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PE & VC News

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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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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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 so far, the industry is up about +90K jobs.  Healthy, but not “bubbling.”

Interestingly, employment in the sector is still about 120K away from its all-time high of about 8.4 million at the end of 2006.  It’s getting there, just perhaps too slowly for an industry used to fast ups and downs.

How do the data look by sectors?  This detailed look follows.

Financial Activities Source: Quandl, Bureau of Labor Statistics

The Four Broad Sectors the BLS Releases

The BLS reports four non-insurance, financial industry sub-sectors.  These sub-sectors are monetary authorities (i.e. central banks), depository credit intermediation (i.e. banks), commercial banks, and securities, commodity contracts, investments, and funds and trusts. We’ll take a look to see which of the four is performing the best.

Monetary Authorities

Beginning first with the devils, also known as the central bankers.

The picture of employment at central banks isn’t pretty.  Employment at America’s central banks peaked in mid-2003 at about 23K.  Since the post-technology bubble peak, employment at monetary authorities is down about 5K to just under 28K.

It also doesn’t look like employment at central banks is going to make a roaring comeback anytime soon, having been in a growth rut for the past couple of years.

Monetary Authorities Source: Quandl, BLS

Depository Credit Intermediation (Banks)

Shifting now to the entities most individuals think of as the definition of financial – banks.  Overall, the view over the past 16 years is pretty sobering.  The sector had a strong run-up prior to the housing market collapse, and since has had a difficult time recovering the jobs lost.  With that said, and acknowledging that the industry is still 140K jobs under water compared to its all-time peak, growth is beginning to come back.

Through the first half of 2016, banks have added jobs.  Not amazing, but moving in a growth direction.

Depository Credit Sources: Quandl, BLS

 

Commercial Banks

Moving to commercial banks, here’s how they look.

The picture is similar to the retail banking picture above.  Recently, there’s been some sign of life in the sector, but certainly not a strong pulse.

Commercial Banking Source: Quandl, BLS

Securities, Commodity Contracts, Investments, and Funds and Trusts

Lastly, to the investment universe.

Interestingly, of the four sectors addressed here, the strongest of the four is securities, commodities contracts, investments, and funds and trust.  Employment in the industry has already past its peak employment peak, and the sector is showing no signal that growth is going to slow down.

Securities Sources: Quandl, BLS

Conclusion

Overall, although growth is certainly not even across the financial industry, employment of financial professionals is coming back.

Of the four “detailed” sectors the BLS releases data on, the strongest is the securities, commodities contracts, investments, and funds and trusts, with the sector already past its prior business cycle peak. It is the only sector that can boast such an accomplishment.

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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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CEO Pay: Does the Financial Industry Win?

March 21, 2016

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?  […]

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How Did Venture Capital Perform in 2015?

February 8, 2016

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 […]

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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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