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PE & VC News

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 quarter of 2014, estimated private equity deal flow came in at about $15 billion, a decline from the $19 billion in the first quarter. Moving in a like direction, the number of deals also declined in the third quarter compared to the second quarter, dipping from 106 to 89.

In comparing 2014 deal flow to 2013, through the first three quarters total deal flow in 2014 is at about $48 billion, a small drop from the $49 billion seen through the first three quarters of 2013.  The fourth quarter of 2013 saw a gigantic $50 billion in deal value made, making it unlikely that 2014 deal flow will beat total deal flow value in 2013.

The recent IT sector deal flow also shows the surprisingly strong upward drift in deal value. In 2008, total deal flow value summed to $16 billion.  In contrast, total deal flow in 2014 is on track to perhaps surpass $70 billion in 2014. Interestingly, the potential $70 billion in deal flow is still $45 billion lower than what the private equity industry did in 2007, the year before the onset of the global financial crisis.

IT Private Equity Deal FlowA View on the 2015 Outlook

Van Wert and Sundar Raj, close observers of IT sector deal flow were somewhat subdued about the 2015 outlook – “The start of any year is usually a little soft … the debt market is still going to be the primary driver on a lot of these PE deals and their ability to trade at these high multiples …if the debt markets contract, you’ll see a pull-back on these deals and a fairly quick correlation on the multiples investors are willing to consider. On the other hand, if the public markets correct in the near-medium term, lower stock prices may translate into more take-private opportunities for PE investors.”

PE Transactions by Sector

With the broad view covered, here’s a look at PE transactions by sector. Interestingly, the software sector has dominated 2014 so far, accounting for over 60% of all private equity deal flow. In second place is IT services at around 15%, followed by Communications and Networking at about 10%, and Hardware at around 9%.

Private Equity Deal Flow by Sector.fwPE Deal Flow by Median Deal Size

Lastly, here’s a look at private equity deal flow by median deal size.

Overall, since collapsing in 2008 following the housing market bubble bursting, median deal size has been on a strong upward drift. Median buyout deal size has expanded from a low of about $40 million in 2009 to a 2014 high of about $160 million.  The $160 million median deal value in 2014 is $60 million higher than the previous 2007 peak of $100 million. Median growth deal size is much  more subdued.  Growth deal size has gone from a low of a little less than $10 million in 2009 to a recent high of about $23 million in 2014.

Buyout and Growth Median Deal SizeCautiously Optimistic

Overall, third quarter private equity activity in the IT sector was relatively strong, with the outlook cautiously optimistic for 2015.  What this holds for PE employment will play out as the deal activity starts to unfold in early 2015.


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 at all?

Private Equity Employment Over the Past 25 Years

Since 1990, the private equity industry has been through three recessions and two booms. The first recession occurred in 1994 to 1995, with private equity employment dropping slightly from 22,160 (July 1994) to 21,900 (April 1995). The second recession came after a peak employment of about 34,000 in March 2001.  The technology-bust recession saw employment decline by 30,000 in October 2003, a decline of almost 12%. The third recession came after a peak in the  private equity industry employment of around 36,000 in August 2008.  The decline amounted to about 3,000, with private equity employment reaching a trough in May 2010 at about 33,000, representing an overall drop of around 8%.

Switching to the booms, the two private equity booms can be classified into a big boom period and a little boom period – the boom from April 1995 to March 2001 and the shorter expansion from October 2003 to August 2008. As shown, the boom from April 1995 to March 2001 saw employment jump by about 12,000, growing by about 54%. The boom from October 2003 to August 2008 saw employment jump by around 5,500, an increase of about 18%.

Private Equity Employment through July 2013
The next part of the equation is the Federal Funds target rate.  The following graphic reflects the Federal Funds rate from 1990 to October 2014. Over the past 25 years, the Federal Reserve has had three “long” loosening cycles (a loosening cycle is when the Fed is lowering the Federal Funds target interest rate). The first was from June 1990 to December 1993, with the Fed rate dropping from just over 8% to a little under 3%. The second long loosening cycle occurred from December 2000 to May 2004.  Over this period, the Fed rate dropped from about 6.5% down to a little over 1%. The third loosening cycle occurred started in July 2007.  This loosening cycle is still ongoing, with the target Fed rate virtually zero (0 to 0.25%).

The Federal Reserve has also gone through three “long” tightening cycles (although the tightening cycles are generally much shorter than the loosening cycles). The first was from December 1993 to April 1995, with the rate going from around 3% to 6%. The second tightening cycle occurred from January 1999 to July 2000, with the rate increasing from around 4.5% to about 6.5%. The third tightening cycle happened during the housing market boom, with the rate rising from a low of 1% in May 2004 to a high of 5.25% in August 2006.

Federal Funds Rate
With the two components of the question established, the following is what the two measures look like when overlaid.

Private Equity Employment and the Federal Funds Rate

The two are closely related.  A decrease in the Federal Funds rate is generally associated with poor or decelerating economic conditions.  Unsurprisingly, when economic conditions are worsening, or just in general not good, private equity employment generally declines.

How strong is the correlation and what’s the magnitude of the correlation?  Without going too much into econometrics, the linear relationship comes out at -1.5. Presuming that the simple linear relationship were correct, the -1.5 means that if the Federal Funds rate jumped from the current approximately 0% to 1%, private equity employment may drop by 1,500 individuals. (More detailed econometrics confirm a negative effect, but with a smaller magnitude.)

Simple Linear Relationship between Private Equity Employment and the Federal Funds Rate
Overall, the Federal Reserve may start a new tightening cycle after almost 10 years of a quite loose monetary policy.  The increases may, over some time, put downward pressure on private equity employment.


In recent years, the venture capital and private equity industries have gained some serious ground.  Although industry conditions have improved significantly in 2014, there’s still room to grow, at least if one thinks the technology boom is where the industry needs to be.  Of course, even if one thinks the technology period was too much of a bubble, there’s still quite a bit of room for improvement before the industry even gets close to the early 2000s heydays.

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Where has venture capital activity grown the strongest in recent years?  The following is a look.

The first graphic is a map view of the data for where it looks like 2014 will end. As is likely no surprise to any venture capital or private equity professional, (recorded) venture capital money flows to Silicon Valley in large amounts, estimated at about $22 billion in 2014.

Just as interesting as the flow of money to Silicon Valley is the amount of venture capital that gets recorded in middle America.  In fact, if one summed up all the venture capital activity in states not touching an ocean, the number is still far behind that of California.

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Here’s bar chart look of the same data.

The massive rise of cash flow to firms in California is readily apparent.  In 1995, about $3.2 billion went to entrepreneurs in California.  In the same year, the area where entrepreneurs received the second most investment dollars was Massachusetts, at about $697 million.  The difference amounted to $2.5 billion.

Fast forward to 2014.  An anticipated $21.8 billion will be invested in entrepreneurs headquartered in California.  By contrast, an estimated $3.8 billion will go to entrepreneurs headquartered in Massachusetts.  The difference: $18 billion.

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Some other interesting observations are worth mentioning.

First, the rise in venture capital activity in New York is amazing.  In 1995, an estimated $303 million went to entrepreneurs in New York (placing entrepreneurs headquartered in New York sixth among all entrepreneurs).  Switching to 2014, an estimated $3 billion will go to New York-based entrepreneurs. The rise of entrepreneurs in New York is perhaps only bested by the rise of entrepreneurs headquartered in Utah.  From 1995 to 2014, venture capital investment in Utah has increased from $23 billion to an estimated $850 million.

The rise of innovation in Utah and New York is countered by the rapid relative decline in other areas. The second chart that follows has relative growth in venture capital dollars (only states with somewhat reliable 2014 numbers are shown). On the bottom of venture capital decliners is Louisiana at -94%, followed by South Carolina (-93%), Missouri (-82%), Iowa (-80%), Tennessee (-73%), New Jersey (-68%), Vermont (-52%), Nebraska (-34%), and Delaware (-10%).

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Overall, the venture capital industry continues to see rapid movement of dollars to locations of the entrepreneurs.  The industry is still dominated by firms headquartered in California, with entrepreneurs in other states – notably New York and Utah – on the rise.


What’s Up with Recent Revenue Trends and Enterprise Values?

October 6, 2014

The private equity world has been through some rough times in the past few years.  Judging by the recent revenue and enterprise value trends, those rough times are now gone. Revenue Trends Depending upon the industry, interested investors, and the state of the economy, revenue is a critical component in deal evaluations. Given the importance of […]

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A Year into Italian Crowdfunding: How is it Looking?

September 22, 2014

It’s been a year since Italian policymakers loosened bureaucratic control over the start-up world.  How have things gone during the first year of Italy’s crowdfunding? Background of Italy’s Crowdfunding As some history, Italian politicians are the first in the world to allow retail equity crowdfunding, with “no” limits on investment options.  The “no” limits statement […]

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The Universities of Top VC-Backed Entrepreneurs

September 8, 2014

Pitchbook is out with their annual review of which universities are producing the most venture capital-backed entrepreneurs.  Where would you guess these entrepreneurs attended school? On top of the 2014 list are entrepreneurs out of Stanford at $3.52 billion. In second place is Harvard at $3.24 billion.  Rounding out the top ten are the Indian Institute […]

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The Performance of the Economy by President

August 25, 2014

Private equity professionals spend a good part of their day looking at balance sheet figures.  Here’s a break from the traditional look at financial numbers and instead a focus on how the economy has performed over the past 60 years’ – by each U.S. president. The five measures are Gross Domestic Product (GDP), Employment, Inflation, […]

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Should PE Professionals be Nervous When Looking at the Pace in Mergers and Acquisitions Volume?

August 11, 2014

In the mergers and acquisitions world (M&A), 2014 is off to an incredible start.  We’ve seen Valeant’s $46 billion proposal for Allergan (April 22).  About a month later, May 18, we saw AT&T acquire DirectTV .  On June 15, Medtronic acquired Covidien in a deal worth about $43 billion.  Earlier in the year we digested Comcast’s […]

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How has Financial Employment Performed by President?

July 28, 2014

Pretty much everyone knows the western world is experiencing one of the worst recoveries on record.  This is quite evident when looking at the incredibly long time it took for employment to get back to where it was in 2008, by the tentative growth in GDP, by the weakness in wage inflation, by the stubbornly […]

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Venture Capital Through the Recent Recovery

July 14, 2014

Anyone who follows the private equity/venture capital world knows that political entities attempt to recruit business startups.  Over the past few years, leaders in various areas, including New York, Utah, and other traditionally less important areas, have promoted the growth of their startup scene – and their efforts are being rewarded. What Do the Numbers […]

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