From the category archives:

PE & VC News

The Tax Cuts and Jobs Act of 2017 created a relatively little known, but potentially powerful investment vehicle known as Opportunity Zones.  Opportunity Zones are tax-preferred investments in certain geographic areas.

Source: Unsplash; breaking the gates into Opportunity Zones

In theory, the idea behind Opportunity Zones is great.  Investors, including venture capital funds, invest in specified low-income areas.  In exchange for raising funds for investments in under-served communities, investors are eligible for certain tax deductions and exemptions on capital gains. 

Initially, the response from the venture capital community was strong.  High-profile investors like AOL cofounder Steve Case and former Facebook president Sean Parker expressed interest in creating Qualified Opportunity Funds.  Their initial enthusiasm waned as potential restrictions on what counts as an opportunity zone and what counts as revenue were considered. 

That initial enthusiasm may be coming back.  On April 21st, the Internal Revenue Service (IRS) released new guidance on the usage of opportunity zones.

First Big Answer

The first big question from investors with a Silicon Valley mindset regarded the rule on 50% of gross income.  Venture capital investors were shying away from Opportunity Zones because of a concern about how the requirement that “50% of the gross income of a business must come from within the opportunity Zone” would be implemented. Did that mean that all the revenue for the business had to be generated within the Opportunity Zone boundaries?  The answer from the IRS on April 21st was no.  Rather, the 50% requirement could be satisfied by showing that 50% of the company’s employee hours or wages occurred within the Opportunity Zone.  This largely generated a sigh of relief from venture capital, private equity, and other technology-focused investors because most of a technology company’s revenue would stem from business outside of the Opportunity Zone, which would have implied that almost none of their investment would qualify for the tax preferred status.  Again, a large sigh of relief.

Second Big Answer

A second question venture capital investors were concerned about was the location of an opportunity zone.  What if a fund manger wanted to sell assets in one opportunity fund and invest in a different opportunity fund?  Would the tax advantages go away with such a sell? 

As with the first question, the IRS’ updated guidance sided with the investors.  The IRS indicated that the tax benefit of an Opportunity Zone investment is tied to the length of time a person has his funds in an opportunity fund, not how long the assets have been in a specific fund.

Conclusion

Overall, Opportunity Zone funds will likely continue to gain steam as investors find out more about the positive aspects of the funds.  If you’re a private equity or venture capital analyst, you may want to consider directing your company towards Opportunity Zones.  After adjusting for taxes, Opportunity Zone investments may beat other types of investment opportunities.

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Friday’s GDP report was somewhat of a shocker.  Gross domestic product grew by 3.2%. Quite healthy by most any measure.  Contrary to popular economic opinion, economic growth is strong.  There is absolutely no evidence yet of a recession.

Could the strength in the overall economy show up in venture capital markets?  The answer is yes. 

Last year venture capital blew through the roof at a massive $132 billion, breaking historical records.  Fascinatingly, 2019 could continue the booming. 

Here are 4 charts, produced by private equity data provider Pitchbook, that show the picture of VC through the first quarter of 2019.

#1 VC Deal Activity

The first figure is on US venture capital deal activity.  Activity is booming.  The first quarter of 2019 saw deal volume of almost $33 billion and deal count at 1,853.  The deal volume figure is almost 25% of what we saw in 2018, suggesting we’re roughly on pace to match the record-breaking year of 2018.  Amazing strength.

Source: Pitchbook

#2 VC Quarterly Investments

In the first quarter of 2019, we saw the second-highest quarterly capital investment in the past 10 years.  The only quarter to surpass the awesome start to 2019?  An almost unimaginable fourth quarter of 2018, which came in at more than $40 billion.

Source: Pitchbook

#3 The Massive Deals are Taking Over

The third figure showing the incredible state of venture capital today is the breakdown of VC deals (measured in dollars) by size of the deal. 

In orange are deals worth over $50 million.  The next largest deal size is $25 million to $50 million in light blue.  The remaining colors are for deal values less than $25 million. 

Fascinatingly, deals have become massive.  The deals worth more than $50 million accounted for more than 60% of all deals in the first quarter of 2019.  The beats even 2018, which saw massive deal values reach just shy of 60% of all deal values.  Again, amazing.

Source: Pitchbook

#4 Series D Pre-Money Valuations Reach a Record

The fourth figure on the state of venture capital is pre-money valuations.  Almost unbelievably, pre-money valuations for the top 75th percentile reached above $1 billion for the first time at $1.1 billion.  This set a record and far surpassed the previous record we saw in 2018 at $756 million.

Source: Pitchbook

Conclusion

Overall, venture capital in 2019 could continue the record-setting pace the world saw in 2019.  With the exception of perhaps the end of the 20th century and the first few years of the 21st century, there has perhaps never been a better time to be involved in venture capital than now.

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The first quarter of 2019 was an awesome start to the year for growth equity funds.  According to data from Private Equity International, growth equity funds saw $24.9 billion in fundraising.  The $24.9 billion is the strongest start to a year in the past ten years.  Prior to 2019, the strongest start was 2011 at $23.05 billion.

Other areas of the private equity universe have not done as well so far in 2019. The first quarter of 2019 for Fund of Funds was tiny at just $0.9 billion, the lowest fundraising total in the over the period shown.

Venture capital fundraising was also weak at just $5.9 billion.  The next weakest year over the past decade was Q1 2010 at $6.1 billion. 

The very weak first quarter for Fund of Funds and venture capital was almost matched by secondaries.  Fundraising for secondaries came in at $1.1 billion, second lowest in the past decade.  The weakest first quarter figure was in Q1 2009 at a dismal $0.6 billion.

Lastly, Other private equity investments, which includes co-investments, distressed, and turnaround investments, came in at $4.2 billion.  Compared to the past decade’s results, this was the third weakest.  The only two weaker first quarter figures were in 2011 and 2009 at $2.5 billion and $3.7 billion, respectively.

Source: Private Equity International

Is this an ominous signal for the rest of 2019?

The strong growth equity fundraising figures combined with the weak venture capital/Fund of Funds/secondaries/Other presents a conflicting story. 

Which one will win out?

If one uses the total fundraising figure and annualizes the first quarter’s results, 2019 is headed for a slightly weaker year than 2018.  This, of course, would mean that no collapsing years similar to 2009/2010 are on the horizon for the remainder of this year. 

Anyone willing to bet that 2019 will come in much weaker than 2018 when the end of the year arrives?  Does growth equity results have you scared off from betting on weakness? 

Oh, the loveliness of private equity fundraising and predicting future returns.

Source: Private Equity International

Conclusion

In looking at the first quarter of 2019, growth equity private equity funds have done quite well.  All other private equity categories haven’t fared as well, which presents us with an interesting question – Which category will be the leading indicator for the rest of 2019?

History belongs to the bold, those that can predict the future before it happens.  Which direction do you have for the remainder of this year?

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Why are PE and VC investors steering away from opportunity zones?

April 1, 2019

Why are PE and VC investors steering away from opportunity zones?

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Some Thoughts on 2018 Results Heading with 10 Months Left in 2019

March 4, 2019

We’re a couple months into 2019, which means we are just now starting to get final 2018 figures.  Let’s see how well you know what the 2018 venture capital landscape looked like. First Question: How much did U.S.-based venture capital-backed companies raise in 2018? U.S.-based companies raised an astonishing $99.5 billion this past year.  Will […]

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Private Equity: Is the Edge Still There?

February 18, 2019

Private equity: is the edge still there? If you’re a private equity professional, this question is probably instills one of two feelings inside you. First, it could strike fear into your heart as you attempt to raise funds for new investments.  Why would people invest in an illiquid asset class if the promised return is […]

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Taking Stock of Where VC was at the End of 2018

February 4, 2019

If you were asked how the venture capital (VC) industry performed in 2018, what would you say? Red hot? Slowing? Just starting to boom? Sick of San Francisco? Private equity and venture capital data provider Pitchbook recently released their accounting of the state of the VC industry at the end of 2018. Here’s a look. […]

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Who are the 25 Most Valuable Startups in the U.S.?

January 7, 2019

Every now and then we enjoy looking at the most valuable startups in the U.S.  It provides perspective and sometimes inspires awe at the state of American ingenuity.  Without further adieu, the list follows. But, before looking, can you guess which companies show up in the top 5?  Where would you guess the most valuable […]

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Could Take-Privates Spike in 2019?

December 24, 2018

In an interesting speculation on the state of the private equity universe, Adam Lewis of private-equity data provider Pitchbook is out with an interesting look take on the “take-privates” activity.  In particular, he speculates that the take-private activity will spike in 2019. Some Background Before getting into the reasons why take-private activity could spike in […]

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How Did Financial Employment Do in 2018?

December 10, 2018

The year is almost over.  As such, now seem like a good time to review how financial employment did in 2018. There are two charts here.  The first compares growth in financial employment with other major sectors.  The second compares growth in financial industry employment by president for the first almost 2 years in office. […]

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