Wednesday, February 29, 2012

Private Equity Performance: What Do We Know?

The authors of this paper present evidence on the performance of nearly 1400 U.S. private equity (buyout and venture capital) funds using a new research-quality dataset from Burgiss, sourced from over 200 institutional investors.

Using detailed cash-flow data, the authors compare buyout and venture capital returns to the returns produced by public markets. The authors also compare the evidence from Burgiss to that derived from other commercial datasets – Venture Economics, Preqin and Cambridge Associates – as well as recent research.

The authors find better buyout fund performance than has previously been documented. This in part reflects recently discovered problems with data provided by Venture Economics, upon which several previous studies had relied. Average U.S. buyout fund performance has exceeded that of public markets for most vintages for a long period of time. The outperformance versus the S&P 500 averages 20% to 27% over the life of the fund and more than 3% per year. Average U.S. venture capital funds, on the other hand, outperformed public equities in the 1990s, but have underperformed public equities in the 2000s.

Using individual fund data, the authors explore the relationship between absolute measures of performance – internal rates of return (IRRs) and multiples of invested capital – and performance relative to public markets. Within a given vintage year, performance relative to public markets can be predicted well by a fund’s multiple of invested capital and IRR, so the authors are able to estimate the performance relative to public markets that would have been derived from the other commercial datasets, had the required cash-flow data been available.

Private equity performance in the other commercial sources – other than Venture Economics – is qualitatively similar to that the authors find using the Burgiss data.

Tuesday, February 21, 2012


Corporate VC Investors Steadily Participating in Increased Share of Total VC Deals

Over the last three years, corporate venture capitalists (CVCs) have steadily increased investment activity, participating in 15 percent of all venture capital investment deals in 2011 according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA) based on data by Thomson Reuters. This participation rate compares to 2010 when corporate VCs were involved in 13.6 percent of all venture capital deals and 12.7 percent of all deals in 2009. In 2011, CVCs invested $2.3 billion into 551 deals compared to $2.0 billion into 481 deals in 2010, a 15 percent increase in dollars and deals for the year.

“Corporations bring a unique and specialized perspective to venture investing and are increasingly becoming more active in supporting the growth of emerging technologies. In turn, the venture capital industry has embraced the CVCs’ depth of resources - including R&D, access to broad marketing channels and operating experience - as invaluable contributions to the success of the startup economy,” said Mark Heesen, president, National Venture Capital Association.

Driven by strong clean tech investment, CVCs put the most money into the Industrial/Energy sector where $974 million was invested in 95 deals. The MoneyTree report also showed that CVCs participated in more than one-fifth (22 percent) of the Clean Tech deals and provided nearly 15 percent of financing in the sector since the beginning of 2010. Similar to 2011 trends in traditional venture capital investment, CVCs were most active in the Software sector in 2011 where they invested $883 million in 284 deals. Biotechnology ranked second in terms of the number of deals where 172 rounds comprising $694 million were completed.

"It's not surprising to see corporate venture capitalists becoming even more active in the Biotech sector," noted Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers. "Larger biopharma companies have recognized that their expertise does not lie in early stage R&D - the smaller, more nimble venture-backed companies are more efficient at drug development. Accordingly, the larger biopharma companies are looking to these venture-backed companies to help fill their pipeline as many of their blockbuster drugs are coming off patent. Bringing corporate venture capitalists to the table early in the company's development helps ensure that there will be interest in the drugs being developed and identify a potential acquirer early on, thus allowing the VCs to deliver more expedient returns to their investors."

To read the chart below, read across:
Year; Corporate Venture Investment: Deals $; Total Venture Investment: Deals $; % Total Deals; % Total $

2002 551 $1,905.9 3,183 $20,849.5 17.3% 9.1%
2003 447 $1,296.0 3,004 $18,613.8 14.9% 7.0%
2004 528 $1,548.7 3,179 $22,358.7 16.6% 6.9%
2005 535 $1,557.2 3,262 $22,945.70 16.4% 6.8%
2006 636 $2,031.5 3,827 $26,594.2 16.6% 7.6%
2007 777 $2,609.4 4,124 $30,829.0 18.8% 8.5%
2008 783 $2,263.5 4,113 $30,546.6 19.0% 7.4%
2009 390 $1,428.4 3,066 $19,751.8 12.7% 7.2%
2010 481 $1,999.8 3,526 $23,243.7 13.6% 8.6%
2011 551 $2,331.7 3,696 $28,454.5 14.9% 8.2%

“The venture-backed community represents an immense source of creative ideas. Aligning objectives through investment and integrating complementary capabilities assures that solutions can be brought forward at a scale that matters," said Mary Kay James, DuPont Ventures and NVCA Corporate Venture Group Advisory Board Member. "Given these benefits we anticipate the total amount of CVC investment and the percentage contribution to the overall venture investment totals to continue to steadily increase in the coming year and beyond."

Wednesday, February 15, 2012


Activity in Canada’s venture capital (VC) market grew in 2011, with the highest level of VC invested in four years, though still substantially below the level recorded in 2007. At the same time, the VC industry’s ability to meet strongly rising demand with further investment growth is threatened by continued weakness on the fund-raising front. These were among the findings of a statistical report released today by CVCA-Canada’s Venture Capital & Private Equity Association and research partner Thomson Reuters.

According to the report, VC invested across Canada totaled $1.5 billion in 2011, up 34% from the year before. Indeed, disbursement levels were the highest since 2008, though they remained well shy of the $2.1 billion invested in 2007. Increased dollars invested went to 444 domestic firms in 2011, up 24% year over year.

“Canadian VC investment rose in 2011 to meet surging demand for risk capital, fuelled by rising levels of entrepreneurship, the activity of business incubators, and R&D incentives, notably the Scientific Research and Experimental Development (SR&ED ) program”, said Gregory Smith, President of the CVCA and Managing Partner, Brookfield Financial Corp. “Furthermore, growth in companies financed and dollars invested was located in all key technology centres, in all regions of the country,” he added.

The report found increased Canadian VC market activity in 2011 was felt in virtually all innovation sectors of the economy. Trends were led in IT sectors, with $692 million invested last year, up 41% from 2010. In addition, life sciences received $343 million, up 15% over the same period, while clean technology received $245 million, up 43%.

“Knowledge-based industries, which are the foundation of Canada’s future economic competitiveness and productivity, were the clear beneficiaries of market trends last year”, said Mr. Smith. “The strong backing of clean-tech firms, which secured a record level of VC investment in 2011, demonstrates that Canada has the potential to become a world leader in the development of a wide range of environmental technologies.” he added.

At the same time, Mr. Smith signaled concern about the ability of VC fund-raising activity to support continued investment growth in the years ahead. The report found new commitments to Canadian VC funds were almost unchanged between 2010 and 2011, with $1.0 billion raised in the latter year, up only 2%. Funds raised in the American VC market, in contrast, rose 32% year over year. “Canada has an historic opportunity to become an innovation leader,” said Mr. Smith, “by making major investments that enable our best technology businesses to realize optimal growth and compete on a global stage.” He added: “However, in order to act decisively on this opportunity, we must first overcome challenges to supplying VC funds that, in turn, supply entrepreneurs.”

Mr. Smith observed that stalled fund-raising has contributed to low levels of Canadian VC deal capitalization. The report found that, despite the overall growth in disbursements, the gap in VC financing sizes between Canada and the United States was further eroded in 2011. Domestic innovative firms captured only 37% of the dollars going to firms south of the border last year, down from 39% in 2010.

In light of this financing gap, Mr. Smith also stressed the important contribution of the SR&ED program to keeping Canada competitive in the global race to build knowledge-based economies and create knowledge-based jobs. “The current SR&ED tax credit regime facilitates investment by domestic and international VC funds in Canadian innovative firms, and rewards risk-takers for their R&D activity,” he said. “It is an integral part of the high-technology ecosystem that we need to nurture and grow in Canada.”

The 2011 statistics reveal that Ontario and Québec were tied in VC market share this time around, with both absorbing 36% of all disbursements, or $550 million invested and $549 million invested, respectively. Deal-making was also up in British Columbia, Alberta, and Atlantic Canada last year.

The report found the activity of foreign VC funds in Canada increased in 2011. Foreign activity brought a total of $430 million to deals, up 38% from 2010, and reflecting the highest level of cross-border investment in four years.

In contrast with direct foreign VC activity in Canada, there was no record of indirect foreign limited partner (LP) commitments in the $1.0 billion raised by Canadian VC funds in 2011. The year before, foreign LPs accounted for 16% of new fund commitments.

“The absence of foreign LPs in Canadian fund-raising last year is a source of great concern,” said Mr. Smith. He added: “Improved fund-raising trends that foster more sustainable VC investment levels in Canada depends in part on our ability to attract non-resident capital to top-tier domestic fund managers.”

VC fund exits from Canadian portfolio assets held onto some post-slowdown momentum in 2011. Liquidity events totaled 27, down 13% from 2010, but numbering slightly more than events reported in 2008 and 2009. Q4 2011 activity included the largest acquisition in domestic market history, the US$1.1 billion purchase of Montréal’s Enobia Pharma Corp. by Alexion Pharmaceuticals Inc. However, IPO activity remained weak, with only two IPOs registered in 2011.

Wednesday, February 8, 2012

Venture Capital Investment in Europe Fell 14% in 2011


Venture capitalists put €4.4 billion into 1,012 deals for European companies in 2011, a 14% decline in investment and 19% decline in deal flow from 2010, according to Dow Jones VentureSource. This marks the lowest annual deal count for Europe since VentureSource began tracking the region in 2000.

The fourth quarter was the weakest of the year in terms of deal activity as 194 deals collected €1.1 billion, a 43% drop in deals and 38% decline in investment over the same period in 2010. Weakness in the fourth quarter is notable as it is traditionally one of the most active quarters for deals.

“Venture capitalists are having difficulty raising funds as the Euro crisis weighs on limited partners’ minds and fewer companies are finding exits. This has naturally led to a slowdown in investment. With less capital flowing into venture firms, there’s less to invest in start-ups,” said Anthony Sheldon, research manager, Dow Jones VentureSource. The median size of a European venture capital deal was €2 million in 2011, on par with 2010.

Exits Mirror Fourth-Quarter Drop in Investment

The fourth quarter’s weakness in investments mirrored the exit environment. The fourth quarter of 2011 was the year’s weakest for mergers and acquisitions (M&As) and initial public offerings (IPOs) as 30 European venture-backed companies were acquired and two companies went public.

In all of 2011, 148 companies exited via an M&A, raising €7 billion, a 12% decline in deals and 7% increase in capital raised. Companies that got acquired, however, recorded the highest median raised on record. The median paid for an acquisition in 2011 was €5.1 million.

In all of 2011, 14 venture-backed companies went public, raising €695 million, a drop in IPOs but an increase in capital raised from 2010 when 18 IPOs raised €438 million.

As VCs Focus on Web, Consumer Services Investment Passes IT for First Time Since 2001

For the first time since 2001, the Web-heavy Consumer Services industry raised more capital than the Information Technology (IT) industry. Consumer Services companies raised €1.1 billion for 223 deals in 2011, a 63% increase in investment despite a 6% drop in deals from 2010. It was the industry’s strongest year for investment since 2001. IT companies raised €812 million for 270 deals in 2011, a 50% decline in investment and 25% decline in deals.

More than half of the capital collected by the Consumer Services industry went to the social media, entertainment and shopping companies in the Consumer Information Services sector. Those companies raised €691 million for 192 deals, a 79% increase in investment despite an 8% decline in deals.

Within the IT industry, Software remained the most popular investment area, driven by interest in business applications software and communications software. The Software sector raised €467 million through 194 deals in 2011, a 14% decline in investment and 13% decline in deal activity.

Medical Devices Offers Some Stability in Healthcare

As deal activity and investment fell in all areas of Healthcare, the Medical Devices sector offered moderate stability, seeing a drop of just 7% in both deal activity and investment. Medical Devices companies raised €323 million for 91 deals in 2011, a mild decline from the €348 million raised for 98 deals in 2010.

As usual, Biopharmaceuticals took the lion’s share of the industry’s investment as 121 deals raised €856 million, a 29% decline in deals and 20% decline in investment.

Uptick in Deals for Advertising, Data Companies

The Business Support Services sector, which includes companies developing technologies and services for data management, advertising and marketing, was the only sector to see an uptick in both deals and investment in 2011. The sector raised €479 million for 90 deals, a 62% increase in investment and 5% increase in deals.

The broader Business and Financial Services industry, which includes the Business Support Services sector as well as financial services and engineering companies, raised €614 million for 132 deals, a 15% increase in capital invested despite a 12% decline in investment.

Companies Focused on Renewables Capture Most Energy Investment

In 2011, 56 deals in the Energy & Utilities industry raised €253 million, a 26% decline in deals and 25% decline in investment. Renewable Energy companies accounted for most of the industry’s investment, raising €238 million for 49 deals.

Country Perspectives

Europe’s four major countries for venture investment – the U.K., France, Germany and Sweden – witnessed record-low deal activity in 2011.

- The U.K. remained the favorite destination for venture capital investment in Europe in 2011. Companies in the U.K. raised €1.2 billion for 274 deals, a 36% decline in investment and 17% decline in deals.
- France came in second place as companies raised €728 million for 217 deals, a 15% decline in investment and 18% decline in deals.
- Germany came in third as companies raised €475 million for 120 deals, a 23% decline in investment and 26% decline in deals.
- Sweden came in fourth as companies raised €299 million for 67 deals, a 7% increase in investment despite a 36% decline in deals.

China Overtakes U.K. in Venture Capital Financing


China surpassed the U.K. to become the second-largest recipient of venture capital equity financing in 2011.

According to Dow Jones VentureSource, which tracks venture-backed companies, Chinese firms received 332 venture capital equity financing deals in 2011, surpassing the U.K.’s 274. The U.S. retained its lead with 3,209 deals.

Each deal represents a single case of equity financing by a professional venture capital firm, corporation, other private equity firm or individual. Deals are an indicator of the emergence of start-up and growth companies in an economy.

Venture capital firms are not only placing more bets on China, but bigger bets, as well.

In total value, Chinese companies attracted US$6 billion in venture capital equity financing, compared with US$1.7 billion in the U.K. and US$6.1 billion in Europe as a total. The median deal size of a venture capital deal for a Chinese company was US$12.4 million in 2011 – more than four times the median deal size in Europe, at US$2.7 million. The U.S. median deal size for venture capital financing was US$5 million.

Chinese companies’ gains in venture capital financing come as their European peers experience a decline. VentureSource data indicates a continuous decline in venture capital financing for European companies.

The near parity of China and Europe’s venture capital financing in 2011 is a relatively new phenomenon. Until 2010, European companies had consistently attracted more than double the venture capital financing of Chinese companies. As recently as 2009, for example, Europe’s venture capital financing of US$5.2 billion was 86% greater than China’s US$2.8 billion. This lead diminished in 2010 to 20% and in 2011 to just 2%.

“Thanks to a growing economy and strong exit environment, venture capitalists have shown significant interest in funding Chinese companies,” said Guido Schenk, sales director, Dow Jones VentureSource.

While China continues to attract financing for consumer-oriented industries, including consumer goods and services, the country is also recording strong increases of venture capital financing for information technology and healthcare companies.

Chinese companies operating in the consumer services industry, which includes many Internet companies, raised US $3.3 billion in 2011, a 12% increase from 2010.

Chinese information technology companies attracted US$849 million in venture capital financing in 2011, a 35% increase in investment from 2010.

China’s healthcare industry attracted US$317 million of financing by venture capital firms in 2011, a 73% increase on the previous year.

For information on Dow Jones VentureSource’s research methodology, visit

Friday, February 3, 2012

K-12 Marketplace Sees Major Flow of Venture Capital

Complete article

The flow of venture capital into the K-12 education market has exploded over the past year, reaching its highest transaction values in a decade in 2011, industry observers say.

They attribute that rise to such factors as a heightened interest in educational technology; the decreasing cost of electronic devices such as tablet computers, laptops, netbooks, and mobile devices; and the movement toward standardization of curriculum through the Common Core State Standards.

"Having been in this space, covering it for more than a decade, I've not seen this level of interest or supply of early-stage K-12 businesses in the last decade by any stretch of the imagination," said Adam J. Newman, a founding and managing partner of Education Growth Advisors, an education business advisory firm in Stamford, Conn.

"What you have right now in K-12 education is an ecosystem of really dynamic entrepreneurs and emergent companies and a very diverse set of organizations that have become interested in the education space," he said.

Betting on Education
The flow of venture capital funds into the K-12 market dropped precipitously in 2001, following two years of huge investments of about $500 million annually before the dot-com bubble burst. Investments leveled off between 2001 and 2006, before rising again, and taking off last year, surpassing venture capital investments in higher education for the first time since 2006.

Venture capital transaction values in the K-12 field, which include both public and private schools, increased from roughly $130 million in 2010 to $334 million last year, according to data from the Chicago-based GSV Advisors.

Precollegiate education historically has not been an easy market for venture capitalists to break into, analysts say, but certain factors are contributing to a higher awareness of this market for investors.

Venture capitalists generally look for "high-growth opportunities" and rely on the ability to scale up new enterprises quickly, said Mr. Newman. So the common standards in English/language arts and math, for instance, which have been adopted by all but four states, are contributing to companies' perception of a potential for fast growth in standards-related ventures across a larger market, he said.

"[The common core] is breaking down some of those state-level barriers that made it challenging for folks [to achieve scale]," said Mr. Newman. (His firm's other founding and managing partner, Christopher L. Curran, is a trustee of Editorial Projects in Education, the nonprofit publisher of Education Week.)

For instance, MasteryConnect is an educational technology startup that aims to help teachers transition to the common-core standards. The platform allows teachers to find, administer, score, and track student data through formative assessments.