PE/VC Round-up

PE/VC Presence in the USPreqin reports that there are 3,535 private equity and venture capital firms currently headquartered in the US.  Of those, over 41% are located in California and New York.  PE/VC firms in those two states accounted for 58% of the $1.9 trillion of PE/VC funds raised in the US over the past 10 years, with New York accounting for 69% of that amount ($748 billion).  Interestingly, the largest PE firm in the world — the Carlyle Group — is based in Washington, DC.  Since 2004, Carlyle has raised over $63 billion.  Its last fund alone – which closed in 2013 — raised $13 billion.  Other states with substantial PE/VC presence are Massachusetts, Illinois and Texas.

California actually hosts more PE/VC firms (801) than New York (663), thanks to its 532 VC groups.  Over the last 10 years, California’s VCs have raised a total of $116 billion, or 46% of all VC funds raised in the US during that period.

By far the most common strategy employed by US-based PE firms is leveraged buy-out.  There are a total of 999 buy-out firms which raised over $1 trillion in the last 10 years.  New York hosts the largest contingent of LBO firms (249), which have raised $431 billion in capital since 2004.

PE is today a $3.5 trillion business world-wide.

‘Club Deals’ Lawsuit to Settle?   Ten of the most prominent PE firms in the country may have run out of litigation options.  Last year, they lost their tenth try at dismissing the anti-trust lawsuit they’ve been defending since 2007.  The Massachusetts federal court judge presiding over the case said there was “simply too much evidence of improper behavior” to throw the suit out.

The claim is that the ten firms – Apollo, Bain, Blackstone, Carlyle, Goldman Sachs, KKR, Providence Equity, Silver Lake, TPG and Thomas H. Lee – colluded with one another in so-called ‘club deals’ to drive down the prices of nineteen leveraged buy-outs between 2003 and 2007 (including such well-known names as Neiman Marcus, Toys ‘R’ Us, Harrah’s, Loews, Vivendi and Warner Music).  When two or more of the defendants went in together on those LBOs, the other members of the group allegedly agreed not to engage in bidding wars on those buy-outs.  Such an agreement among the defendants not to ‘jump deals’ (as topping bids are known in the PE industry) would constitute a price-fixing violation of the Sherman Anti-Trust Act of 1890.

Trial is now scheduled for November of this year.  The expectation is that any settlement with the shareholders of the nineteen companies bought out by the defendant group will be north of $1 billion.  The LBOs themselves totaled $170 billion.

Just one piece of the incriminating evidence is an e-mail from Tony James of Blackstone to KKR’s George Roberts saying “[t]ogether we can be unstoppable but in opposition we can cost each other a lot of money.”

VC’s ‘Series A Crunch’Got a good idea for a tech start-up?  Set aside whatever money you have, collect what you can from friends & family, attract a few hundred thousand of seed capital from an angel investor and you should have enough to develop a prototype and begin to find your market.   Six months to a year later, you may feel ready to shoot for a few million dollars of venture capital to scale up your business, but, when you do, be prepared for what could be a big, unpleasant surprise.  Regardless of how well you’ve tested and marketed your new venture and how polished your business plan may be, you are likely to run into a brick wall when it comes to follow-on funding.   More than 60% of seed-funded tech start-ups nowadays succumb to the so-called ‘Series A crunch.’   There is simply more demand for early-stage venture capital today than there is supply.  Between 2011 and 2012, the number of seed-stage technology companies shot up 64% from 1,065 to 1,749; over that same period, the number of Series A rounds actually decreased from 703 to 692.  The only way to get Series A funding these days is by having a better chance of becoming a billion-dollar company than most of your competition for funding.  VCs are not interested in merely profitable companies, they’re looking for the next big thing and are funding fewer start-ups so as to put more capital into those with blockbuster potential.  The ‘Series A crunch’ is essentially the market’s way of culling lesser entrepreneurs and ideas.   As one VC put it, “if you can’t prove you have a chance of building a truly great company in eight years, no one will want to fund you for the next two.”  

  • Victor Sowers

    Stephen, do you know if the physical location of a PE firm (at least in the States) influences the geographic dispersion of where they’re actually investing? Does a California based PE firm tend to invest in California-based opportunities? Is that sector related/biased such that California based PE shops are there because they are more tech-centric?

    Also, do you see more problems in the Series A crunch arena or in the Death Valley for private company raises?

    • Stephen Bornstein

      Victor, California VC firms are based there primarily (but not exclusively) to exploit Silicon Valley. California buy-out firms, on the other hand, usually have a global purview as do the PE firms based in the NYC area.

      Start-ups that can’t raise enough seed capital to negotiate the Valley of Death never have to face the Series A Crunch. I don’t have any statistics on the VoD, but I would guess that a lot more start-ups fail at that earlier stage than get through it only to confront the SAC.

  • Michael Scott

    It may be true that a “brick wall” faces the companies that manage to stabilize at the first level, but is Series A really so limited? If a startup channels into a field that is truly global, like film distribution, doesn’t that open up into a broader funding arena? Especially in emerging markets in Asia and Africa, which are increasing independent film production (Nigeria is already challenging India in films produced). What I’m saying is, after you hit the “wall”, maybe you’ll find eager investors if you run in a different direction?

  • n hammond

    Sitting in central/eastern Europe this is a very interesting article if depressing in some ways. This area needs PE/VC badly but unfortunately the deal size is too small. Hopefully some more outward looking funds with a more adventurous will come this way.