It’s been an amazing run for private equity. As measured by the performance of publicly traded private equity companies, the value of private equity investments is up anywhere from 61% to 163% from the end of 2015 through March 12, 2020, returns most any investor would take even if over part of the years private equity was not the absolute winner among all asset classes.

Source: Econometric Studios, Yahoo Finance

Lower rates

The boom in private equity has turned into a thump, which has some wondering whether a rebirth is around the corner. What could be the trigger for a rebirth? Perhaps even lower rates than what the world recently saw may do the trick.

Just in March, as of writing, 14 central banks had lowered rates, including Argentina (-200 basis points (bp)), Canada (-50 bp), Moldova (-100 bp), Jordan (-50 bp), Kuwait (-25 bp), Qatar (-75 bp), Macau (-50 bp), Hong Kong (-50 bp), United Arab Emirates (-50 bp), Bahrain (-50 bp), Saudi Arabia (-50 bp), the United States (-50 bp), Malaysia (-25 bp), and Australia (-25 bp).

Source: Econometric Studios

Recent moves to lower rates in March come on the heels of action earlier in the year. In January and February, 21 other central banks reduced rates, while only two central banks raised rates. Unless inflation picks up rates are heading lower.

Source: Econometric Studios

Everyone deserves a second time around

With lower rates, the obvious question is – What do they mean for private equity activity? The answer is probably – a lot. Private equity firms often borrow money to finance deals, such as in mergers and acquisition, leveraged buyouts, and late-stage venture capital. When money is cheap, private equity deals look more attractive to investors and private equity money managers.

How much of a difference could lower rates across the globe make? Well, potentially quite a lot as long as private equity managers feel they can find good deals.

Consider, for instance, a potential leveraged buyout where the potential internal rate of return (IRR) is 11%. Suppose because of central bank action, the private equity firm thinks it can lower its interest costs from 4% to 2.5%. That 1.5% difference could push the IRR up from the 11% to perhaps 17% or 18% – potentially making the private equity investment potentially too profitable to pass up.

Conclusion

Overall, the shift to even lower interest rates than what the world has already seen suggests another round of strong private equity activity may be on the docket for the latter half of 2020 and going into 2021 and 2022. It’s a good time to looking for private equity investment deals.

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The finance industry is always under construction. One of the most recent fascinating trends is the incredibly expanding private equity (PE) to venture capital (VC) pipeline. Private equity data provider Pitchbook is out with an interesting new note on the topic. Here’s a review.

Private Equity Buyouts as a Proportion of All VC Exits

The first fascinating chart from Pitchbook’s analysis is the proportion of all VC exits coming from PE buyout firms. In 2009, the proportion was a little over 10%. The figure was relatively flat from 2009 to 2013, barely budging from the sub-15%. Then, things picked up. In 2014, the proportion increase from about 12% to about 13%. The proportion increased again from 2014 to 2015 and again from 2015 to 2016. Still, even after consistent increases, the proportion of VC exits from PE buyout firms was still below 15%. Then the picture changed.

In 2017, the proportion jumped to about 19%. It jumped again in 2018 to 20%, the all-time high as of writing. In 2019, the PE-VC exit universe took a bit of a breather, dropping about a percent to 19%.

Overall, there’s an increasingly cozy connection between PE and VC.

Source: Pitchbook

Top Firms

The expansion of PE directly to VC-backed companies begs the question – Which firms are doing the deals? Luckily, the authors of the research note provided a top 10 list of VC-to-PE buyouts from 2000 to 2019. Take a guess before looking. Drum roll please …

On top is Vista Equity Partners. The investment firm, with offices in Austin, Chicago, New York, Oakland, and San Francisco, has more than $52 billion in capital commitments and made 66 VC-to-PE buyouts over the 20 years covered. Vista is by far the top investor in the VC-to-PE movement.

In second place is TA Associates Management at 40 tech deals and 4 non-tech deals.

Rounding out the top five are Providence Equity Partners (40 tech deals/2 non-tech deals), Thoma Bravo (37 tech deals/0 non-tech deals), and Insight Partners (34 tech deals/1 non-tech deal).

The other members of the top 10 include Francisco Partners (31 tech deals/1 non-tech deals), Silver Lake Management (29 tech deals/0 non-tech deals), Kohlberg Kravis Roberts (26 tech deals/9 non-tech deals), the Carlyle Group (25 tech deals/7 non-tech deals), and Warburg Pincus (25 tech deals/6 non-tech deals).

Source: Pitchbook

How Do the Buyout Deals Compare to the Other Type of Deals

Another interesting question answered in the note is the proportion of PE-VC-backed companies by type. The types include acquisition, buyout, IPO, and other. Perhaps the most striking finding from the following graphic is the 2019 figure. For most of its history, buyout firms were in the 15% to 35% range. In 2019, the buyout percentage of total PE-VC pipeline was more than 60%. The private and equity and venture capital worlds are definitely changing.

Source: Pitchbook

Conclusion

The interest from private equity in venture capital-backed companies is becoming ever more pronounced. Let the cozy relationships continue to blossom?

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Every now and then Inc. magazine releases some interesting lists related to private equity and venture capital. They recently released their take on the top 50 most entrepreneur friendly companies in the U.S. The following is a map of such. Can you guess which companies are tops on the list?

Source: Inc. Magazine

Take your guesses now, because the list follows. Before looking at the list, is anyone surprised by the less-than-complete geographic dispersion of investing companies working with entrepreneurs? The middle of America has very few private equity and venture capital firms, comparatively speaking. The states of Utah and Colorado have a couple – other than that, all the top entrepreneurial friendly investing companies are headquartered along the east or west coast.

Have you taken your guesses? On to the list.

The List

The following table captures Inc. magazine’s top 50 most entrepreneurial friendly companies. The list is in no particular order.

The companies on the list with the largest target portfolio of companies

The list offers many ways to slice and dice the data. The first view captures the investing companies that have the largest target portfolio of companies. The companies on Inc. magazine’s list includes:

  • CCMP Capital, headquartered in New York, New York, with a target company size of between $250 million and $2 billion in enterprise value.
  • Permira, with locations in Menlo Park, California and New York, New York, targets companies with enterprise values of between $200 million and $5 billion.
  • Thomas H. Lee Partners, headquartered in Boston, Massachusetts, with a firm target size of between $250 million and $2.5 billion in enterprise value.
  • Trilantic North America, headquartered in New York, New York, with an enterprise target value of $100 million to $1 billion.
  • Wynnchurch Capital, headquartered in Rosemont, Illinois, with an annual revenue target for the target company of $50 million to $1 billion in annual revenue.

The two Midwest companies

Out of interest, can you guess which company headquartered in Utah is on the list and which company is headquartered in Colorado? Take a guess.

  • The Utah-based company is Tower Arch Capital, headquartered in Draper, Utah. Tower Arch Capital has a target annual revenue for target companies of between $20 million to $150 million.
  • The Colorado-based company is Mountaingate Capital. Mountaingate Capital has a company earnings before income taxes and depreciation (EBITDA) of $5 million to $25 million.

Some of the investing companies with the smallest targets

  • Clearview Capital, headquartered in Stamford, Connecticut, with a target EBITDA of between $4 million and $20 million.
  • JMI Equity, headquartered in Baltimore, Maryland and San Diego, California, with an annual revenue target of between $10 million and $50 million.
  • Palladium Equity Partners, headquartered in New York, New York, with an EBITDA of between $10 million and $75 million.
  • Prospect Partners, headquartered in Chicago, Illinois, with an annual revenue target of between $10 million and $75 million.
  • Ridgemont Equity Partners, headquartered in Charlotte, North Carolina, with an EBITDA target of between $5 million and $50 million.
  • Shorehill Capital, headquartered in Chicago, Illinois, with an EBITDA target of between $3 million and $15 million.
  • Source Capital, headquartered in Atlanta, Georgia, with an annual revenue target of between $10 million and $75 million.
  • Spell Capital, headquartered in Minneapolis, Minnesota, with an annual revenue target of $5 million and above.
  • Stripes, headquartered in New York, New York, with annual revenue target of $10 million and above.
  • Tecum Capital, headquartered in Wexford, Pennsylvania, with an EBITDA target of $3 million to $15 million.
  • TPG Growth, headquartered in San Francisco, California, with an annual revenue target of $15 million and above.
Source: Inc. Magazine

Conclusion

Overall, Inc. magazine has an interesting view of the top 50 most entrepreneur friendly investing companies in the U.S. Perhaps unsurprisingly, the list is heavily focused on investing companies along the east and west coasts. Perhaps next year – very likely next year – many other investing companies, such as the exploding investing scene in Austin, Texas – may show up on the list.

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Why are PE Firms Not Keeping Portfolio Companies as Long?

February 3, 2020

The world of private equity is in constant flux. Anybody who has spent anytime with the high-minds in private equity would confirm this observation. The new question on the flux is this – Why are private equity (PEs) not keeping portfolio companies as long as they used to? The question stems from a recent report […]

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Looking Back at Top PE and VC Datapoints in the 2010s

January 20, 2020

What kind of decade was the 2010s for the venture capital and private equity industries? Good, bad, ugly? By most measures, the 2010s was an amazing decade to be involved in the high finance of investing. Here are some of the most interesting charts put out by private equity data provider Pitchbook showing the ride […]

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The Top Priorities of Private Equity Managers in 2020

January 6, 2020

What are the top priorities of private equity managers in 2020? Although the priorities may change by the minute, Lincoln International is out with a fascinating look at what private equity managers consider as their top priorities this year. Before looking, take a guess. Which priority would you guess comes in on top? Would it […]

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The 2020 Venture Capital Outlook May Be Record-Breaking

December 23, 2019

Venture capital data provider Pitchbook is out with their 2020 outlook for venture capital. After some amazing years of incredible valuation growth and funding grabs, one might think that the industry would take a breather – perhaps even decline a little. That is not what Pitchbook sees in 2020. Here are three interesting predictions from […]

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5 Things the Labor Market Has Taught Us This Year

December 9, 2019

The financial industry’s success is intricately connected with the performance of the economy’s labor markets.  In 2019, the labor market taught us many things, here are five. #1 The Economy Can Boom During Trade Wars Perhaps the most surprising result of the 2019 year is the economy and its labor market can continue to boom […]

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Everyone Loves Tech – Including Private Equity

November 26, 2019

One of the most important questions in private equity is – Who’s popular?  Where’s the smart money going?  Based upon a recent report out of private equity data provider Pitchbook, the answer is tech – short for technology. Assets Under Management The true test of whether something is popular in the investment world is what?  […]

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An Amazing Year in Private Equity – Can 2020 Keep Things Going?

November 11, 2019

According to private equity data provider Pitchbook, 2019 has been an amazing year for private equity.  As of November 6, 2019, the total amount of capital raised by the private equity industry is at $246.3 billion.  Strong, incredibly strong.  In fact, according to Pitchbook, 2019 will be the largest private equity fundraising year ever. The […]

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