Softbank has completed its purchase of Fortress Investment Group, it was announced yesterday.  The deal was originally announced in February 2017 at a price of $3.3 billion.  Fortress went public in 2007 at $18.50 per Class A Share, and its shares declined dramatically during the financial crisis and never really recovered, selling to Softbank at $8.08 per share.

I'm looking forward to seeing what Softbank has in store for Fortress, and how it fits into Softbank's overall strategy.

Link to Softbank press release:
https://www.softbank.jp/en/corp/news/press/sb/2017/20171228_01/ 

Consulting firm NEPC, LLC has announced the results of its Q3 2017 NEPC Endowment and Foundation Poll, and the results contain the following findings:

• Allocation to PE:
  • 31% have an allocation to private equity of over 10%.
  • 14% have no allocation to private equity.
  • 29% had an allocation of 1-5%
  • 27% had an allocation of 6-10%
• 51% plan to increase their allocation to private equity in the next 12 months.
  • 39% plan to maintain expoure
  • 10% plan to decrease exposure
• Outlook on PE returns
  • 44% anticipate lower returns for PE going forward
  • 39% anticipate returns in line with past returns
  • 17% anticipate higher returns
• Current valuations:
  • 34% believe PE is overvalued
  • 2% undervalued
  • 10% in line iwth historical valuations
  • 17% not sure
  • 37% indicated that it depends on the strategy.

My take-aways from this are that as overall portfolio returns fall, endowments and foundations are considering increasing their exposure to private equity, as this asset class has outperformed other traditional asset classes.  They are doing this even with the expectation that PE returns will fall over time.

Link to NEPC press release:
http://www.nepc.com/insights/nepc-survey-endowments-and-foundations-increase-private-equity-exposure-despite-expecting-lower-returns 

There's an interesting opinion piece on TechCrunch by Jon Evans called "After the end of the startup era."  In this piece, Mr. Evans argues that the golden age of the startup may be over, and in its place is a new world where big companies rule.  He asserts that many of the developing technologies (AI, hardware, self-driving cars, AR/VR and cryptocurrencies) favor large companies with talent, data and money available to develop these expensive and complex technologies.  It's an interesting piece.

Link:  https://techcrunch.com/2017/10/22/ask-not-for-whom-the-deadpool-tolls/ 

In the Reuters article "SoftBank's big checks are stalling tech IPOs," author Heather Somerville explores the impact of deep-pocketed investors on the IPO market.  As deep pools of capital are available to companies, it delays a traditional reason for companies to go public.  SoftBank, which closed a $93 billion investment fund in May, has made some significant investments in companies such as WeWork, which provide these companies with capital so they don't have to go public. In addition, along with the big checks comes big valuations, and there is some concern that these companies would not achieve the same valuation in the public markets.

Link:
http://www.reuters.com/article/us-wsjd-conference-softbank-group/softbanks-big-checks-are-stalling-tech-ipos-idUSKBN1CO3BXwww.reuters.com/article/us-wsjd-conference-softbank-group/softbanks-big-checks-are-stalling-tech-ipos-idUSKBN1CO3BX 

I'm pleased to be speaking on two panels at the upcoming PartnerConnect West 2017 conference in Half Moon Bay, CA on October 10 and 11, 2017.  The first panel is "The LP View On The VC Cycle -- Where Are We In It, And Should LPs Be Allocating More to VC Today?" and the second panel is "Growth Equity Shark Tank: LPs Review a Live Growth Equity Pitch."  The conference link is here: https://partnerconnectevents.com/pcwest2017/agenda

Bloomberg yesterday (8/2/2017) posted a fascinating piece on the Bell Canada Enterprises (BCE) leveraged buyout that fell apart during the financial crisis.  The article is "How the World's Biggest Buyout Deal Crashed and Burned" and it's worth a read.

Link:  
https://www.bloomberg.com/features/2017-bce-oral-history/

The Wall Street Journal reported today in the article "From $2 Billion to Zero: A Private-Equity Fund Goes Bust in the Oil Patch" that EnerVest Ltd.'s 2013 energy-focused private equity fund is "now worth essentially nothing."  According to the article, the $2 billion fund "borrowed heavily to buy oil and gas wells before energy prices plunged" and "is now worth essentially nothing."  Investors in the fund included leading pension plans, foundations and other institutional investors.

It's rare for a private equity fund to become almost worthless.  The article states that only seven private equity funds larger than $1 billion have ever lost money for investors, according to Cambridge Associates LLC, a leading investment adviser.  It's more common for early-stage venture capital funds to suffer losses, and I know of a few funds of the 1999 to 2000 vintage years that lost a significant portion of their value.

This is a good reminder that investing in private equity, growth equity and venture capital funds is risky, and includes the risk that the fund may become worthless and the investor may lose their entire investments.

Link to article:
https://www.wsj.com/articles/from-2-billion-to-zero-a-private-equity-fund-goes-bust-in-the-oil-patch-1500210002

​First time investors in private equity funds are sometimes alarmed / confused / surprised to learn that their fund investment has a negative return in the early years of the fund’s life.  Then, to their relief, as the fund ages, the fund’s return increases.  This is known as the ”J-Curve” and it is a common phenomenon in private equity, particularly early-stage venture capital.  

​A simplified hypothetical representation is of the J-Curve is below:

In a nutshell, Michigan has shifted public school teachers to a defined contribution plan, but allows teachers to opt for a more traditional defined benefit pension, but one that splits the costs 50/50 between workers and the state.  It's an interesting article and worth a read.

Link:
http://www.investors.com/politics/editorials/michigan-just-prevented-a-fiscal-crisis-are-other-states-paying-attention/ 

The private equity world has a lot of terminology.  In a prior post, I discussed the structure of a private equity fund, and introduced the terms "limited partners" (or "LPs"), the "general partner" ( or "GP") and the "management company."  In this post, we'll explore fund "sizes" and a little bit of how investments in private equity funds work.

The "size" of a private equity fund is based on the total amount of money all investors commit to invest in the fund - known as "committed capital."  Because a private equity fund invests capital over time, the fund does not need all of the investors' money at the inception of the fund, and so the fund "calls" capital over time.  Private equity funds typically have initial terms of 10 years, but most of the new investing occurs during the first several years (usually 3-5 years) of the fund, known as the "investment period."  As a result, the fund calls the bulk of capital from the investors during this investment period.
​
​Let's use an example.

To read more, please click "Read More" to the lower right.

Basic Limited Partnership Structure
In a basic limited partnership, there are several passive investors (known as "Limited Partners" or "LPs") and the manager of the fund, (known as the "General Partner" or "GP").  The diagram below illustrates this basic structure.

This is one of a series of posts on fund terms.  Other posts include:

• Management Fee
• ​Carried Interest Overview
• Carried Interest – Preferred Return and GP Catchup
• GP Clawback

Private equity funds (buyout, venture capital and growth equity funds) are typically structured as limited partnerships, which have two types of partners: limited partners, or LPs, which are passive investors in the fund; and a general partner, or GP, which is the manager of the fund.  As I evaluate funds, one of the fund terms that receives special attention is the amount of money the GP will commit to the fund - which is called "GP Commitment", "GP Capital Commitment" or "GP Commit."  ​

To read more, please click "Read More" to the lower right.

This article comes on the heels of some other public comments made by others in the industry and outside the industry which have re-kindled a long-standing debate about the merits of the private equity industry.

I have previously posted about this topic, and I think the prior posts help to frame this article.

Prior posts:
http://www.allenlatta.com/allens-blog/mike-moritz-on-private-equity-aka-leveraged-buyouts
​http://www.allenlatta.com/allens-blog/a-response-to-mike-moritzs-article-on-stephen-scharzman

Link to Reuters article:
http://www.reuters.com/article/us-milken-conference-privateequity-idUSKBN17Y2MT

I read an interesting article today titled "Nasdaq 6000: What It Reveals About Tech Stocks And Venture Capital."  The article discusses whether there is a tech bubble in the public markets (no) and whether there's a venture capital bubble (possibly).  It's worth a read.  Link:
http://www.nasdaq.com/article/nasdaq-6000-what-it-reveals-about-tech-stocks-and-venture-capital-cm779469

The Fortune article "Snapchat Actually Isn't the Hottest IPO This Year" argues that MuleSoft is actually a hotter initial public offering than Snap.  This argument is based on post-IPO trading metrics, such as first day "pop" (first day closing trade price vs IPO price) and price-to sales metrics.  It's an interesting article.  Link: http://fortune.com/2017/03/30/snapchat-ipo-snap-stock-mulesoft/ 

In a prior post "Mike Moritz on Private Equity (aka Leveraged Buyouts)" an opinion piece penned by the famed venture capital investor was discussed.  Now there's a rebuttal to Mr. Moritz's article.  ​

Stephen Davidoff Solomon's opinion piece "A Venture Capitalists's Misguided Critique of a Trump Adviser" rebuts Mr Moritz's article in a number of ways.  Whether you agree or disagree with the opinions of Mr. Solomon and Mr. Moritz, this very public debate is pretty fascinating.  

​Link to prior post:
http://www.allenlatta.com/allens-blog/mike-moritz-on-private-equity-aka-leveraged-buyouts 

Link to Mr. Solomon's article:
https://www.nytimes.com/2017/02/14/business/dealbook/a-venture-capitalists-misguided-critique-of-a-trump-adviser.html
​
Link to Mr. Moritz's article:
https://www.nytimes.com/2017/02/07/opinion/stephen-schwarzmans-bad-business-advice.html 

Mike Moritz, the famed venture capital investor at Sequoia Capital, has published an opinion piece on the New York Times called "Stephen Scharzman's Bad Business Advice."  In this opinion piece, he takes a swipe at the leveraged buyout business, which is now known as private equity.  He focuses on the amount of debt used in these transactions and the attendant cost-cutting that often includes layoffs.  I have met Mike Moritz on a couple of occasions, and found him to be a very smart and opinionated person.  His piece is worth a read, even if you don't agree with his positions.  

Link:  https://www.nytimes.com/2017/02/07/opinion/stephen-schwarzmans-bad-business-advice.html?_r=0

The bottom line is that too much money is going into venture funds and companies, and too little is being returned to investors.  In my view, this will lead to overall lower returns for the venture capital industry and will highlight the need to be very selective when investing in venture capital funds in order to select only the best managers who can deliver exceptional returns.

Link:
https://www.bloomberg.com/gadfly/articles/2017-01-11/silicon-valley-startup-pipeline-needs-shot-of-drano