Private Market Environment 1st Quarter 2018
1Q18 Market Overview Highlights Global equity markets were volatile in the first quarter of 2018, ■■ Global equity markets were volatile in bringing an end to what was one of the most tranquil periods 1Q18, bringing many of the major equity indices into correction territory during for public equities in recent history. Early in the quarter, stocks the quarter. Despite this, IPO activity extended the prior year’s gains, propelled by strong corporate was strong: global IPO issuance totaled $42.8 billion in 1Q18, an increase of 28% earnings and optimism that the recently enacted tax cuts in the f rom 1Q17. United States would fuel continued strength in the world’s larg- ■■ PE firms worldwide raised $108 billion est economy. In February, rising interest rates and inflationary in 1Q18, little changed from the prior quarter but an 11% increase from 1Q17. expectations, driven in part by a larger-than-expected increase Europe-focused funds raised $38 billion, in wage growth in the United States, hammered global equity the region’s largest quarterly total since markets. By the end of the first full week of February, many of the 1Q08 and a 122% increase over the prior quarter. major world equity indices were in correction territory (a decline ■■ U.S. venture capital investment activity of 10% or greater from a recent high). Equity markets continued totaled $21.1 billion in 1Q18, the larg- to fluctuate wildly for the remainder of the quarter, driven by est quarterly total since 4Q00. Activity continues to be driven by mega-round bargain hunting by investors, receding inflation concerns, a sell- financings (i.e., financing rounds of off in technology stocks, and fears of a trade war between the >$100 million), which totaled $7.3 billion in 1Q18. United States and China. Despite the heightened volatility in the public equity mar- and TCV, was valued at $8.5 billion in an equity financ- kets, IPO activity was strong during the quarter. Global ing completed in June 2015 and a reported $19.0 bil- IPO issuance totaled $42.8 billion in the first quarter, an lion in a private secondary transaction in December 2017. increase of 28% from the year-ago period, according to Dropbox, backed by venture capital firms Sequoia Capital, Ernst & Young. The increase in IPO issuance was driven by Institutional Venture Partners, and Index Ventures, among an increase in the number of large deals (>$1.0 billion in others, was valued at $10.0 billion in its last round of fi- proceeds) that were successfully completed. In the United nancing in 2014. The successful IPOs of Dropbox and States alone, there were three IPOs that raised at least $1.0 Spotify, as well as the $6.5 billion sale of venture capi- billion in the first quarter, compared with just two in all of tal–backed software integration company MuleSoft to 2017. In Europe, IPO issuance totaled €12.5 billion in the Salesforce in March, have helped allay some concerns first quarter, a 22% decrease from the strong prior quarter about whether the lofty valuations of the large number of but nearly three times greater than in the first quarter of unicorns (privately held venture capital–backed compa- 2017. One of the most anticipated offerings of the quarter nies valued at $1.0 billion or greater) would be justified in was that of cloud storage company Dropbox, which raised the public markets or in an M&A transaction. $756 million in its IPO in March. Dropbox priced its IPO above expectations at $21.00 per share and closed its first Global buyout investment activity was strong overall in day of trading at $28.48 per share, valuing the company at the first quarter, although there were marked differences more than $12.0 billion. in trends among the major regions: activity increased year over year in Europe and the United States but fell in Asia. Early in the second quarter, music-streaming company In Europe, buyout investment activity totaled €23.5 billion Spotify completed a non-conventional direct listing of its in the first quarter, an increase of 13% over the year-ago shares on the New York Stock Exchange (NYSE). Spotify period and the strongest first-quarter total since 2015. closed its first day of trading at $149.01 a share, valuing Strong showings from France, Germany, and Denmark the company at $26.5 billion. The company, whose ven- more than offset a significant drop in investment activity ture capital backers include Northzone, Accel Partners, in the United Kingdom, which was due in part to ongo- ing uncertainty related to Brexit. In the United States, buyout investment activity totaled $71.6 billion in the Largest PE-Backed M&A Exits Announced first quarter, an increase of more than in the First Quarter 40% from the year-ago period and the At March 31, 2018 largest quarterly total since 2013. The Seller Portfolio Company Value (MM) large increase in transaction value was Lightspeed, Hummer Winblad, NEA, driven by several large deals, most Morgenthaler Partners, Sapphire MuleSoft $6,500 Ventures, Bay Partners notably the $17.0 billion carveout of CI Capital Partners Ply Gem Industries $2,400 Thomson Reuters’s finance and risk Aleph Capital Partners Interoute Communications $2,330 division led by The Blackstone Group. AEA Investors Pro Mach $2,200 This is the largest buyout transac- Siris Capital Polycom $2,000 tion since the Global Financial Crisis (GFC), although significantly smaller
2 in size than the largest pre-crisis buy- out investment: the $45.0 billion take- Largest PE Investments Announced in the private buyout of energy utility TXU First Quarter in 2007. General partners continue to At March 31, 2018 structure their investments prudently; Buyer Target Value (MM) for example, in the United States, the Thomson Reuters’ Financial & Risk Blackstone $17,000 average equity contribution rate dur- Business Akzo Nobel’s Specialty Chemicals Carlyle Group $12,600 ing the first quarter was 38.9%, com- Business pared with 30.9% in 2007. CVC Capital Partners Gas Natural SDG SA $4,700 Silver Lake, P2 Capital Partners Blackhawk Network Holdings $3,500 Public Markets and Stone Point Capital AmTrust Financial Services $2,700 Economy United States U.S. equity markets were whipsawed in the first quarter of 2018, although the major equity in- and business spending, which were partially offset by a dices ended the period well above their lows. The Dow strong increase in imports. Many economists believe that Jones Industrial Average (DJIA), S&P 500, and Nasdaq the recently passed Tax Cuts and Jobs Act will fuel contin- generated quarterly returns of –2.0%, –0.8%, and 2.6%, ued strength in the U.S. economy. The most-recent jobs respectively (see table 1). Both the DJIA and the S&P 500 report showed a still-strong labor market. Although payroll experienced their first down quarter since the third quarter growth in March was lower than expected at 103,000 new of 2015. During the first quarter, investors weighed still- jobs, the monthly average for the first quarter exceeded strong economic data and corporate earnings against ris- 200,000 new jobs. The unemployment rate ended the ing bond yields and concerns over the impact of a trade quarter at 4.1%, the lowest level since December 2000. In war with China. On February 5th, the S&P 500 fell by March, the Federal Reserve raised its benchmark interest 4.1%—its worst one-day drop since 2011—and the DJIA rate by 25 basis points and maintained its forecast of three shed 1,175 points—its largest one-day point-loss ever. U.S. rate hikes in 2018. equity markets bounced back from their lowest levels but were battered again in March by a selloff in technology Europe stocks and fears that tariffs imposed by the United States Europe grew at an attractive pace in the fourth quarter, on up to $60 billion of imports from China would escalate thus continuing its recent trend. The quarter-over-quarter into a full-blown trade war. real GDP growth in the euro area was 0.6%, which brought annual growth for 2017 to 2.8%. This was driven by rising U.S. real GDP grew at an annual rate of 2.9% in the fourth employment, growing household wealth, and strengthen- quarter of 2017, according to the most recent estimate ing business investment, in addition to the broader global from the Bureau of Economic Analysis (BEA). This was expansion. The ECB revised its growth forecast further slightly higher than analyst estimates but down from the upward for 2018, from 2.3% to 2.4%, and kept it steady pace of 3.2% logged in the prior quarter. For the full year, for 2019 and for 2020 at 1.9% and 1.7%, respectively. UK U.S. GDP grew by 2.3%, up from 1.5% in 2016. Growth growth remained more modest, coming in at 1.4% for the during the year was driven by solid increases in consumer year, but inflation declined somewhat to 2.5%, down from
3 a recent high of 3.1%, and labor productivity saw its stron- every major stock index in the region posted a loss for the gest gains since 2008. first quarter, with the exception of Hong Kong’s Hang Seng. The Hang Seng achieved a return of 0.9%, whereas Japan’s Like many public market indices worldwide, the main Nikkei, China’s Shanghai SE and CSI 300, Australia’s S&P/ European market indices were volatile and turned negative ASX 200, and India’s BSE Sensex 30 each contracted by at in the first quarter: the FTSE 100 lost least 3.0% (see table 1), and South Korea’s KOSPI was down 7.2%, Germany’s DAX lost 6.4%, and 0.7%. Performance of the Asian public markets mirrored Table 1 World Equity Markets France’s CAC 40 lost 2.5%. These mar- the dampened sentiment of the stock markets globally: a At March 31, 2018 kets thus gave up most of their gains for global sell-off in the markets was triggered in February as a Total Return the past 12 months. Markets appeared result of investor concerns stemming from inflation expec- a (%) worried about the possibility of inter- tations and rising bond yields in the United States. 1Q TTM est rate increases, as well as about the North America prospect of increasing global trade pro- In March, the Asian markets shifted their focus toward a United States -2.0 19.4 (DJIA) tectionism, among other things. potential trade war between China and the United States, United States (S&P 500) -0.8 14.0 which caused concerns that growth in the region could United States Certain political developments helped suffer as a result. Japanese equities (down 5.0% in 1Q18) (Nasdaq) 2.6 20.8 improve visibility on matters that will were hit especially hard as investors assessed the impact of Canada -4.5 1.7 (S&P TSX) influence the economy in the future. a strengthening yen and potential new tariffs on the coun- Europe Brexit negotiators approved the de- try’s economy. United Kingdom -7.2 0.2 (FTSE 100) tails of the transition proposals that Germany (DAX) -6.4 -1.8 were agreed upon in December, sug- GDP continued an upward trajectory for Asia’s main econo- France gesting that Britain will formally leave mies: China, Japan, India, South Korea, and Australia all (CAC 40) -2.5 3.9 Asia-Pacific the EU in March 2019 but be bound by had quarter-over-quarter growth in real GDP. In particular, Japan its regulations until the end of 2020. China showed strong economic data: February exports (Nikkei 225) -5.0 15.6 Trading arrangements thereafter have grew at their fastest pace in three years. During the first China -4.2 0.4 (Shanghai SE) yet to be determined, although senti- quarter, Beijing announced a 2018 GDP growth target of China (CSI 300) -3.3 15.1 ment appeared to move in favor of a 6.5%, despite already having experienced better-than- Hong Kong softer Brexit: the Labour party called expected growth of 6.8% in 2017. This target represents (Hang Seng) 0.9 29.4 for permanent membership of a cus- China’s emphasis on maintaining long-term economic India -3.0 12.7 (BSE Sensex 30) toms union with the EU after Brexit. In growth and stability, as opposed to its growth-at-all-costs Australia (S&P/ASX 200) -3.4 4.0 Germany, Chancellor Merkel was able approach in the past. Meanwhile, economic numbers were Korea to form a new government, avoiding softer in Japan: the Bank of Japan’s Tankan first-quarter (KOSPI) -0.7 15.3 Latin America other potentially destabilizing out- survey showed weakened business sentiment for the first Brazil comes. time in two years. In light of the ongoing uncertainty re- (Bovespa) 11.7 31.4 garding the direction of the U.S. Federal Reserve’s policies, Mexico -6.3 -3.3 (IPC) Asia the central banks of Asia’s main economies all decided to Source: Bloomberg. After capping off an exceptional year keep their key interest rates unchanged during the quarter. aIn local currency. Total return cal- culates price-change with dividends in 2017 for public equities in Asia, reinvested.
4 IPO Markets Review Table 2 World Economic Overview By Region United States At March 31, 2018 The U.S. IPO market started the year quite favorably: 43 10-Year Currency companies raised $11.8 billion during the first quarter— Real GDPa Inflation Gov’t Bond Units per $c 2Q 3Q 4Q Rateb (Yield) 12/31/17 3/31/18 the largest quarter by proceeds raised since the second North America quarter of 2015 but a decrease of 20% from the prior United States 3.1 3.2 2.9 2.4 2.75 1.00 1.00 quarter in the number of issuances. Both the quarterly pro- Canada 4.2 3.3 3.4 2.3 2.11 1.26 1.29 ceeds raised and the number of IPOs represented the sec- Europe ond-highest first-quarter figure since 2008 and are above UK 1.9 1.8 1.4 2.5 1.35 0.74 0.71 historical averages—an indication of positive momentum Euro Area 2.4 2.7 2.8 1.3 0.49 0.83 0.81 over recent periods. Activity during the quarter was driven Germany 2.3 2.7 2.9 1.6 0.49 0.83 0.81 France 1.9 2.3 2.6 1.6 0.71 0.83 0.81 by issuances from foreign technology companies, the Italy 1.5 1.7 1.6 0.7 1.78 0.83 0.81 largest of which were PagSeguro Digital, a Brazilian pay- Spain 3.1 3.1 3.1 1.2 1.15 0.83 0.81 ment services provider, and iQiyi, a Chinese online video- Asia-Pacific streaming platform. Among U.S.-based companies, activ- Japan 2.4 2.4 1.6 1.1 0.04 112.70 106.24 ity was led by Apollo-backed ADT, a provider of monitored China 6.9 6.8 6.8 2.1 3.73 6.50 6.29 security services. Quarterly U.S. IPO activity through March India 5.7 6.5 7.2 4.3 7.39 63.87 65.08 31, 2018, is illustrated in figure 1. Australia 2.0 2.9 2.4 1.9 2.60 1.28 1.30 South Korea 2.9 3.8 2.8 1.3 2.62 1,067.16 1,061.28 Latin America Private equity–backed IPO activity was relatively muted Brazil 0.4 1.4 2.1 2.7 9.48 3.31 3.31 during the quarter: issuances generated $5.4 billion in pro- Mexico 1.8 1.5 1.5 5.0 7.33 19.67 18.16 ceeds and accounted for 51% of total IPOs—their small- Source: Bloomberg. est share of the quarterly total in six years. Although the aReported as percentage-change from one year prior for all countries except the United States and Japan, for which GDP is reported as annualized percentage-change from preced- $3.6 billion raised through nine buyout-backed IPOs was ing period. bAverage percentage-change in consumer prices from one year prior. largely in line with historical averages, venture capital– c Source: The Wall Street Journal. backed activity declined, with only 13 companies raising $1.8 billion. Venture capital–backed companies responded cautiously to the volatile stock market that dampened the post-IPO performance of several listings in 2017, including By industry, performance was led by pharmaceutical and the highly anticipated offerings by Snap and Blue Apron, technology companies, which generated returns of 27% which had both experienced double-digit declines in stock and 17%, respectively, and accounted for half of the IPOs price as of year-end. Despite the first quarter of negative during the quarter. Cloud storage company Dropbox, performance for most U.S. indices in quite some time, which priced its IPO at $21.00 in March at a valuation of venture capital–backed listings were well received overall, approximately $9.2 billion, saw a 49% increase in share generating an average increase in share price of 29% from price during the quarter. The outlook for IPOs in 2018 ap- IPO date to quarter-end. Venture capital listings outper- pears to be positive: new filing activity was high during the formed both buyout and non–private equity listings, which first quarter, and the IPO markets overall have continued returned 4% and 5%, respectively. to remain resilient in the face of meaningful political tur-
5 bulence and public market volatility. In early April, Spotify globally since the beginning of 2017 and helped Deutsche held a direct listing on the NYSE in lieu of a traditional IPO, Börse claim the title of the most active European exchange and the success of the listing has the potential to set a by proceeds during the quarter (€5.8 billion). The London precedent for other major technology companies looking Stock Exchange, usually the most active European market, for a public market exit. came in second with total proceeds of only €1.4 billion. This represented the LSE’s lowest quarterly total since the Europe EU referendum dip in mid-2016. Following strong performance in 2017, European pub- lic equity markets went through a period of correction in Private equity–backed IPOs accounted for only around the first quarter of 2018. From late January, markets saw 10% of aggregate IPO proceeds in the first quarter. Private increased volatility and price declines. Against this back- equity’s share of IPO proceeds has been on a decline since drop, European IPO activity held up well: €12.5 billion was late 2016—averaging 43% from 2013 through 2016—as raised during the quarter. Although this represented a de- a result of private equity owners increasingly preferring crease of 22% from the strong fourth quarter, it was 15% private exits, which promise faster liquidity. The public- above the quarterly average of the previous five years. exit channel, where sponsors typically maintain exposure Quarterly European IPO activity through March 31, 2018, for substantial periods following an IPO, may appear less is illustrated in figure 2. attractive in an environment characterized by significant long-term political and economic uncertainties. In the first quarter, 67 companies completed their public listings, which resulted in average proceeds per IPO of Asia €187 million—51% above the average of the previous 20 During the first quarter, 206 companies completed IPOs on quarters. The first-quarter average was driven by a num- Asian exchanges, raising $12.2 billion—a decrease of 44% ber of outsized listings, including the IPO of Siemens from the fourth quarter and a decrease of 18% year over Healthineers, the imaging and diagnostics unit of Siemens. year. The notable decrease in IPO volume and proceeds With proceeds of €3.7 billion, this was the largest IPO raised was primarily a result of poor-performing public equity markets. The largest IPOs completed during the Figure 1 Quarterly U.S. IPO Activity quarter were the $850 million IPO of Kakao Corp on South At March 31, 2018 Korea’s KOSPI, the $729 million IPO of the Bank of Gansu Number Proceeds o IP s billions on the Hong Kong Stock Exchange, and the $705 million 80 39.2 80 40 69 IPO of Huaxi Securities on the Shenzen Stock Exchange. 70 64 35 60 56 30 52 54 5020.4 43 25 According to Asian Venture Capital Journal (AVCJ ), private 40 37 20 13.8 32 34 33 32 31 34 equity–backed IPOs in Asia in the first quarter accounted 30 12.6 24 11.0 10.4 11.8 15 51 43 8 9.1 for $4.7 billion, or 39% of total proceeds raised. This rep- 20 46 5.3 5.3 7.5 6.3 7.4 10 53 7 4.8 7 39 4.3 34 10 0.7 7 20 22 5 resents a decrease of 58% quarter over quarter and of 35% 22 26 22 21 23 22 0 20 0 2 14 3 14 4 14 1 15 2 15 3 15 4 15 1 16 2 16 3 16 4 16 1 17 2 17 3 17 4 17 1 18 year over year. Notably the three-largest private equity– - backed IPOs in Asia were on the Shanghai Stock Exchange:
Source: Bloomberg, Thomson Reuters, and Pathway Research. Jiangsu Financial Leasing’s $630 million IPO, backed by
6 CITIC Private Equity; Red Star Macalline’s $496 million Figure 2 Quarterly European IPO Activity IPO, backed by Warburg Pincus; and Bank of Chengdu’s At March 31, 2018 Number Proceeds $399 million IPO, backed by CITIC Private Equity and Hony o IP s € billions Capital. Approximately 78% of PE-backed IPO value was 160 23.5 23.3 25 140 raised in China, 9% in Japan, and 7% in India; Hong Kong, 18.0 18.1 16.1 20 120 15.7 South Korea, and Australia accounted for the remaining 100 11.8 12.5 15 balance. 80 146 9.6 10.0 8.3 60 7.2 124 4.9 116 10 105 3.7 4.6 103 40 82 95 3.9 86 71 75 67 5 Private Credit Market 20 76 53 50 52 54 0 0 In March, President Trump signed into law a $1.3 trillion 2 14 3 14 4 14 1 15 2 15 3 15 4 15 1 16 2 16 3 16 4 16 1 17 2 17 3 17 4 17 1 18 omnibus spending bill. Inserted in the bill was a provision to raise the maximum leverage allowed for business develop- Source: PwC. ment companies (BDCs) to two times their equity capital— double their prior limit. The BDC industry, which encom- passes approximately 70 public and non-public BDCs with basis points) remains at very low levels (<5%) as of March equity capital of approximately $45 billion, competes with 31, 2018, according to Fitch Ratings. The trailing 12-month direct-lending funds to provide debt capital to privately default rate was 2.7% at the end of the first quarter, driven held small- and middle-market companies. There are some by default rates of 13% and 20% in the retail and media concerns that the increased leverage limit for BDCs will in- sectors, respectively. Non-investment-grade credit spreads crease competitive dynamics in the direct-lending market. remain at low levels, but overall yields have increased It is important to note, however, that the actual use of lever- slightly since year-end 2017 as a result of rising benchmark age among BDCs is dictated not just by statutory limits but rates and inflationary expectations. also by the shareholders of and lenders to the BDCs. It is unlikely that most BDCs would be able to significantly in- Private Equity Investment Activity crease their use of leverage without their lenders’ approval U.S. Buyout Investment Activity and/or a material increase in their cost of debt, and without U.S. buyout investment activity totaled $71.6 billion in the tacit approval of their shareholders, who could drive a the first quarter, an increase of more than 40% from both BDC’s share price down to reflect the higher level of risk the prior quarter and the year-ago quarter and the larg- associated with the higher use of leverage. In fact, the aver- est quarterly total in five years, according to data from age BDC currently utilizes leverage of 0.7 times equity capi- Thomson Reuters and Pathway. The outsized quarterly tal, well below the prior statutory limit of 1.0 times equity total was largely the result of the largest buyout transac- capital, according to Keefe, Bruyette & Woods. tion since the GFC: Blackstone’s $17.0 billion carve-out of Thomson Reuters’s finance and risk division. Most buyout In the secondary non-investment-grade credit markets, managers continue to take a cautious approach toward there continues to be few signs of distress outside the re- new investments, wary of the high-valuation environment tail, media, and energy/utilities sectors. The overall high- and strong competition from both strategic and financial yield distress ratio (percentage of high-yield market trad- buyers flush with dry powder. General partners have in- ing at spreads over U.S. Treasuries of greater than 1,000 creasingly developed proprietary sourcing mechanisms to
7 find deals outside traditional auction processes and also Table 3 U.S. Buyout Investment Statistics At March 31, 2018 complex transactions such as take-private buyouts or cor- 2007 2017 1Q18 porate carve-outs in which they have high-conviction in Purchase Price/EBITDA 9.7x 10.6x 10.2x their ability to generate value. During the first quarter, all Equity Contribution % 30.9% 41.3% 38.9% five of the largest buyout transactions announced in the Debt/EBITDA 6.0x 5.7x 5.8x United States were either take-private buyouts or corpo- EBITDA/Cash Interest 2.1x 3.1x 3.0x
rate carve-outs, including the aforementioned carve-out Source: S&P LCD. by Blackstone, Silver Lake’s $3.5 billion take-private of BlackHawk Network Holdings, and Stone Point Capital’s short-term interest rate, credit markets have remained ac- $2.7 billion take-private of AmTrust Financial Services. commodative for leveraged buyout activity. The yield to maturity on the S&P LSTA Leveraged Loan B/BB index was The average purchase-price multiple for U.S. buyout trans- 4.86% at March 31, 2018, up from 4.55% at year-end 2017 actions that closed during the first quarter fell to 10.2x but still below the average figure for the past decade. EBITDA, down from 10.6x EBITDA during all of 2017, ac- cording to S&P LCD. Valuations still remain high compared U.S. Venture Capital Investment Activity with historical standards, however, and general partners U.S.-based venture capital investment activity during the have been forced to structure transactions prudently to ac- first quarter continued its record-setting pace, totaling count for potential multiple contractions or an economic $21.1 billion from 1,206 transactions, according to the slowdown during the lifespan of their investments. The av- PwC/CB Insight MoneytreeTM Report. The first-quarter fig- erage equity contribution rate during the first quarter was ure represented the largest amount of capital deployed 38.9%, still well above the average of 30.9% during 2007, since the fourth quarter of 2000 and the fifth-consecutive and the average interest coverage ratio of 3.0x remained quarter in which venture capital investment has increased. nearly a full turn higher than in 2007 (see table 3). Despite Activity continues to be led by mega-round financings continued small increases by the Federal Reserve in the (i.e., financing rounds of greater than $100 million), which totaled $7.3 billion from 34 transactions—the fourth-con- secutive quarter in which more than 30 mega-rounds oc- Figure 3 U.S. Buyout Transaction Value curred. Notably, the strong momentum for venture capital At March 31, 2018 investment comes despite a continued decline in the num- billions 600 ber of transactions: the 1,206 deals completed during the 500 first quarter represented the lowest total in more than five years. U.S. venture capital transaction value and volume, 400 through March 31, 2018, are illustrated in figure 4. 300 600 200 251 262 Although the increasing size of later-stage investments 100 158 170 215 213 194 38 89 127 72 continues to be the primary driver behind the elevated in- 0 48 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1 17 1 18 vestment figures overall, the quarter-over-quarter increase was driven largely by early- and expansion-stage invest-
Source: Thomson Reuters and Pathway Research. ments. Seed- and early-stage investments saw the largest
8 increase, drawing $4.7 billion in investment, or 24% greater Figure 4 U.S. Venture Capital Transaction Value & Volume than in the prior quarter. Expansion-stage companies drew At March 31, 2018 Value Number o a further $7.0 billion in interest—an increase of 12% rela- billions ransactions 5,840 5,851 tive to the fourth quarter of 2017 and the largest quarterly 80 5,343 6,000 5,080 5,268 value invested in the strategy since the second quarter of 70 4,628 5,000 60 4,183 2001. The expansion stage also represented 25% of the 50 3,394 4,000 2,791 2,861 2,720 number of investments during the quarter, up from an av- 40 77 74 3,000 erage of 19% over the three prior years. Later-stage com- 30 59 62 1,371 1,206 2,000 20 31 36 33 36 panies accounted for the largest portion of the investment 29 22 26 1,000 10 15 21 total at 36%, despite a decline of 8% from the prior quarter. 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1 17 1 18 The later-stage total included the two-largest financings of the quarter: the $1.3 billion round held by Uber and the $535 million round held by DoorDash. Both rounds were Source: PwC & CB Insights MoneyTree™ Report.. backed by Softbank Group and Sequoia Capital.
Venture capital investment by industry was led by the value of UK buyouts was only €2.8 billion in the first quarter, software sector, which drew $9.1 billion in investment, or down 64% from the quarterly average for 2017. This decline 43% of the quarterly total. Activity was also high in the was largely a result of reduced activity in the mid-/large-cap healthcare sector, where $5.3 billion was invested in 168 market: only two UK deals valued above €200 million were transactions. The total capital deployed in the healthcare completed in the first quarter. The softness of the UK mar- sector represented an increase of 21% over the prior quar- ket stands in sharp contrast to the activity in France, where ter and the largest quarterly figure on record. Healthcare buyouts completed in the first quarter of 2018 had an ag- companies accounted for four of the 10 largest financing gregate value of €5.7 billion—an increase from a quarterly rounds of the quarter, including the $500 million raised by average of €3.8 billion in 2017. France experienced strong biotech company Moderna Therapeutics in early February at a valuation of just above $7 billion. Figure 5 European Buyout Transaction Value & Volume At March 31, 2018
Europe Value Number o € billions ransactions In Europe, the aggregate value of completed buyouts was 200 1,200 €23.5 billion in the first quarter, according to data provided 1,021 by CMBOR. This nearly equaled the quarterly average of 150 781 900 713 708 675 703 €24.7 billion for 2017, which was the most active year since 626 638 622 592 100 173 437 600 the GFC. European buyout transaction value and volume through March 31, 2018, are illustrated in figure 5. 50 91 99 181 300 72 61 66 56 61 74 61 162 21 21 24 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1 17 1 18
This significant level of activity was achieved despite a drop in contribution from the United Kingdom. The aggregate Source: CMBOR, Ernst & Young, and Equistone Partners Europe.
9 activity in the first quarter across deal sizes and accounted drop, European credit markets maintained a robust level for one-third of the European buyouts valued at or above of activity. In the first quarter, European primary high-yield €100 million. Germany continued its solid activity from the issuance totaled €19.6 billion, according to UBS. Although prior year, contributing €4.1 billion to the first-quarter total. this is 16% below the record-breaking quarterly average of Rounding out the quarter’s top three European buyout mar- 2017, it is above the quarterly average of every previous kets was Denmark, which hosted the largest closed deal of year. The current credit market conditions continue to be 2018 to date: Hellman & Friedman’s take-private of Nets, conducive to leveraged buyout activity. which valued the Danish payment processing company at €4.4 billion. The next-largest deal was BC Partners’ €2.6 bil- Asia lion acquisition of CeramTec, a German maker of technical Asia-based private equity investment activity totaled $24.8 ceramics. billion from 662 transactions during the first quarter, accord- ing to AVCJ, which represents a decrease in value of 13% from Although 2017 was characterized by a continuous decline the fourth quarter and 19% from the prior year. China was in the price of debt, the trend appears to have turned in once again responsible for the largest share of activity at 63%, 2018: yields have been increasing—albeit slowly—since followed by India (14%), Indonesia (6%), and Australia (5%). the beginning of February. Although spreads on BB-rated During the first quarter, the largest private equity–backed in- euro-denominated bonds were as low as 185 basis points vestments in Asia were the $2.5 billion investment in China’s in January, they ended the first quarter at 245 basis points. JD Logistics by a consortium led by Hillhouse and Sequoia, Even so, spreads remain low compared with the levels the $1.8 billion investment in India’s HDFC by a consortium predominant before the spring of 2017. Against this back- led by KKR, and the $1.5 billion investment in Indonesia’s PT Go-Jek by a consortium led by KKR. The majority of the pri- Figure 6 Worldwide Private Equity Fundraising vate equity investments during the first quarter were expan- By Region sion/growth capital investments, which totaled $15.5 billion, At March 31, 2018 or 63% of total invested capital. Expansion/growth capital Amount aised billions investments were followed by venture capital transactions at 500 11 13 14 $3.5 billion (14% of invested capital). Buyouts accounted for 46 28 38 400 61 14 14 34 12%, and other transaction types (PIPEs and mezzanine) ac- 85 21 39 29 93 300 113 27 101 counted for the remaining amount. Information technology 15 16 21 82 88 5 32 79 20 60 34 1 led all industries at $8.6 billion (35% of invested capital) as a 200 25 41 315 24 48 6 248 239 235 258 290 24 4 result of a large volume of transactions and a number of high- 100 207 38 124 158 92 92 66 65 profile deals valued at over $500 million. This was followed 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1Q17 1Q18 by financial services, where 25 deals accounted for over 21% U.S. Europe Asia-Pacific Other of invested capital for the quarter.
Source: Thomson Reuters, Preqin, and Pathway Research. Notes: Fundraising amounts are based on net amounts raised, which are adjusted for fund size reductions. Fundraising Market Comprises buyouts, venture capital, private credit, energy, infrastructure, and other fund strategies. Following the largest annual fundraising total in nearly Data is continuously updated and is therefore subject to change. a decade in 2017, private equity firms worldwide raised Amounts may not foot due to rounding.
10 $108 billion in the first quarter of 2018, according to data fundraising during the first quarter, closing on $15.6 bil- from Thomson Reuters. The quarterly figure represented lion. Venture capital funds raised $11.4 billion during the a nominal decrease from the $109 billion raised during quarter, an increase of 6% from the first quarter of 2017. the prior quarter but an 11% increase from the first quar- Notable venture capital funds that raised capital during ter of 2017. The first quarter also represented the fourth- the quarter included Norwest Venture Partners XIV ($1.5 consecutive quarter in which private equity fundraising sur- billion), General Catalyst IX ($1.4 billion), and Battery passed $100 billion. The market overall remains receptive Ventures XII ($1.3 billion). Other private equity strate- to proven general partners with differentiated approaches gies also experienced an active quarter, driven by infra- to sourcing and/or value creation, which has allowed many structure fundraising. The category raised $14.5 billion, long-standing managers to raise capital quickly and at in- of which $6.0 billion came from the first closing of KKR creasing fund sizes. Worldwide private equity fundraising Global Infrastructure Fund III. through March 31, 2018, is illustrated in figure 6. Private credit fundraising dipped in the first quarter, total- Activity during the quarter was driven by a surge in ing just $9.7 billion. This represented a notable decline fundraising in Europe: the $38.0 billion raised by Europe- from the $35.0 billion raised in the prior quarter and just focused funds represented the largest quarterly total since the second quarter since 2011 in which less than $10.0 bil- the first quarter of 2008 and an increase of 122% over the lion was raised. Direct-lending funds raised $5.1 billion and prior quarter. The bulk of the capital, however, was raised accounted for 52% of the strategy’s total; activity was led at the large end of the market: four large buyout funds by Guggenheim Private Debt Fund II, which raised $2.0 accounted for 85% of the quarterly figure. Largest among billion. these was EQT VIII, which raised €10.8 billion to target buy- Figure 7 Worldwide Private Equity Fundraising By Strategy out investments primarily in Northern Europe. U.S.-focused At March 31, 2018 funds also experienced a strong quarter, raising $65.2 bil- o lion. Although the amount is 15% below the prior quarter’s Amount aised 100 total, it was even with both the year-ago quarter and the 10 10 7 10 13 12 15 13 8 18 13 19 13 5 5 13 7 8 10 3 5 3 quarterly average of the past three years. The quarter-over- 80 12 14 10 8 10 5 9 21 10 12 17 19 16 16 20 18 21 11 quarter decline related to sharp drop-offs in energy and 60 13 24 21 22 15 10 13 14 15 11 private credit fundraising activity, despite double-digit in- 24 11 40 61 64 creases in buyout, venture capital, and other private equity 58 51 48 48 50 20 42 38 45 46 46 41 strategies (e.g., infrastructure and special situations). 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1 17 1 18
Quarterly fundraising by strategy was led by buyout a b funds, which raised $69.1 billion and, at 64%, accounted for their largest share of the quarterly total in more than Source: Thomson Reuters, Preqin, and Pathway Research. Notes: Fundraising amounts are based on net amounts raised, which are adjusted for fund 10 years. The strategy included nine of the 10 largest size reductions. Data is continuously updated and is therefore subject to change. fundraisings of the quarter, and five funds greater than aComprises distressed debt, subordinated debt, and senior direct lending strategies. bComprises infrastructure, special situations, and other fund strategies not classified as buy- $6.0 billion. Carlyle Partners VII represented the largest out-, venture capital–, credit-, or energy-focused.
11 California Pathway Capital Management, LP 2211 Michelson Drive, Ninth Floor About Pathway Capital Management, LP Irvine, CA 92612 Tel: 949-622-1000 Founded in 1991, Pathway creates and manages single- and multi-investor private equity funds of funds for institutional in- Rhode Island vestors worldwide. Pathway manages capital on behalf of some Pathway Capital Management, LP 500 Exchange St. of the largest corporate and public pension plans, government Suite 1100, 11th Floor entities, and financial institutions around the globe. Since its Providence, RI 02903 Tel: 401-589-3400 formation, the firm has committed more than $75 billion to more than 575 private equity investments. London Pathway Capital Management (UK) Limited 15 Bedford Street Pathway is registered as an investment adviser with the SEC in London WC2E 9HE the United States and as a portfolio manager and exempt mar- Tel: +44 (0) 20 7438 9700 ket dealer in Ontario, Quebec, and Saskatchewan, Canada. Hong Kong Pathway’s wholly owned UK subsidiary is regulated in the UK by Pathway Capital Management (HK) Limited the Financial Conduct Authority. Pathway’s wholly owned Hong Level 8, Two Exchange Square 8 Connaught Place Kong subsidiary is regulated in Hong Kong by the Securities and Central, Hong Kong Futures Commission. Tel: +852-3798-2580 www.pathwaycapital.com
Note: Information contained herein has been obtained from sources believed to be reliable, but Pathway accepts no responsibility or liability (including for indirect, consequential or incidental damages) for any error, omission or inaccuracy of such information. The projections shown are provided for informational purposes only and should not be construed as investment advice or providing any assurance or guarantee as to returns that may be realized in the future from your private equity commitments. Projections and expected returns are subject to high levels of uncertainty regarding future economic and market factors that may affect future performance. Accordingly, such projections/expectations should be viewed as only one possibility out of a broad range of possible outcomes. The information provided herein should not form a primary basis for any investment decision made by you or on your behalf and neither Pathway nor any of its affiliates shall act as a fiduciary or adviser with respect to this matter. ©2018 Pathway Capital Management, LP All rights reserved. Reproduction and/or distribution of these materials, in whole or in part, without the prior written permission of Pathway Capital Management, LP, is prohibited. Pathway is an SEC-registered investment adviser, is regulated in the UK by the FCA, and is regulated in Hong Kong by the SFC.