Risk-Adjusting the Returns to Venture Capital

Performance evaluation of venture-capital (VC) payoffs is challenging because payoffs are infrequent, skewed, realized over endogenously varying time horizons, and cross- sectionally dependent. The authors of this study show that standard stochastic discount factor (SDF) methods can be adapted to handle these issues. The authors’ approach generalizes the Public Market Equivalent (PME) measure commonly used in the private-equity literature.

The authors find that the abnormal returns from both VC funds and VC start-up investments are robust to relaxing the strong distributional assumptions and implicit SDF restrictions from the prior literature: VC start-up investments earn substantial positive abnormal returns, and VC fund abnormal returns are close to zero.

The authors further show that the systematic component of start-up company and VC fund payoffs resembles the negatively skewed payoffs from selling index put options, which contrasts with the call option-like positive skewness of the idiosyncratic payoffs. Motivated by this finding, The authors explore an SDF that includes index put option returns.

This results in negative abnormal returns to VC funds, while the abnormal returns to start-up investments remain large and positive.

A solid start for Australian private equity in 2013

The first quarter of 2013 saw the Cambridge Associates LLC Australia Private Equity and Venture Capital Index (C|A Australia Index) post gains of 2.36%, according to the latest quarterly report released by The Australian Private Equity and Venture Capital Association Ltd (AVCAL) today. Over the same period, the S&P/ASX 300 Index continued to rise on the back of growing confidence in the US economy and domestic interest rate cuts, increasing by 8.04%.

The C|A Australia Index over the medium to long term outperformed listed equities, posting annualised net-of-fees returns of 7.18%, 3.71% and 8.99% over the three, five and fifteen-year horizons respectively. However, ten-year returns showed listed market returns of 10.21% outpacing an 8.37% return by private equity.

One-year returns for the C|A Australia Index were steady at 6.72% on an AUD basis and 7.42% in USD terms. For ten of the last eleven years, annual rolling returns for the Index have been positive.

Australian Private Equity & Venture Capital Association (AVCAL) CEO Dr Katherine Woodthorpe said, “It is interesting to note that the first quarter of 2013 saw the highest level of distributions to limited partners in the last five quarters, and the second highest level since records began. Despite the challenging environment for exits, it is encouraging to note that private equity is generally delivering good returns to investors, particularly with realisations being top of mind for many limited partners at the moment."

Dow Jones VentureSource U.S. Quarterly Report - 2Q 2013

Dow Jones VentureSource’s quarterly findings for U.S. venture capital fundraising, investment, valuation, and liquidity.

Highlights for 2Q 2013 include:

*U.S. venture capital raised 4% more funds in the first half 2013 than in the first half of the previous year

*Venture capital investment saw its worst quarter since 1Q 2010

*Median pre-money valuation increased 27% from 1Q 2013 Initial public offerings (IPOs) doubled from the previous



Venture Fundraising Increases in U.S. during 2Q 2013

50 funds garnered $6.8 billion in 2Q 2013, a 4% decrease in number of funds, but a 48% increase in the amount raised from the prior quarter.

Insight Venture Partners VIII LP, the largest U.S. venture capital fund of the year, raised $2.6 billion, accounting for 38% of the total amount raised in 2Q 2013.

Median U.S. fund size was $150 million in the first half of 2013.



U.S. Venture Investment Fall Slows in 2Q 2013

U.S.-based companies raised $7.2 billion from 801 venture capital deals in 2Q 2013, a 2% decrease in capital and a 0.5% decrease in number of deals from the previous quarter.

Compared to the same period in 2012, a 16% decrease was registered in number of deals, while amount raised went down 19%.

With the exception of Healthcare and Consumer Goods that experienced a drop of 8% and 80% respectively, all others sectors saw an increase in amount raised.


Equity Financings into U.S.-based, VC-backed Companies, by Industry Group (2Q 2013)

Information Technology (IT) saw the largest investment allocation, with 238 deals garnering $2.1 billion and accounting for 29% of total equity investment.

Healthcare followed with $1.9 billion in 168 closed deals, a decrease of 8% in amount invested and 3% drop in number of deals compared to the previous quarter.

Business and Financial Services increased quarter over quarter, with $1.3 billion invested in 169 deals – a 10% and 16% rise in dollars and deals, respectively, compared to 1Q 2013.

Investment in Consumer Services registered both the highest quarter over quarter increase in capital invested and number of deals: 40% and 20%, respectively.

Complete Report

Cambridge Associates U.S. Private Equity and Venture Capital Commentary Quarter and Year Ending December 31, 2012

Overview

On the heels of a strong finish in 2011, U.S. private equity and venture capital funds also performed well in 2012, due in large part to double-digit returns in most of the large sectors in both asset classes. In the four years between 2009 and 2012, private equity funds had positive returns in all but three quarters and venture capital funds rose in all but two quarters, as indicated by the Cambridge Associates LLC benchmark indices of the two alternative asset classes. During the fourth quarter of 2012, both private asset classes bested large cap public equities, but for the year, venture capital trailed public equity returns and private equity funds had mixed success against the public equity indices.

Over the past ten years, private equity significantly outperformed venture capital and the public markets, while over that same time period, venture slightly underperformed public indices. Returns for the Cambridge Associates LLC U.S. Private Equity Index® and Cambridge Associates LLC U.S. Venture Capital Index® were positive in the fourth quarter of 2012 while most public equity indices were negative. Macro factors impacting the public markets were largely political, such as the “fiscal cliff” negotiations, and overall market uncertainty had a dampening effect on initial public offerings (IPOs).

Highlights of the fourth quarter and year are:

_ With the exception of the one-year period, the private equity benchmark outperformed large and small public companies in all of the time periods ending December 31, 2012 listed in the table above. During various periods over the past ten years, the venture capital index’s record against the public markets has been mixed but over the long term, venture has significantly outperformed public equities.

_ The spread between the private equity and venture capital ten-year returns is down to 7.2% after hitting a peak of 12.7% at the end of the third quarter 2010. _ As of December 31, 2012, public companies accounted for about 18.6% of the private equity index, a decrease of approximately 2.0% from the third quarter. Public company representation in the venture capital index decreased to 11.8% from about 14.9% last quarter. Non-U.S. company exposures in both private asset class indices rose a bit in the fourth quarter. In the private equity index, it went up approximately 0.8% to 19.7% and in the venture capital benchmark, it increased 0.3% to 10.8%.

Private Equity Performance Insights:

During the fourth quarter of 2012, most U.S. public equity indices were down amid economic and political uncertainty regarding the “fiscal cliff.” The Cambridge Associates LLC U.S. Private Equity Index®, however, remained in positive territory for the second consecutive quarter and the third of four in the year. The index’s fourth quarter return was 3.5%, bringing its return for the year up to 13.8%, an increase of about 2.2% from the previous year. In the fourth quarter, portfolio company valuations increased across all vintage years from 2000 to 2012; funds launched in each of the five vintages that represented at least 5% of the index saw asset values improve by at least $1.3 billion. In dollar terms, valuations grew most for consumer, healthcare, energy, financial services, and manufacturing companies; all were among the index’s large sectors.

According to Dealogic, 12 private equity-backed companies went public in the fourth quarter at a value of $3.6 billion; the number of companies equaled the third quarter’s activity but the value represented an increase of $1.9 billion. During 2012, 61 private equity-backed companies went public, fetching $12.7 billion, and while there were 13 more IPOs than in 2011, the value of the deals was roughly half. Some of 2012’s better known IPOs included Bloomin’ Brands and Realogy (which includes real estate brands Coldwell Banker and Century 21 among others). The latter represented almost 10% of the value raised by IPOs during the year.

Both the fourth quarter and year were active periods for mergers and acquisitions (M&A) involving private equity-backed companies. There were 237 M&A transactions in the fourth quarter, up from 199 in the third. The values of 70 of those deals were disclosed to the public, which is in line with the previous quarter’s 71. Based on the publicly available values, the average transaction size rose from $224 million in the third quarter to $562 million in the fourth. In 2012, there were 806 M&A transactions, an increase of 115 over the prior year. The values of 279 deals were disclosed to the public in 2012 at an average size of $291 million. In 2011, there were 245 transactions with publicly-disclosed values worth an average of $362 million.

Five vintage years -2007, 2006, 2005, 2008, and 2004 - represented nearly 82% of the private equity index’s value by the end of 2012; the index has grown more concentrated since 2010 when there were seven vintage years of note in the index. Returns among the five vintages were slightly better in the fourth quarter than they were in the third, ranging from 2.2% for the 2004 funds to 5.4% for the 2008 funds. Throughout 2012, an active M&A environment and generally strong public markets helped drive realizations and bolster unrealized valuations.

During the fourth quarter and year, in funds raised in the 2007 vintage year, write ups in the consumer and energy sectors combined to account for roughly 40% of the vintage’s increased valuations. In the second largest vintage year, 2006, retail and healthcare led all other sectors with respect to valuation increases, representing more than 70% of the write-ups in the fourth quarter and more than 50% for the year. For the year’s best performing vintage, 2005, consumer sector portfolio companies jumped the most in value but healthcare and IT businesses also contributed. Energy sector write-ups were by far the largest in the fourth quarter’s highest returning vintage, 2008.

All Eight Key Sectors in the PE Index Earned Positive Returns for the Quarter, Consumer Led All

All of the eight sectors that represented at least 5% (“meaningfully sized”) of the index produced positive returns during the fourth quarter of 2012. The three largest sectors – consumer, energy, and healthcare – comprised more than 51% of the index’s total value and returned between 4.1% and 6.7%. On a dollar-weighted basis, the three earned a gross return of 5.5%, outperforming the total benchmark gross performance by 0.7%. Among the eight meaningfully-sized sectors, consumer posted the highest return for the quarter; the 2006 and 2007 vintage years contributed most to the performance and they accounted for more than 52% of the sector’s market value at the end of the year. Media produced the fourth quarter’s lowest return, 0.9%, which was driven mostly by modest valuation moves (both up and down) in all vintages except for 2004 and 2008. During the quarter, fund managers allocated more than half of the capital invested to energy, consumer, and healthcare companies – about 3% higher than the historical average.

For the year, manufacturing was the best performing sector and media was the worst. Write ups for manufacturing companies in vintage years 2007, 2004, and 2006 were the largest drivers of that sector’s return. The 2004 vintage was the largest positive contributor to the annual performance for media, the only large sector that did not produce a double-digit positive return for the year. The three largest sectors – consumer, energy, and healthcare - outperformed the benchmark’s total gross return by 0.2% and outperformed all other industries by 0.4%.

Distributions Hit a Record Level; Capital Contributions Also Rose

In the fourth quarter, managers in the U.S. private equity index called about $25.2 billion from limited partners and returned $48.6 billion; these represent a 46.3% increase in contributions and a 122.6% increase in distributions from last quarter. The increase of nearly $8.0 billion in capital calls from the prior quarter was the largest quarter-over-quarter rise since the second quarter of 2010. Distributions increased by nearly $26.8 billion from the third quarter, hitting the highest quarterly level seen in the 27 years that Cambridge Associates has tracked the industry.

Investors in funds launched in 2007, 2008, and 2011 contributed $17.9 billion, or 71% of the total capital called during the quarter, the 2007 funds alone represented $9.7 billion, or 39% of the capital called. Conversely, each of the vintage years between 2004 and 2008 distributed more than $4 billion in the quarter. Investors in funds launched in 2006 and 2007 received approximately $22.8 billion or 47% of the capital distributed. Distributions outnumbered contributions in all quarters in 2012. During 2012, managers in the U.S. private equity index called $71.3 billion from limited partners, more than $10.0 billion less than they called in either 2011 or 2010 but 43% more than in 2009. Total distributions during 2012 hit $118.0 billion – the largest annual amount since the index’s inception. Distributions increased by 23% over totals hit in 2011, 59% from 2010, and 327% from 2009. Exits and recapitalizations helped drive distributions to record highs. Friendly credit markets enabled recapitalizations and anticipated tax hikes made motivated sellers out of some private equity investors. Last year was the second in a row but only the fifth since the inception of the private equity index in which distributions outpaced contributions; the others were 1996, 2004, 2005, and 2011. From 2006 through 2010, when contributions outnumbered distributions, private equity fund managers in the index called 1.3 times as much capital as they distributed; in 2011 and 2012, the reverse was true, as distributions outweighed contributions by a similar margin.

Venture Capital Performance Insights

For the first time in three years, the venture capital index produced a single-digit annual return, coming off of two consecutive years of 13%+ performance. Dragging down the index’s performance for the year were returns of less than 1% in the middle two quarters and just over 1% in the last. Middling performance from the index’s largest sector, IT, contributed heavily to the benchmark’s result. The IPO market, active during the first half of the year, struggled in the second half following disappointing Facebook IPO results. Contributions were lower in 2012 than in 2011 while distributions increased, and distributions not only outpaced contributions for the year but they hit their highest annual level since 2000.

According to the National Venture Capital Association (NVCA) and Thomson Reuters, 49 venturebacked companies went public in 2012 for a total IPO offer value of nearly $21.5 billion. The number of venture-backed IPOs was in line with 2011, however the total offer value was up significantly, thanks entirely to the $16.0 billion Facebook IPO. There were 469 venture-backed M&A deals in 2012, down slightly from 2011 with 498. For deals with values disclosed to the public, the average size of a venture-backed M&A transaction was up 21.7% from 2011, to approximately $173.6 million.

Fourth-Quarter VC Performance Mediocre; Solid Overall in 2012

After beginning 2012 with a strong first quarter, the Cambridge Associates LLC U.S. Venture Capital Index® returned 0.6%, 0.6%, and 1.2%, respectively, in the second, third, and fourth quarters, ending the year with a 7.2% return. All but one of the meaningfully-sized vintage years had flat or positive returns in the fourth quarter with the exception being vintage year 2000; and all were up for the year (see table to the right). The fourth quarter performance was driven by the five vintages that each made up more than 10% of the index; vintage years 2000 and 2005 through 2008 vintage years together comprised over 64% of the index. Despite mediocre fourth-quarter performance, all seven of the meaningfully-sized vintage years earned positive returns for the year, led by the 2000 and 2010 vintages. Significant write-ups in software, IT, and healthcare companies were behind the positive performance for these two vintage years. Software was by far the largest contributor to the 2000 funds return while IT led in the more recent vintage, 2010. The once dominant vintage year 2000 represented only 11.2% of the index in 2012, down from roughly 13.0% the year before and a peak of over 40% in June 2005.

Software Posted the Highest Fourth Quarter and Annual Returns in 2012

The venture capital index remained concentrated by sector, with the three largest – IT, healthcare, and software – accounting for nearly 76% of the index’s value. With totals slightly higher than their long-term averages, over 81% of capital invested during the fourth quarter went into companies in these sectors. IT and healthcare companies garnered more than twice the dollars allocated to software. Among the large sectors, software was the best performing during the quarter, posting a 3.5% return, while media’s - 3.7% was the lowest. Write-downs in media investments in funds raised in 2000 and 2005 were not offset by smaller write-ups in other vintages.

For the year, the three largest sectors returned over 11.9%, outperforming the total 2012 return for all portfolio companies by over 2.2%. Software companies earned a gross return of 23.0%, by far the best among the top three sectors. Vintage years 2000 and 2008 contributed the most to the sector’s strong return. On a pooled, dollar-weighted basis, software companies produced double-digit returns in vintage years 2000 and 2005 through 2008.

VC Calls and Distributions Increased Slightly from Prior Quarter Levels

In the fourth quarter, managers in the U.S. venture capital index called just under $3.4 billion, an increase of $171 million, or 5.3% from the previous quarter. Distributions also rose from the third quarter to the fourth, albeit by only 2.9%, to $6.1 billion. This marked the fourth consecutive quarter that distributions outnumbered contributions. It has been more than 12 years since there was a similar trend in LP cash flows.

Managers of funds raised in 2008, 2010, and 2012 called approximately $1.7 billion or 50.0% of all capital called during the quarter. Each vintage called more than $500 million. Investors in the 2000 and 2004 vintage years each received over $1.0 billion in distributions or 44.2% of the total distributed. Vintage years 2005 and 2006 both distributed more than $600 million in the quarter. Managers in the U.S. venture capital index called less and distributed more capital in 2012 than they did in 2011. Contributions decreased 12.2% to $13.7 billion while distributions increased 50.5% to nearly $22.2 billion. Distributions in 2012 were the third highest annual total of all-time, behind only the bubble years of 1999 and 2000.

70 percent of Entrepreneurs say Boston's Startup Community Could be More Inclusive to Women

Seventy percent of Boston-area entrepreneurs say that the hub's startup community is either sometimes or not at all inclusive to female entrepreneurs, according to a recent survey commissioned by the New England Venture Capital Association. In addition, the survey of 100 Boston-area entrepreneurs found that more needs to be done in terms of providing access to funding and other resources to female entrepreneurs in Boston. It's no secret that women are in the minority in the venture capital and tech communities. Moving forward the NEVCA will tackle this issue proactively by tracking the number of women entrepreneurs receiving venture financing and continuing the conversation about creating a community that attracts and retains more women in tech.

(Logo: http://photos.prnewswire.com/prnh/20130724/NE51592LOGO )

According to the survey, fundraising in Boston, a critical activity for any entrepreneur looking to give life to their ideas is a challenge for female entrepreneurs. Only eight percent of female entrepreneurs said that being a woman had a positive impact on their fundraising, according to the report. Meanwhile, 64 percent of respondents said that Boston's startup community is only sometimes inclusive to female entrepreneurs and six percent said that Boston's startup community is not at all inclusive to female entrepreneurs. Thirty percent of respondents said that in general, Boston is inclusive to female entrepreneurs.

"Boston has a crop of tremendously talented female entrepreneurs, and is doing no better or worse than any other major startup market as far as the ratio of venture-backed women to men founders. Our 'Lean In' breakfast with Sheryl Sandberg in April ignited a number of interesting conversations among startup companies and the investor community, and we are interested in propelling that conversation further and making explicit that Boston wants to be home to the best women in technology," said C.A. Webb, executive director of the NEVCA in Cambridge. 

NEVCA president and partner at Bessemer Venture Partners, Steve Kraus added, "We want women who are coming up through the ranks of some of Boston's fastest growing venture-backed companies to, like many of the men they work with, leave those companies eventually and start their own. And we want women founders to move to Boston to start their companies because they know this is the best place in the world to be a woman running a startup." 

Despite the fact that female entrepreneurs are the minority in the startup community, the report found there is an extremely dynamic group of women running startups in Boston, including Helen Greiner of CyPhy Works; Meredith Flynn-Ripley of HeyWire; Michelle Dipp of OvaScience; Katrine Bosley of Avila Therapeutics; Bettina Hein of Pixability; Paula Long of DataGravity; Anna Palmer of Fashion Project; and Lissy Hu of Careport Health among others. Still, 33 percent of survey respondents reported that there were no women on their management teams; 37 percent had only one woman on their management teams; 17 percent had two women on their management team and only nine percent had three women on their management team. Here is a link to NEVCA's 2013 list of women-run startups in Boston.

"CRV has seen tremendous success backing women entrepreneurs: Paula Long at Equallogic and DataGravity, Tushara Canekeratne at Virtusa, and Maria Cirino at Guardent have collectively created over $2 billion in shareholders' value and more than 7,000 jobs.  We would love to see more of those startups led by women," said Izhar Armony of Charles River Ventures.

Methodology
The New England Venture Capital Association surveyed entrepreneurs in Boston from June 6^th –June 24^th about the inclusiveness of Boston's startup community towards women and how many women are in founder or leadership roles at the city's startups.

About the New England Venture Capital Association
The New England Venture Capital Association (http://www.newenglandvc.org) represents more than 700 venture capital professionals from 90 top firms, collectively managing more than $50 billion in investor capital. Its mission is to help ideas that matter become local businesses that benefit entrepreneurs, investors, and the world. To do so it advances the collective interests of member firms in keeping the region competitive, championing emerging and proven venture-backed companies, maintaining strong connections to local universities and talent, and supporting the region's thriving startup community.

More Merger & Acquisition Trends For 1st Half 2013 From Berkery Noyes

Media and Marketing Industry Merger & Acquisition Trends For 1st Half 2013

Consumer Publishing had the largest half-to-half year rise in volume, increasing 21 percent since second half 2012. At the same time, M&A volume in the Entertainment segment improved 11 percent. The amount of deals in the B2B Publishing and Information segment underwent a slight uptick, rising from 86 to 90 transactions in the prior half year period.

Complete Berkery Noyes Report


Online and Mobile Industry Merger & Acquisition Trends For 1st Half 2013

Volume in the E-Marketing & Search segment increased 17 percent on a half-to-half year basis. The largest transaction in first half 2013, both in the overall industry and the E-Marketing segment, was Salesforce.com’s acquisition of digital marketing provider ExactTarget for $2.25 billion.

Complete Berkery Noyes Report


Software Industry Merger & Acquisition Trends For 1st Half 2013

Four of the industry's top ten highest value transactions in first half 2013 were completed by private equity firms. In the cyber security subset, Vista Equity Partners' acquisition of Websense for $942 million was the largest deal backed by a financial sponsor since 2011, when Thoma Bravo acquired Blue Coat Systems for $1.15 billion.

Complete Berkery Noyes Report


Healthcare Industry Merger & Acquisition Trends For 1st Half 2013

Healthcare IT remained the most active market segment in first half 2013, representing 40 percent of the industry’s aggregate volume year-to-date. Meanwhile, the largest Pharma IT transaction backed by a financial sponsor in first half 2013 was JLL Partners’ acquisition of BioClinica, a provider of clinical trial management solutions, for $105 million.


Complete Berkery Noyes Report


Financial Technology and Information Industry Merger & Acquisition Trends For 1st Half 2013

The segment with the largest half-to-half year increase in volume was Insurance, which rose 42 percent in first half 2013. The industry’s highest value transaction in first half 2013, Fidelity National Financial’s announced acquisition of Lender Processing Services for $3.83 billion, occurred in the Banking segment.

Complete Berkery Noyes Report

EDUCATION INDUSTRY 1ST HALF 2013 -Mergers and Acquisitions

M&A MARKET OVERVIEW

Berkery Noyes tracked 678 transactions between 2011 and 1st Half 2013, of which 213 disclosed fi nancial terms, and calculated the aggregate transaction value to be $20.66 billion. Based on known transaction values, we project the values of 465 undisclosed transactions to be $2.70 billion, totaling $23.37 billion worth of transactions tracked over the past two and a half years. Disclosed median enterprise value multiples for all segments combined in this report during the last 30 months were 1.5x revenue and 12.0x EBITDA.

1ST HALF 2013 KEY HIGHLIGHTS

• Capita plc, a UK based provider of business process outsourcing (BPO) and professional support services, was the most active acquirer in 1st Half 2013 with four industry transactions: Creating Careers, KnowledgePool, Inc., Blue Sky Performance Improvement, and Micro Librarian Systems.

• Pearson plc was also an active acquirer in 1st Half 2013 with three transactions: Learning Catalytics LLC, IndiaCan Education Pvt Ltd and Exam Design, Inc.

• There were 33 fi nancially sponsored transactions in 1st Half 2013, with an aggregate value of $836 million, representing 24 percent of the total volume and 20 percent of the total value, respectively.

1ST HALF 2013 KEY TRENDS

• Total transaction volume in 1st Half 2013 increased by fi ve percent over 2nd Half 2012, from 128 to 135.

• Total transaction value in 1st Half 2013 decreased by 16 percent over 2nd Half 2012, from $4.57 billion to $3.84 billion.

• The median revenue multiple declined from 1.4x in 2nd Half 2012 to 1.0x in 1st Half 2013. Median value remained nearly constant during this timeframe.

• Deal volume in the K-12 Media and Tech segment increased 38 percent over the last six months, from 21 to 29 transactions, giving it a slight edge over Professional Training Institutions as the industry’s largest market segment year-to-date.

Complete Berkery Noyes Report