaries eating up a […]

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The Politics of Disposable Income

December 28, 2015

This past week saw one of the most well-known economic indicators – Disposable Personal Income – come in about in line with expectations. With the year almost over, and another presidency about to hit the road, now seems like a good time to take a look at how Disposable Income has performed by presidency. Before taking […]

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Playing Politics with the Federal Funds Rate

December 14, 2015

If things go as expected, on Wednesday Federal Reserve Chairwoman Janet Yellen will announce the first Fed rate hike in almost a decade (2006 was the last time the Fed increased the federal funds target rate). Since 2006, we’ve seen a peak in the housing market, a collapse in global financial assets, unemployment above 8%, […]

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What Is Going on with the American Consumer?

December 1, 2015

Every private equity professional – whether they want to admit it or not – is somewhat of an economist.  Private equity professionals must, by their very nature, follow demographic shifts, economic outlooks, and other economic forces. The force discussed here is the American consumer, typically considered the driving force of the American economy.  This presumption […]

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Could 2015 Mergers and Acquisitions Reach an All Time High?

November 16, 2015

Pitchbook recently released their accounting of mergers and acquisitions performance. Unless the fourth quarter of 2015 falls off the planet, 2015 is set to reach an all-time high in value terms.  Overall, if deal value climbs only by the amount it did in the first quarter of 2014, deal value in 2015 will reach about […]

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The 20 Top Cities for Global Finance

October 26, 2015

If you’re an observer of global finance, you know the financial world is becoming ever more competitive.  Among the many competitive forces is geography.  Finance firms move and shift employment for a number of reasons, including incentives, competitive wages, startup culture, and lots of other factors. With this as the background, which are the 20 top […]

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California Job Creation: Is the PE/VC Connection with Silicon Valley Responsible?

October 5, 2015

On usually the first Friday of every month, the Bureau of Labor Statistics (BLS) releases its estimate of net job creation (or destruction) for the nation as a whole.  The figures in the report are perhaps the most influential economic indicators in the world, including estimates on wage growth, unemployment, labor force, and industry job […]

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