From the category archives:

Private Equity Firms

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


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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Recently, chatter has focused on whether the technology industry is in a bubble.  Is it?

Individuals following say, home prices in San Francisco, one might get the impression that it is.  Since bottoming in January 2012 at about $621K, the median home price in the Bay Area is now approaching $1.1 million, a growth of about 75% in just 3 years.

Median Home Price in San FranciscoValuations

Others point to the enormous valuations some of the “rockstars” of the tech industry are getting for their companies as a signal that things are getting a little frothy.

As examples of frothiness, just look at what the valuations of some tech industry companies are getting.  Uber, the ride sharing service, recently raised $1 billion on an enormous $40 billion valuation.  Snapchat, the more private way to share pictures and texts, is purportedly raising money on a $19 billion valuation.  And Pintrest, the site where mostly women comment and post about the niceties in their lives, is raising funds at an incredible $11 billion valuation.

How could there not be a bubble with such unproven valuations?

The One Chart That Answers the Question

But, are these indicators really reliable signals that the technology industry is in another bubble phase – 15 years after the internet stock bubble exploded in 20o1? Here’s the one chart that should answer this question.

On the left axis and in blue is the amount invested in IT industry startups, as measured by Price Waterhouse Coopers’ MoneyTree survey. On the right axis and in orange is the number of deals in IT industry startups, again, as measured by Price Waterhouse Coopers’ MoneyTree survey. It’s impossible to miss the “bubble” that occurred in 1999 and 2000.

The dollar volume of deals exploded from $9 billion in the first quarter of 1999 to a peak of $41 billion in the second quarter of 2000. Simultaneously, the number of deals expanded from 1,306 in the first quarter of 1999 to 3,087 at the peak in the second quarter of 2000.

How does this “bubble” experience compare to today? Simply put, today’s strong technology industry startup scene is simply experiencing a “boom.”

It’s easy to see the booms and busts since 1995, but one thing is fairly clear – bubbles are much less common and current conditions in the IT industry startup world are, right now, nowhere near bubbly territory.

IT Industry.fwConclusion

Overall, the chatter that the startup scene in the IT industry is probably overblown. When looking at the history of the number of deals and the amount invested, there’s a clear distinction between “bubble” territory and simply strong growth that’s likely to experience some bust in the next year or so.

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If you are in any way involved in the angel side of private equity investing, you’re likely well aware of the debate regarding the usefulness of crowdfunding, and specifically private equity crowdfunding.  Crowdfunding exists because there is a general void in the marketplace between what angel investors are willing to, and able to, fund and what larger scale private equity firms and institutional investors are willing to look at.

With revenue of less than $10 million annually, entrepreneurs in many industries, with the exception of certain technologies, are too small to reach the larger private equity firms and generally don’t have sufficient assets to issue debt.  Essentially, a decent number of entrepreneurs fall between the angel investing arena and the size of deals venture capital/private equity firms might consider.  Within the past couple of years, the solution to this investor-entrepreneur matching problem has been partly addressed by a new form of investing: private equity crowdfunding.

The debate: is private equity crowdfunding here to stay as a innovative new way of financing start-ups and business job creation, or is it a trap luring unsuspecting investors into higher than usual risks on unproven businesses?  The question is tough to give a “no” answer to, for one main reason that momentum is on private equity crowdfunding’s side, with such new firms as CircleUp, RelayFund, or MicroVentures livelihoods depending on crowdfunding’s success.

Private equity crowdfunding proponents point to at least two efficiencies gained by their services. First, by screening deal flow (for instance, CircleUp only accepts 2 percent of companies that apply), it limits the number of poor deals an angel capital or private equity investor sees.

Second, by bringing deals online, it expands the number of potentially profitable investments that angel investors may not have seen offline.  Essentially, instead of choosing one investment from the limited presentations an angel investor sees, an angel investor’s opportunity set increases.

On the opposite side of the debate are (and perhaps unsurprisingly) individuals concerned with regulations, in particular the heightened problems crowdfunding places on attorneys responsible for ensuring compliance with reporting requirements.  In addition to the regulatory concerns, others appear more concerned about smaller investors (the paternalistic sort of view).  Basically, some fear that smaller investors will be enamored with the charismatic presentation or invest in companies they simply want to see succeed regardless of whether the charismatic presenter or liked business has the highest chance of turning into a successful investment.  With a few years behind us already, the initial paternalistic concerns don’t appear to be a problem, although, we’re only a few years into this potentially disruptive industry.

Overall, private equity crowdfunding has the potential to be a game-changer in the private equity and angel capital investing arena, with at least $50 billion of annual private company investments on the line.  We’ll see if it turn out to be a boon to entrepreneurship, business growth, and job creation while simultaneously benefiting all types of investors or whether it turns out to be simply a fad.

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The Beauty of This Chart if You Are a True Private Equity Believer

May 13, 2013

If you’re a true private equity believer, the following chart has got to be beautiful. The figure shows the most recent GDP figures by the three broad expenditure categories (which, excludes net exports): consumption, private domestic investment, and government expenditure. In the political budgeting realm, there is no bigger issue than the debate over the […]

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Prioritization of Private Equity

April 22, 2013

On March 5, 2013, the U.S. stock markets posted their highest marks since 2008’s losses, marking the numerical return of investment to its levels prior to the recent recession. One would think that the same activity of private equity is returning to previous levels as well, and a number of events seem to support that theory. […]

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If Facebook Were Managed by Private Equity Professionals

January 7, 2013

Most investors appear to be well aware of what went wrong with the hottest IPO of 2012 – the Facebook IPO.  According to KCSA Strategic Communications, 93 percent of survey respondents – attorneys doing the legal work behind the IPO – indicated that Facebook was the most anticipated IPO of 2012. Not surprisingly, and perhaps […]

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Underpaid Private Equity Professionals?

December 24, 2012

Contrary to what appears to be popular opinion, almost everyone that thinks in terms of value added comes to the same conclusion that professional athletes are generally underpaid, and usually by a good amount.  An opposite conclusion holds true for the earnings of doctors, whose wages and output generally fall in the category of overcompensation […]

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Private Equity Risks for 2013

December 17, 2012

At this time last year, private equity was recovering modestly, with around $1 trillion in dry powder and another $2 trillion in assets still held on general partners’ books.  Bain & Company described the outlook as highly uncertain, with the general spread between the valuations of buyers and sellers as some of the highest in […]

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GDP Per Capita and Private Equity Employment

December 3, 2012

Perhaps correlating private equity employment with the growth in Gross Domestic Product (GDP) per capita is a useless endeavor given all the assumptions and compounding factors that could influence the results, but here it goes. The following figure represents the correlation between GDP per capita and private equity employment per capita.  The regression line going […]

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Private Equity Professionals Handling the Fiscal Cliff?

November 26, 2012

How might the fiscal cliff be handled by private equity professionals in comparison to elected officials? Private equity professionals are a very dissimilar bunch of individuals, although there is a common thread among this group – the competitive search for maximum output at minimum cost. Certain unaware individuals may assume, based upon a few selected […]

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