CALLAN INSTITUTE Private Markets Trends IN THIS ISSUE Winter 2017 pg. 1 Private Markets in 2016 pg. 2 Fundraising pg. 3 Buyouts pg. 4 Venture Capital pg. 5 Returns Year in Review: Private Equity Activity Trends Downward in 2016 Gary Robertson In 2016, U.S. equity assets appreciated for the eighth con­ In the private equity market, company investments and exits secutive year. A Fed rate hike preceded a steep drop in trended downward during the year for both buyouts and ven­ January, but the rally that resumed after continued through the ture capital; however, the absolute level of activity continued to Brexit vote and accelerated after November’s U.S. presiden­ be high (except for IPOs). The one upward anomaly was the tial election. Most other countries experienced improved equity announced dollar volume for buyouts: It reached an eight­year market results during the year as well. high in 2016, although the number of transactions fell. U.S. economic growth continued and the unemployment rate As measured by the Thomson Reuters/Cambridge Private improved to a nine­year low of 4.7%. Among the other high­ Equity Database, private equity returns strengthened over the lights for 2016: year (+0.81%, +2.12%, and +3.80% for the first three quar­ • The S&P 500 Index posted a strong 11.96% gain (following ters). The fourth­quarter return is expected to be in the +2% 2015’s 1.38% and 2014’s 13.69%); – 3% range, given the S&P 500’s 3.82% fourth quarter rise. • Annualized U.S. GDP figures fluctuated within a range of 0.8% in the first quarter to 3.5% in the third quarter. For the Looking Ahead year, GDP growth was 1.6%, compared to 2.4% in 2015; With continued strong fundraising, a high­price environment for • Non­U.S. and emerging market equities improved companies, and fundraising outpacing investment rates, 2017 from 2015 (MSCI ACWI ex USA Index: +4.50%; MSCI faces the same challenges as the prior three years. Since the Emerging Markets Index: +11.19%); presidential election, markets have anticipated business­ and • U.S. fixed income, as measured by the Bloomberg Bar­ investment-friendly legislative and tax changes as well as fis­ clays U.S. Aggregate Index, posted a positive return of cal stimulus. We expect the rally and hopeful outlook will foster 2.65% for the year. continued liquidity in the private equity market, and that distri­ butions will benefit investors as company pricing remains in Knowledge. Experience. Integrity. Exhibit 1: Funds Closed January 1 through December 31, 2016 50.4% 14.1% Amount Strategy No. Funds ($mm)* 59.1% Venture Capital 439 44,030 Buyouts 298 184,538 Subordinated Debt 25 22,481 34.2% Distressed Debt 36 29,093 7.2% Secondary and Other 24 19,786 2.9% 9.3% Fund­of­funds 50 12,229 4.1% 2.8% 6.3% 5.7% 3.9% Totals 872 312,156 Funds* Amount* * Numbers may not sum to total due to rounding. Source: Private Equity Analyst sellers’ market territory. Debt remains inexpensive and avail­ Analyst. The year broke the watershed $300 billion mark able, so on the investment front, larger deals are being made for the first time since 2008, which saw $350 billion raised even though the number of transactions has moderated. We (Exhibit 2). expect that strong liquidity will also continue to drive a frothy fundraising environment. Plan sponsor support of the private In the fourth quarter, commitments totaled $118.1 billion, and equity strategy—notwithstanding high­price­related general 256 funds were created. The amount raised more than doubled market concerns—continues to be strong. the third quarter’s $38.6 billion, and the number of new funds jumped by 79% from the prior quarter’s 143. Private Equity Fundraising U.S. private equity funds raised $312 bil lion in the U.S. in 2016 By strategy, the largest change in 2016 was an 8 percentage (Exhibit 1), a moderate 6% increase over 2015’s $296 billion. point drop in Buyouts’ share of capital allocations compared During 2016, 872 partnerships were formed, up by 77 (10%) to 2015; Distressed Debt fell by 1 percentage point. The de­ over the previous year’s 795, according to Private Equity creases were offset by increases of 4 percentage points in Exhibit 2: U.S. Fundraising Back to a Peak ($ billions) $373.4 $350.0 Venture Capital $314.6 $312.1 $295.7 $283.4 Buyouts/Distressed Debt $246.1 Subordinated Debt $200.3 Secondary and Other $147.9 $124.0 $114.6 Fund-of-Funds 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Private Equity Analyst 2 Secondary and Other, 3 percentage points in Subordi nated Buyouts Debt, and 2 percentage points in Venture Capital. Fund­of­ Buyout fundraising (including distressed) totaled $214 billion Funds remained unchanged (Exhibit 3). for the year, with 334 funds formed, according to Private Equity Analyst. This represents a 6% decrease in commitment volume The largest private equity funds that closed during the year and 3% decline in funds formed from the $227 billion raised were Advent Global Private Equity VIII with $13 billion, TPG and 345 funds formed in 2015. In 2016, 15 partnerships raised Partners VII with $10.5 billion, and Green Equity Investors VII more than $2 billion during the year, down from 17 partnerships with $9.6 billion, according to Private Equity Analyst. in 2015. The 15 funds accounted for 35% of the total buyout commitments made during the year, although they only repre­ European fundraising jumped to $131 billion in 2016 after two sent 4.2% of new partnerships formed. years of declines. The increase was a meaningful $34 billion (35%) increase over 2015’s $97 billion. During 2016, 283 part­ Buyout firms purchased 1,728 companies in 2016, down 14% nerships were formed, up by 37 (15%) over the previous year, from 2,006 in 2015, according to Buyouts newsletter. The year’s according to Private Equity Analyst. announced dollar volume was $163.2 billion (a nine­year high), and was up 39% from $117.5 billion in 2015. The fourth quar­ The largest European fund that closed in 2016 was Apax ter saw 322 transactions, down from 385 in the third quarter, Europe VII with $9 billion. Cinven Fund VII was second with and dis closed dollar volume totaled $28.3 billion, down from $7.5 billion. $39.0 billion. According to S&P Capital IQ, in the second half of the year average pur chase price multiples remained in the Fundraising is approaching the records seen during the lever­ neighborhood of 10x earnings before interest, taxes, deprecia­ age bubble. Large funds are being raised in very compressed tion, and amortization (EBITDA) for a second year. Aver age time periods, making due diligence challenging for limited part­ leverage multiples of about 5.5x EBITDA are adhering to the ners. Terms for very popular general partners are (in some in­ 6x EBITDA cap imposed on banks by regulators. Of course, stances) eroding at the margin for investors. Distributions con­ averages can mask wide variability in specifics. tinue at high levels. With the resumed stock market rally and banished volatility lifting plan sponsor total fund values, we ex­ The largest transaction closed by a buy out fund during 2016 pect fundraising to continue near peak levels. was the first quarter’s $14.2 billion take-private of beverage Exhibit 3: The shifts from 2015 to 2016 50.3% 41.5% 14.1% 12.2% Venture Capital 59.1% 66.7% Buyouts Subordinated Debt 37.9% Distressed Debt 34.2% Secondary and Other 7.2% Fund-of-Funds 4.0% 4.6% 2.9% 9.3% 4.1% 5.5% 10.1% 2.8% 2.8% 6.3% 2.6% 5.7% 8.3% 3.9% 3.9% 2016 2015 2016 2015 Total Count: Total Count: Total Value: Total Value: 872 795 $312.2bn $295.7bn Source: Private Equity Analyst Knowledge. Experience. Integrity. 3 company Keurig Green Mountain by BDT Capital Partners, quarter, there were 105 M&A exits, and announced values to­ JAB Forest, and Acorn Holdings, according to Buyouts. The taled $18.1 bil lion, down from 142 exits totaling $27.5 billion in Keurig buyout was significantly larger than 2015’s largest, the the third quarter. The largest fourth quarter exit was the $2.6 $9.2 billion take­private of grocery store chain Safeway by billion sale of insurance broker Acrisure to a management­led Cerberus and two real estate funds. The second largest buy­ investor group. out in 2016 was the $10.3 bil lion take­private of antivirus soft­ ware company Qihoo 360 Technology in the third quarter, with The full year produced eight IPOs raising a total of $4 billion— Sequoia Capital leading a consortium of Chinese sovereign a huge drop compared to the 31 IPOs that raised $9 billion wealth and investment firms. The largest fourth quarter buy­ in 2015, and significantly less than the ebullient 50 IPOs and out was Riverstone’s $4.3 billion take­private of independent $42 billion in 2014. Due to significant volatility around year-end power producer Talen Energy. 2015 there were no buyout-backed IPOs in the first quarter of 2016, but the market has rebounded since then. The largest Similar to the previous year, general partners appeared to be IPO in 2016 was the $1.2 billion offering in the fourth quarter trying to exercise price discipline in 2016 compared to the pre­ by insurance annuity contract provider Athene Holding backed financial crisis period, where aggressive buying resulted in by Apollo Global Management.