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Global Outlook & ReviewThe 2016

3The 2016

Global Outlook & Review

From the Desk of LAURA KREUTZER

In late 2006, when we published the first edition of what has become our annual outlook supplement, the private equity industry was deep in the biggest buyout boom

in its history. With the publication of the 10th edition of this supplement, some aspects of the market bear an eerie resemblance to those days. Debt is cheap. Deals are not. Firms that can point to a solid track record have been able to raise funds with relative ease. Those in the midmarket, in particular, can often raise amounts that are considerably larger than their prior offerings.

But many limited partners remember all too well the carnage that followed the excesses of the 2006 and 2007 boom years. No doubt, memories of the difficult period that followed the boom contributed to the faint current of caution that appears to have crept back into limited partner mindsets as 2015 drew to a close. Whether LP concern will translate into a slower fundraising year in 2016 remains to be seen.

Over the years, this supplement often has tried to tap into our inner psychics to pinpoint future trends. We weren’t always right in our predictions for the year to come. Back in 2006, for example, several members of our editorial team predicted private equity fundraising would level off or even slow down in subsequent years so general partners could digest all of the money they raised in 2006. Boy, did we get that one wrong!

However, more recently, we have gotten a few things right. Last year, we foresaw the increased appetite among LPs for first-time funds and spinouts and also pointed to a movement toward larger funds and faster fundraising periods in the middle market as well as the growing influence of co-investment capital on market dynamics. All of these trends intensified in 2015.

As we look ahead to 2016, we foresee a continued appetite for new funds but also a growing number of LPs adopting more defensive strategies with their commitments. Although small and midmarket funds remain the darlings of the LP community, 2016 may be the year things finally begin to look up for distressed debt and special situation funds as more LPs seek to hedge their bets against a frothy deal environment.

As we head into a new year, we believe the air will eventually start to come out of the high pricing that has developed in the past 18 to 24 months. Whether or not we are right in the timing of our predictions will have to wait until next year’s supplement.

Fundraising u Investors Prep for Active 2016, but Many Plan to Proceed Cautiously ....................................... 4

Secondary u Uncertainty Could Complicate Secondary Deals in 2016 .................................................................12

Venture Capital uHerd of Venture-Backed Startups With Billion-Dollar Valuations Could Thin in 2016 ........14

Rising Stars u Select 2015 profiles excerpted from Private Equity Analyst ............................................................18

Timeline u 2015: The Year in Private Equity ..........................................................................................................................20

55% Recycled Fiber 30% Post Consumer Fiber

Copyright © 2015 Dow Jones & Company, Inc. All rights reserved. u The 2016 Global Outlook & Review was published in January 2016. u Dow Jones & Company is a News Corporation Company. Copying and redistributing prohibited without permission of the publisher. This publication is designed to provide factual information with respect to the subject matter covered but its accuracy cannot be guaranteed. Dow Jones is not a registered investment adviser, and under no circumstances shall any of the information provided herein be construed as a buy or sell recommendation or investment advice of any kind.

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To the Reader

contents

The 2016 Global Outlook & Review

4

By LAURA KREUTZER and JENNIFER BOLLEN

Private equity’s fundraising engine chugged at full throttle

in 2014 and remained steady in 2015, fueled largely by a healthy supply of cash flowing back into investor portfolios. As 2016 unfolds, investors expect that engine will continue to run for both small and large funds, thanks partly to the volume of capital seeking higher returns.

However, underneath the fundraising furor, more investors have begun to question how much longer the good times can last.

“It’s been a really healthy and active fundraising environment for a number of years now, and the music is going to stop eventually,” said Kevin Campbell, managing director and portfolio manager at DuPont Capital Management. “But the big question is how long can it keep going, and how does the industry absorb the capital?”

Limited partners, placement agents and fund formation attorneys said they expect U.S. private equity fundraising to remain busy in 2016, with many of the same trends that emerged in 2015 continuing into the year ahead. Firms that generated strong returns in prior funds quickly hit their targets

last year if not their hard caps, often with more investor demand than they could accommodate. At the same time, firms are returning to market with new funds sooner than expected, often seeking larger amounts of capital, a trend that is particularly pronounced among small and midmarket firms.

All of this activity has stoked fears recent vintage year vehicles will produce disappointing returns. A slowdown in the volume of initial public offerings in recent months, along with signs of a more challenging leveraged loan market and an economic slowdown in many emerging market economies has injected a degree of uncertainty into investor mindsets that was not as prevalent at the end of 2014.

“There is big divergence between private multiples and where people think the value ought to be for deals,” said David Fann, president and chief executive at TorreyCove Capital Partners. “Really good companies are trading at 13-times cash flow in the buyout space, and historically, nobody made a reasonable rate of return on private equity when multiples were more than 10 times. People are pricing these deals for perfect execution.”

Some investors also question whether all of the money limited partners have recycled back into the asset class will put some at risk of hitting or exceeding their allocations, should the public markets experience another dramatic downturn.

Investors Prep for Active 2016, but Many Plan to Proceed Cautiously

5The 2016


A Small and Midmarket CornucopiaLPs have plenty of funds to choose from in the coming year, particularly in the small and midmarket segments. U.S. midmarket buyout shops that returned to the fundraising trail in late 2015 or that expect to return in 2016 include Arsenal Capital Partners, Avista Capital Partners, Berkshire Partners, Thoma Bravo, Kohlberg & Co., Leonard Green & Partners and Vista Capital Partners.

A survey of 104 investors conducted by placement agent Probitas Partners found U.S. midmarket buyout funds, defined as funds ranging from $500 million to $2.5 billion in size, ranked as the most popular strategy among LPs in 2016, followed closely by U.S. small buyout funds, defined as less than $500 million.

Strong investor demand has allowed certain midmarket firms to raise much larger pools than they did last time around, a trend LPs predict will continue into 2016. Audax Group, Genstar Capital and American Industrial Partners all raised funds in 2015 that were significantly larger than their prior offerings.

Although investors say some firms can successfully manage a fund-size increase, particularly if it is accompanied by a matching increase in investment staff, others contend LPs need to tread carefully. Dan Cahill, a managing partner at midmarket-focused fund-of-funds manager Constitution Capital Partners, said his firm declined to re-up with at least one manager in its portfolio due to concerns over fund-size inflation.

“Some groups will get out there and their overall numbers look strong, but they have a lot of volatility in the portfolio,” said Mr. Cahill. “A lot of groups look good until you drill down into the portfolio.”

As some midmarket firms raise larger amounts for their core strategies, others are launching funds to target smaller deals, following in the footsteps of groups such as Vista Equity Partners and Riverside Co. Thoma Bravo, TSG Consumer Partners and Alvarez & Marsal have all pitched new funds in the past year that target investments that are smaller than those they back through their flagship funds.

“It’s an opportunity for GPs to leverage the halo that they already have in certain sectors or [strategies],” said Eric Zoller, co-founder and partner at placement agent Sixpoint Partners.

Investors also say they expect more firms to return to market earlier than anticipated, even before they have reached the threshold at which they would be allowed to start raising a new fund, typically when they’ve invested two-thirds to three-quarters of the prior fund’s capital. In such cases, the firms typically don’t start charging management fees on the new fund until they make the first investment.

“The really good GPs have a well-refined nose for sniffing out money and raising it when they can,” said Mr. Fann of TorreyCove, “It’s like a sixth sense they’ve developed.”

2007 “Nobody is making any more predictions and there is no outlook at this point. Last year, they kept saying it would be the end of this year…but larger deals keep getting done…There is no letting up.”–Robert Polenberg, a director with S&P Capital IQ’s Leveraged Commentary and Data, speaking about the potential for a credit market downturn

2007 “Management teams are refusing to take that much leverage. They are telling us, ‘I don’t feel like running a company if you’re not going to do something to lower that leverage.’”–Joe Nolan, a principal at what was then GTCR Golder Rauner (now GTCR), speaking about portfolio company resistance to the high debt loads buyout firms wanted to place upon them

2007 “I don’t expect anything to come out of this investigation, but I do foresee PE funds putting in place safeguards and guidelines for how they invest with other PE firms.”–Marco Masotti, a partner with Paul Weiss Rifkind Wharton & Garrison LLP, on the Department of Justice investigation into possible anticompetitive practices associated with club deals

2008 “The biggest opportunity [in 2008] is to take advantage of the carnage: Take advantage of pendulum swings and people’s emotions.” –Mark St. John, CVC Capital Partners

2008 “Every time you heard a whiff of a problem, it used to be that you had to stay out of emerging markets. Now that things in the U.S. have gone south, people say: ‘At least I have emerging markets.’”–Jennifer Choi, then research director for the Emerging Markets Private Equity Association, on the relative attractiveness of emerging markets private equity to investors

2008 “It’s very hard to buy today knowing that it may be cheaper tomorrow. As a result, everyone waits, prices drop and you create a vicious cycle.”–Steve Smith, then head of Americas financial sponsor coverage at UBS AG, on the potential exit environment in 2008

2009 “We’re in the baby pool right now. For a $100 million credit facility, you can still get a club [of banks] together. But if you get much bigger than that, it’s a lot more difficult.”–John Neuner, a managing director at midmarket investment bank Harris Williams & Co., on the difficulty in securing deal financing

2009 “It will take some time for the fear and paralysis to dissipate. Hopefully, it’s a matter of months and not quarters, but it’s not a matter of days.”–Daniel S. Evans, a partner with law firm Ropes & Gray LLP, on prospects for the deal environment

2010 “There is a pulse back. We do see a lot of signs of life, though the recovery is by no means robust.”–Herald Ritch, then chief executive of advisory firm Sagent Advisors LLC, on the resumption of deal activity

A Look Back10 Years of Memorable Outlook Quotes

see more memorable quotes on p. 11 >


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“They aren’t buying flood or fire insurance just yet,” said Peter Martenson, partner at placement agent Eaton Partners. “They totally agree with the thesis that a recession should happen in about two years, but the cops haven’t showed up and there’s no fire yet.”

A Change of Heart for Venture CapitalAfter several years of robust venture fundraising, the bloom may start to come off of the venture capital rose in 2016.

“There are going to be some folks that will be attracted to the shiny objects in terms of some of the numbers and some of the companies that have been developed,” said Eric Harnish, a principal on the research group at NEPC LLC. “But I think there are a lot of investors that are extremely cautious right now.”

As the market for initial public offerings of venture-backed startups has cooled and some mutual fund managers have written down the value of certain startups in their portfolios, late-stage venture firms, in particular, may find it tougher to win over LPs.

However, some limited partners said the environment would need to deteriorate far more before it really puts a serious dent in fundraising.

“If you look at the performance of venture funds and growth funds, they’re doing extremely well,” said Christian Kallen, a principal in the fund investment group at Hamilton Lane. “It’s mostly unrealized, but still pretty good. Not every deal depends on the public market to be a successful deal.”

Europe Preps for 2016 Fundraising SurgeAcross the Atlantic in Europe, investors hungry for large pan-European buyout funds are gearing up for the region’s biggest round of fundraising since 2013.

According to data provider Preqin Ltd., 58 Europe-based buyout funds raised a total of €52.1 billion that year, dropping to 48 raising a total of €29.6 billion in 2014 and, as of early December, 39 raising an aggregate €29.6 billion in 2015.

Market participants expect fundraising figures to surge in 2016 – there are currently 68 Europe-based buyout funds attempting to raise an aggregate €10.4 billion, with fresh launches from a string of firms, including Apax Partners, BC Partners and Permira, expected to add to the competition next year.

In the broader market, Advent International is attempting to raise the buyout industry’s largest vehicle that includes Europe as a geographic focus. Advent has set a $12 billion target for a fund that will invest in the region and in North America, according to Preqin. Cinven and the Georgian Co-Investment Fund are currently trying to raise the next largest Europe-focused buyout funds, each with a $6 billion target.

Antoine Dréan, founder and chairman of advisory firm Triago, described fundraising prospects as “bright” against a

Brighter Skies for Distressed Debt?Although distressed debt and turnaround firms struggled to win over investors in recent years amid low default rates and an abundance of cheap credit, the tide may start to turn in 2016. The pressure low commodity prices have placed on the energy and mining sectors and an expected rise in default rates may bolster distressed debt fundraising this year.

Standard & Poor’s Ratings Services predicts the U.S. corporate trailing 12-month speculative-grade default rate will increase to 3.3% by September 2016 from 2.5% in September 2015 and 1.6% in September 2014, according to a report issued in December.

“It’s worth considering having capital ready to go, if the credit cycle does turn,” said John Haggerty, managing principal and director of private markets at Meketa Investment Group.

Among investors surveyed by Probitas Partners, 31% said they will focus attention on distressed debt funds in 2016, up from 20% of investors that favored distressed debt in a similar survey in 2014.

Some LPs say they are seeing more distressed managers raise their funds in what they call dry closings. In such cases, the manager locks in the capital commitments under an agreement that it will not start charging fees or drawing capital until the market turns and investment opportunities pick up or if default rates reach a certain level.

7The 2016


u DAVID KESSENICH, co-founder and managing partner, Excellere Partners

What surprised you the most about 2015? The most surprising thing to me about 2015 was the unabated trend of increasing valuation multiples for lower midmarket businesses. Amidst the backdrop of pending interest rate hikes, global geopolitical

upheaval and the ongoing predictions of a U.S. stock market correction, we would have expected to see valuations taper off a bit. Clearly, we’re seeing pricing that’s being driven by the record-level supply of capital chasing the limited supply of opportunities.

What do you think will be the biggest challenge the industry will face in 2016? We are preparing for the potential of broad-based misalignment between valuation expectations and the values that can be responsibly underwritten. Several times in the back half of 2015, we heard about or directly experienced full auction processes that produced multiple high single-digit bids, where the sellers elected to wait – presumably, to grow into a higher value. In these instances, the market spoke, but the sellers and their advisers [didn’t accept] the results. This misalignment has the potential to create a challenging near-term deal environment. That being said, we are extremely optimistic that, as we have proved in the past, we will find a few great entrepreneurial companies that meet our investment criteria that will view Excellere as their “partner of choice” and will be new investments for us in 2016.

u ROBERT (BOB) BALTIMORE, managing director, Harris Williams & Co.

What surprised you the most about 2015? Deal activity for private equity typically follows the peaks and troughs as does much of the financial markets. 2015 marked a return to significant M&A on a dollar basis as we saw multiple large deals

announced and consummated. That said, the volume of deals was largely in line with 2014 and has remained relatively stable.

What do you think will be the biggest challenge the industry will face in 2016? The lending market has been more volatile over the last two to three months, with some large financings having to reprice in order to fully syndicate. [During the fourth quarter we continued] to see high-quality deals being successfully executed, and we believe that the lending market will remain active [into 2016]. In addition to an active debt market, the equity funding capability from both strategic buyers and PE sources is ample. Strategic buyers have been very active across all of our industry groups and we expect that to continue in 2016.

What do you think will be the biggest drivers of midmarket deal flow in 2016? Assuming the debt market remains active, we believe that 2016 will be another year of strong deal flow. Ample debt and equity capital and commensurate high valuations will continue to drive strong deal activity. Harris Williams & Co. anticipates continued strength across each of our 10 industry groups, consistent with the activity over the last 12 months.

u ANDRE BURBA, managing director, Pine Brook

What surprised you the most about 2015? As an investor focused on the energy sector, entering the year I believed oil price volatility would be a dominant theme throughout 2015. Though conventional wisdom anticipated a v-shaped recovery in oil prices up until the midyear point, the

speed with which sentiment around oil prices then shifted was surprising. It was interesting to see universal expectations change almost overnight, as the market seemed to fall into line with a “lower for longer” outlook.

What do you think will be the biggest challenge private equity investors will face in the energy sector in 2016? I believe the distress created by lower commodity prices will further encourage private equity energy investors to seek out investment opportunities to capitalize on the fluid market conditions. I also anticipate the already intense competition for management talent in the oil and gas industry will only intensify in the year ahead.

What do you think will be the biggest drivers (or potential drivers) of deal flow in 2016? Financial distress in the energy sector is likely to be a substantial deal flow driver in 2016. As the degree of this distress increases, and the gap between buyers’ and sellers’ expectations continues to shrink, I think there will be an even greater number of attractive and actionable investment opportunities in the year ahead.

uSCOTT EDWARDS, managing director, Sun Capital Partners

What surprised you the most about 2015? I don’t know that anyone anticipated such a prolonged period of low oil prices. We and other firms have seen some benefit from that as the profitability at some portfolio companies has been

enhanced by lower transportation, energy and input costs. In addition, we believe lower gasoline prices have continued potential to stimulate consumer spending as they may create greater disposable income.

What do you think will be the biggest challenge the industry will face in 2016? The superabundance of capital in the market will continue to be a challenge that impacts firms across the spectrum of size and strategy. As a result, I expect valuations to remain high and firms to face strong competition for not only winning but finding deal opportunities. Firms will have to differentiate to get deals and generate returns.

What do you think will be the biggest drivers (or potential drivers) of distressed deal flow in 2016? Liquidity. Distressed and underperforming business with more access to liquidity can “kick the can” and continue operations as they attempt to right their ship. We’ll likely be more focused on acquiring performing companies where there is opportunity for us to have a positive impact in helping them transform potential into business results.

In Their Own Words

North American LBO/Corporate Finance


8

huge amount of dry powder that remained in the market – currently $145.2 billion among Europe-focused buyout funds, according to Preqin.

Fund terms and fees, which many firms have already overhauled since the crisis, are set to change even further. BC Partners, for instance, has offered investors in its latest, €7 billion fund a discounted management fee if they accept a deal-by-deal carried interest structure.

Mr Dréan said investors would benefit from a broader range of fee and carry choices in the future.

“GPs are operating in an intensely competitive fundraising market, with more than 2,500 vehicles seeking capital,” he said. “Other forms of private equity investing that come with lower fees and expenses will continue to grow in popularity, notably no-fee co-investing and low-fee managed accounts.”

Ms. Matharu described the menu of fund terms as a “cyclical phenomenon,” adding it “is never so varied that it indicates a sea change or permanent shift on standard fund terms.”

Mr. Barr said that while the most sought-after funds would retain a certain level of pricing power over investors, offering a choice of terms and fees “is about being relevant to your customer base, and investors are looking for more flexibility about how they invest money.”

Meanwhile, the denominator effect – which caused many investors to withdraw from private equity when slumping

backdrop of low interest rates and increasing market volatility. He said this condition gave private equity an opportunity to outperform other asset classes, and large buyout firms with good records should do well.

“The effort to invest with maximum efficiency and minimum overlap has favored larger GPs for some time and has raised the bar in terms of investor expectations when it comes to smaller managers,” Mr. Dréan said.

Rachel Matharu, a vice president at placement agent Acanthus, said the market expected strong results for the latest round of large-cap European fundraisings. She said Advent’s global fund was widely expected to be oversubscribed and that upcoming launches by Apax and BC Partners were expected to reach the finish line swiftly.

This optimistic fundraising outlook comes as large pan-European vehicles are set to meet growing demand for European private equity among North American investors.

“The European sovereign debt crisis, which coincided with that last fundraising round, resulted in a large-scale retrenchment of North American investors looking to commit capital to Europe,” Ms. Matharu said. “More recently, sentiment has grown considerably more positive.”

However, Rob Barr, a partner at fund-of-funds manager Pantheon, said fundraising for most vehicles may slow in 2016 after many investors returned to private equity last year and fulfilled their allocation requirements. He highlighted the

9The 2016


u GUY HANDS, chairman and chief investment officer, Terra Firma Capital Partners

What surprised you the most about 2015? Based on the opinion polls, I, like most people, thought the Conservatives had no chance of getting an overall majority [in the U.K. parliament]. During the campaign, I said that a Labour-SNP

government would be better for businesses that focus on essential industries like wind farms and care homes. Unfortunately, while I got the election result wrong, to date I have been proved right with regard to industries that employ large numbers of people and provide essential services.

What do you think will be the biggest challenge the industry will face in 2016? The biggest challenge the industry will face in 2016 will be finding good ways to invest a huge mountain of dry powder, now well over $1 trillion. It is very difficult to find value in this market. To do this in a way that aligns ourselves with our investors, Terra Firma has made three large changes in 2015: First, we will not charge investors fees on uninvested capital; second, we are going to invest at least 10% in any strategy or fund we do; third, in order to attract the most entrepreneurial and creative talent out there, I will be sharing ownership of Terra Firma going forward.

Which single asset class offers the best value going into 2016 and why? This question is largely dependent on what happens with interest rates. If they continue to stay low and capital market liquidity continues to increase, then a lot of infrastructure assets, though appearing today expensive, would in the years to come look to be of good value. On the other hand, if interest rates go up, they will look overpriced in the future.

In 12 words or less, what will be the single biggest theme of 2016? Larger LPs continuing the move to look more like GPs.

u WILLIAM JACKSON, managing partner, Bridgepoint

What surprised you the most about 2015? David Cameron returning to Downing St. to lead a majority conservative government.

What do you think will be the biggest challenge the industry will face in 2016? High transaction pricing fueled by robust, but more volatile, debt markets will challenge us all in the sector.

Which single asset class offers the best value going into 2016 and why? Private equity will continue to outperform on an absolute and relative basis as the ongoing European recovery delivers good euro returns and strong cash back to investors.

In 12 words or less, what will be the single biggest theme of 2016? Volatility: U.S. elections, the Brexit debate, interest rates, security concerns, currency movements.

u MICHAEL KALB, senior managing director, Sun European Partners

What surprised you the most about 2015? The asset valuation bubble continued to go on unabated, even in the midst of global political uncertainties including the Middle East and Ukraine, currency exchange rate volatility, a

collapse of oil prices and an economic slowdown in China and other emerging markets.

What do you think will be the biggest challenge the industry will face in 2016? The return of market volatility in light of more recent global events including terrorism, expected interest rate rises in the United States and the pending referendum on U.K. membership [in the European Union], to name a few.

Which single asset class offers the best value going into 2016 and why? Private equity, of course!

In 12 words or less, what will be the single biggest theme of 2016? The need to remain nimble, responsive and decisive in an evolving market.

u THOMAS VON KOCH, managing partner and chief executive, EQT Partners

What surprised you the most about 2015? Firstly, China: We knew growth at 7%-8% per year couldn’t go on forever. Still, it was surprising how fast time caught up, with more “normal” growth affecting both commodities and

the machine industry. Secondly, the energy sector: The geopolitical events combined with the progress in alternative energy leaves you with no reason to believe that oil prices will reach previous levels again.

What do you think will be the biggest challenge the industry will face in 2016? Proving to society that we earn our license to operate. In this environment, with zero interest rates and the industry being questioned in many markets, there is a need for reinvention. We have to show that we are as good at creating value as we have been historically.

Which single asset class offers the best value going into 2016 and why? Direct lending. Small and mid-size businesses have difficulties accessing capital because banks don’t find them that interesting. This creates interesting opportunities for firms like us.

In 12 words or less, what will be the single biggest theme of 2016? How tech will change mature industries.

In Their Own Words

European LBO/Corporate Finance


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Slower economic growth rates in many emerging markets, along with weaker currencies and greater public market volatility have weighed on returns. At the same time, the prospect of higher interest rates and the strong dollar has attracted more institutional capital back to North American funds.

“It has been a particularly buoyant period in the United States and a positive environment for U.S. private equity, and in the rest of the world, we’ve seen a very different and almost inverse picture,” said Steve Cowan, managing director at 57 Stars, a Washington, D.C.-based firm that focuses exclusively on emerging markets private equity. “Whereas money is flowing back into the U.S., you’ve seen the listed markets go down in most [emerging market] jurisdictions, and most major currencies have fallen vis-a-vis the U.S. dollar.”

Investor appetite for new commitments in emerging markets may depend partly on how much exposure they already have to those markets from prior vintage years, said NEPC’s Mr. Harnish.

“If they have an existing portfolio, they probably need to think about how stable these businesses are,” he said, adding investors with new capital to deploy “may think this should be a great time to deploy at lower valuations and get capital into countries that have higher growth rates.”

equity markets led to disproportionate allocations to the asset class – is not expected to create issues in the next fundraising cycle. Mr. Dréan said this is a result of a more sophisticated approach to portfolio management since the crisis.

“Barring a full-blown rout, private equity’s popularity should intensify if public markets lose ground,” he said.

Ms. Matharu added that although investors did not consider stock market performance an immediate concern, they continued to assess the market and “the picture may well change in the second half of next year.”

Emerging Markets’ Double-Edged SwordA strong U.S. dollar and slower economic growth in many emerging markets may translate into a tough fundraising environment – but a potentially promising investment climate – for many countries in 2016.

Private equity fundraising for emerging markets reached $29.74 billion through the first three quarters of the year, putting 2015 on pace to be the slowest fundraising year for emerging markets since 2010, according to data released by the Emerging Markets Private Equity Association.

u RICHARD LAWSON, managing director and chief executive, HGGC

What surprised you the most about 2015? Increased access to debt financing drove a significant uptick in corporate M&A activity, in size and scope of deals, while the PE market for large initial deals, by comparison, was relatively quiet.

Driven by credit investor comfort in corporate “brands,” serial acquirers helped push the return of corporate megadeals with large add-ons and transformative mergers, including Dell/EMC, Kraft/Heinz, Home Depot/Interline, etc. The impact has been readily visible, with only 5% of deals in 2015 being PE-backed, down from 9% in 2014.

What do you think will be the biggest challenge the industry will face in 2016? The macroeconomic climate and resulting choppy debt market will be the biggest challenges in 2016. Following robust deal activity in 2015, slowing global growth will result in valuation declines as investors become more risk adverse. This uncertainty will lead to the tightening of credit markets, further reducing buyout valuation expectations. Although unlikely during a period of economic slowdown, if the Fed stops holding interest rates near zero, further pressure will be placed upon buyout valuations as return profiles change.

What do you think will be the biggest drivers (or potential drivers) of deal flow in 2016? We believe the capital that has continued flowing into private equity will begin to demand liquidity

events. Private equity firms will be pressured to achieve realizations, nudging high-quality companies onto the market. Locating these situations before the company is engaged in an active auction process can result in a deal that provides a realization to the seller, as well as an opportunity to make an acquisition where the seller remains a minority owner of the company, aligning incentives for the buyer.

u CHARLIE MOORE, senior partner, North American operations, Trilantic Capital Partners

What surprised you the most about 2015? Competition among private equity firms for attractive assets ratcheted up another notch from the already robust levels seen in 2014.

What do you think will be the biggest challenge the industry faces in 2016? The realization that high prices are here to stay, notwithstanding a likely Fed rate increase.

Where do you think the valuation of midmarket companies will be headed in 2016? I expect valuations for middle market companies to remain generally at their current levels in 2016, adjusted for a modest rise in rates, absent an exogenous risk-off event. A near-term recession in the U.S. is unlikely; our economy is healthier than most of the rest of the world’s. But there is always a possibility of the unforeseen – war in the Middle East, terrorism at home, China unraveling – that can surprise markets and put risk capital on the sidelines.

In Their Own Words

North American LBO/Corporate Finance

11The 2016


The strong dollar has weighed on portfolio company exits by emerging market managers, particularly those that raised dollar-denominated funds. Brazil has been among the hardest hit, with the Brazilian real declining against the dollar by some 30% in 2015. Investment in the nation has been hurt by a series of corruption scandals over the past year. Private equity fundraising for Brazil reached just $1.54 billion during the first three quarters of 2015, off pace from some $4.21 billion raised for Brazilian funds in all of 2014, according to EMPEA data.

However, some investors remain convinced private equity managers in Brazil will ultimately still perform over the long term.

“The relative underperformance there is mainly a currency issue, rather than an underlying portfolio company issue,” said Mr. Kallen of Hamilton Lane. “Private equity with [its] five-to-10-year hold period should equal out over time.”

Although economic growth in China also poses some fundraising challenges for managers in 2016, investors view that market more favorably than Brazil, thanks partly to its size and buoyant growth rate compared to other markets. However, they add the types of funds investors favor are shifting away from those focused on export manufacturing or resource intensive investments.

“You see continued demand around consumer-driven strategies, or special situations and distressed strategies,” said Mr. Zoller of Sixpoint Partners. He added that although the latter is relatively difficult to do, given China’s regulatory regime, LPs still find it attractive.

Among locales for emerging markets private equity, investors say they also see a few bright spots in the year ahead, including Mexico, thanks partly to a high correlation between Mexico’s economy and the U.S. economy. The nation has implemented economic reforms in industries such as energy and education and has become a growing center for manufacturing exports.

“Mexico has been one of the significant beneficiaries of the increasing costs of exporting from China,” said Mr. Cowan of 57 Stars.

Staying DisciplinedOverall, even as investors predict a busy fundraising year over the next 12 months, the similarities between the current environment and the heady days of the buyout boom in 2006 and 2007, particularly in the U.S., give some cause for concern.

Amid high pricing, abundant debt and ever increasing fund sizes, many investors say that the coming months will test LPs’ ability to remained disciplined in their commitment pacing and manager choices.

“Part of the problem is people think the good times will keep rolling,” said Brian Gallagher, a partner at Twin Bridge Capital Partners. “But when the markets turn, it’s often for reasons that neither you nor I could ever predict.” n

2010 “We are on the same path again as people start to push the envelope. We’ve seen the movie – we lived in it.”–Andy O’Brien, then co-head of syndicated and leveraged finance at J.P. Morgan Chase & Co., on the nascent recovery in the debt markets

2011 “If fund terms do not change now, they never will. It is a buyer’s market. LPs are more willing to look under the bonnet and will seek greater transparency and lower fees.”–Ian Bagshaw, then a partner and co-head of private equity at law firm Linklaters LLP, on fund terms and conditions

2011 “Now discounts are very thin and NAVs are very full. It feels like a feeding frenzy for secondary guys out there.”–Tjarko Hektor, then a partner at AlpInvest Partners, on the secondary deal environment

2012 “Those managers who knew they could get it done came out to market in 2011, but those managers that didn’t think they could get it done didn’t even come out.”–Mel Williams, a general partner at TrueBridge Capital Partners, on the venture capital fundraising environment

2012 “Not infrequently, managers state that they have complementary backgrounds – for example, private equity, consultant and banking experience. However, the industry is still made up predominantly of white males, with sadly little diversity by race, gender and age.” –Rhonda Ryan, then head of the Europe private funds group, PineBridge Investments

2013 “It’s like watching an approach path to an airport. One plane after another, they’re all coming in to land.”–Andrea Auerbach, head of private investment research at consulting firm Cambridge Associates, on the crowded fundraising market

2013 “It’s sort of like the lottery in a way. There always will be big winners. But predicting it is getting harder than ever because of the number of companies in the Petri dish.”–Harry Weller, a general partner at New Enterprise Associates, on investing in consumer Internet startups

2014 “I’m not sure everyone remembers the lessons learned from the great financial crisis. Investor memories tend to be short.”–David Fann, president and chief executive of TorreyCove Capital Partners, on a resurgence of LP commitments

2014 “We’ve had financial sponsors being approached by banks for [listing] assets they hadn’t even thought about selling yet because they only bought them a few years ago,” –David Jennison, a partner at equity capital markets adviser STJ Advisors, on renewed popularity of PE-backed initial public offerings

2015 “It worries me [when] LPs look at a portfolio and try to make a determination on a manager’s ultimate success based just on the black and white numbers in front of them. There’s a lot of desk diligence being done.”–Tim O’Gara, founder of Shannon Advisors, on investor due diligence

A Look Back10 Years of Memorable Outlook Quotes


12

By LAURA KREUTZER

Secondary deal making remained strong for much of 2015, but public market volatility during the third quarter and uncertainty over the future of the global economy could complicate deals in the year ahead.

“We have seen a change in the momentum of the market in which buyers have become a little more selective,” said Tom Kerr, managing director on the secondary team at Hamilton Lane. “There are some signs that the volatility has introduced a little more uncertainty and made the market a bit more challenging for both buyers and sellers.”

High prices on the secondary market helped drive massive amounts of deal volume in 2014 and much of 2015, particularly for large portfolio transactions from banks and fiduciaries, such as pension funds. A large volume of capital available for secondary deals, a strong exit environment in which distributions far outpaced investments and an abundance of cheap leverage all supported robust pricing. As 2015 drew to a close, some secondary buyers and intermediaries were predicting deal volume for the year could end up reaching between $30 billion and $36 billion.

Concern over a potential slowdown in distribution activity, however, might reduce buyer willingness to pay the high prices sellers have come to expect. A slowdown also could hinder general partners’ ability to effect fund restructurings, which have accounted for a growing percentage of deal volume in the past couple of years. Fund restructurings typically have priced at their underlying net asset value or at slight discounts, according to some secondary intermediaries and secondary buyers, who added that fund investors now evaluate them with a much more critical eye than they did when such deals were relatively new.

“These transactions, in particular, are sensitive to pricing, and [limited partners] are only doing them if they’re getting full value,” said Mr. Kerr. “It’s not a motivated seller most of the time. If pricing in these transactions remains very full, then LPs will sell into them, and you’ll see a lot of activity.”

Slower distributions also could lower returns on deals levered with debt. Robust distributions have enabled secondary buyers to easily cover the interest payments on debt added to deals with enough left over to return to LPs, thus bolstering the return on their equity. But if those distributions slow down, a greater percentage will have to go to servicing the debt.

“Things would have to get really bad for the banks to get hurt, but they only have to be fairly bad for the equity holders to get

Uncertainty Could Complicate Secondary Deals in 2016

13The 2016


The capital pile only stands to increase given the number of firms that pitched new secondary funds in late 2015 or early 2016. Firms in the market or planning to start marketing in 2016 include Adams Street, Hamilton Lane, HarbourVest Partners, Lexington Partners, Portfolio Advisors and Willowridge Partners.

“The amount of capital chasing deals is a kind of a counter lever,” said Mr. Samman of Akin Gump. “It will be interesting to see how the economic drivers on pricing co-exist with a real need to deploy capital.” n

hurt,” said Jason Gull, a partner and head of secondary investments at Adams Street Partners.

Despite latent concerns about future distributions, buyers said the volume of potential sales remains strong. However, unlike 2014, when large billion-dollar transactions drove deal volume, midsize transactions – involving perhaps a dozen funds or so – currently dominate the market.

“Those aren’t motivated by some grand scale event but are more the result of routine re-evaluation and purging of portfolios and trying to clean up the balance sheet,” said Fadi Samman, partner at law firm Akin Gump Strauss Hauer & Feld LLP.

The need for ongoing portfolio management as well as the large amount of capital raised by secondary firms in recent years could continue to support higher deal prices, even if distributions start to slow, some industry participants said. Secondary firms in the U.S. and Europe raised a total of more than $10 billion in 2015 through Nov. 30, on top of more than $23 billion such firms raised in 2014, according to data provider Dow Jones LP Source.

u DAVID WACHTER, managing director, W Capital Partners

What surprised you the most about 2015? The expectation that high valuation private rounds are a precursor to near-term exits and IPOs. Private market valuations have been bid up to multiples significantly higher than those in the public markets

due to the search for growth investment opportunities. This spread has effectively caused a narrowing of the IPO window and M&A market as companies need several years to grow into their private valuations. As a result, investors who signed up for a quick flip will need to settle in for the long haul.

What do you think will be the biggest challenge the industry will face in 2016? Managing expectations among shareholders, management and employees in an environment where capital becomes more costly and exits become more uncertain. Many growth companies have business plans that rely on additional financings or an IPO within one to two years. Companies that need money may have to modify their business plan, raise more expensive capital or both, and all stakeholders will have to adjust their expectations of the timing and valuation of an exit.

How do you think secondary deal volume in 2016 will compare with 2015? Secondary deal volume is highly dependent upon the perception of market conditions and volatility. If rates rise and the overall markets experience significant volatility, co-investors and other recent entrants to the private markets will need to re-evaluate their objectives for their private investment portfolios. Investors that are less comfortable with a long-term hold period or supporting their investments with additional capital will drive increased interest in secondary directs.

In Their Own Words

Secondaryu JORDAN GASPAR, managing partner, AccelFoods

What surprised you most about 2015? The pleasant surprise of 2015 is the caliber of first-time food and beverage entrepreneurs entering the space. We’ve seen sophisticated entrepreneurs leaving other sectors like tech and

financial services to come and start businesses in this industry. These founders bring a unique aspect and approach to how they produce their product, go to market and engage with consumers.

What do you think will be the biggest challenge the industry will face in 2016? From retailers increasing shelf space for natural products to online and mobile platforms creating direct-to-consumer sales strategies to large corporates shifting focus to emphasize fresh divisions or investing in and supporting early-stage companies, the entire industry is rethinking how to approach the next generation of innovative brands. With the industry at a defining moment of unprecedented change, it remains to be seen how so many strategic shifts will play out.

Do you expect a change in competition at your level of investing? Why or why not? We are now investing out of a new fund that is substantially larger, allowing us to continue running a next-generation accelerator while committing larger sums of capital in companies generating $1 million to $3 million-plus in revenue. While there is always competition for great deals, we primarily invest in the AccelFoods “graduates,” a strong group of high-quality potential portfolio companies. The AccelFoods platform allows us to offer unique, proprietary partnerships to our companies.

In Their Own Words

Venture Capital

“There are some signs that the volatility has introduced a little

more uncertainty and made the market a bit more challenging for

both buyers and sellers.”

Tom Kerr, managing director on the secondary team at Hamilton Lane


14

Herd of Venture-Backed Startups With Billion-Dollar Valuations Could Thin in 2016

By RUSS GARLAND

The big story in the venture capital industry for 2015 was the

stampede of companies joining the club of startups raising capital at valuations of $1 billion or more.

As of early December, 59 companies had joined the ranks in 2015, and the total number of private, venture-backed companies world-wide valued at $1 billion or more stood at 131, according to data provider Dow Jones VentureSource.

But as the year drew to a close, VCs and others were questioning whether such valuations were sustainable.

The verdict from the public markets was decidedly mixed, as some billion-dollar babies, also known as unicorns, priced initial public offerings at valuations lower than their final venture rounds, and others saw their post-IPO share price drop below the value at which they last raised capital as a private company.

Payments company Square Inc., for instance, priced its IPO in November at $9 a share, sharply below the $15.46 private investors paid in its last round of venture capital in 2014.

Another bad sign for the billion-dollar club was that some of the mutual funds that helped fuel the wave of high-priced financings cut their estimates of several companies’ worth, according to public records.

Still, investors said many of these companies have promising, substantial businesses that will prevail in the long run.

Here are some of the newcomers to the billion-dollar club that are worth watching in 2016 to see if they can live up to the lofty expectations of their backers:

JET.COM INC.

This online marketplace is taking on ecommerce giant Amazon.com Inc. by offering lower prices. It plans to have only a few warehouses, relying instead upon its suppliers to fulfill orders. Jet is led by

founder and Chief Executive Marc Lore, who sold his former company, Quidsi Inc., the parent of Diapers.com, to Amazon in 2010. The Hoboken, N.J., company raised $350 million in November at a valuation of $1.35 billion. Mutual-fund company Fidelity Investments led the round. Other backers include venture heavyweights Accel Partners, Bain Capital Ventures, General Catalyst Partners, New Enterprise Associates and Norwest Venture Partners. Jet will need their firepower because its business plan relies heavily on marketing to capture consumers’ attention.

15The 2016


club includes other companies in similar lines of business, including New York-based Blue Apron Inc., which also delivers meal kits; and Delivery Hero Holding GmbH, also based in Berlin, which delivers meals from restaurants. Besides Germany, HelloFresh operates in the U.S., U.K., Australia, the Netherlands, Belgium and Austria. A €75 million round in September valued the company at €2.6 billion, or about $2.93 billion at the time. Its majority shareholder is Rocket Internet. Other backers include Scotland-based money manager Baillie Gifford and Insight.

UDACITY INC.

An online university, this Mountain View, Calif., company joined the billion-dollar club after shifting its business model to working with technology companies such as Facebook Inc. and Google Inc. to

develop courses. It offers “nanodegrees” that require students to complete projects in technical subjects that are in high demand, such as machine learning. With its latest financing, a $105 million round in November that valued the company at $1 billion, Udacity plans to move back into nontech areas. Sebastian Thrun, a Stanford University professor, co-founded the company in 2011 to make higher education more affordable. Backers include Andreessen Horowitz, Google Ventures and German media conglomerate Bertelsmann SE.

DRAFTKINGS INC.

This company is one of two members of the billion-dollar club that enables people to play fantasy sports online on a daily basis (the other being FanDuel Inc.). Both companies have been in the news lately

because of disputes with U.S. regulators about whether their offerings violate gambling laws. The companies claim an exemption under federal law that deems fantasy sports a game of skill, not chance. The New York attorney general, for one, disagrees and is looking to prevent them from operating in the state. Boston-based DraftKings raised $300 million in July at a valuation of $1.2 billion. Its backers include Atlas Venture and a host of sports and media industry heavies, including Fox Networks Group and Major League Baseball.

BLABLACAR

Although Uber Technologies Inc. is the best-known ride service, the billion-dollar club has several such companies, including this Paris-based startup that raised a fresh round of

venture capital in September at a valuation of about $1.5 billion. New York-based Insight Venture Partners led the €180 million investment in the company, also known as Comuto SA. Accel and Index Ventures are also backers. Unlike Uber, which competes with taxi companies and has battled them in many places, including Paris, BlaBlaCar concentrates on the intercity market, matching riders with trips posted by drivers. It has expanded beyond Europe to countries such as Mexico, India and Turkey. It bought its biggest European competitor, Carpooling.com, in 2015. BlaBlaCar’s name comes from a feature of the service that enables customers to choose how chatty they want their car mates to be.

HELLOFRESH GMBH

Food delivery is one of the hottest consumer-Internet sectors, and Berlin-based HelloFresh is one of the leading players. The startup delivers meal kits weekly to subscribers’ homes.

These include recipes and measured amounts of the ingredients necessary to prepare each meal. The billion-dollar


16

Capital, Kohlberg Kravis Roberts & Co., RRE Ventures, Tiger Global Management and Peter Thiel, the co-founder of PayPal Holdings Inc. Avant looks to grab a market that big banks largely avoid. It concentrates on middle-class con-sumers of middling creditworthiness. The company uses its own money and outside capital from the likes of KKR to make loans. Such alternative lenders aim to shake up the banking industry, but competition is fierce and customer acquisition costs are high.

THUMBTACK INC.

Technology is changing how people find and hire tradespeople, and this is one of the companies leading the charge. It differs from recommendation sites such as Angie’s List and service providers

such as TaskRabbit in that within hours it introduces users to local professionals who then provide estimates for painting a house or other projects. The San Francisco startup raised a $125 million round in September that valued it at $1.3 billion. The deal, however, illustrated some of the strains these pricey valuations are placing on the market for venture capital. Thumbtack sought a $2 billion valuation but couldn’t get investors to bite after it was caught violating Google search rules, The Wall Street Journal reported. Thumbtack swiftly addressed its search misstep and Google lifted a penalty. Baillie Gifford, which is new to such deals, led the September round. Sequoia Capital and Tiger Global Management are also investors in the company, as is Google Capital, the growth-investment arm of Google Inc. n

DATTO INC.

This business software company aims to give small and midsize busi-nesses cheaper access to data backup and recovery services than they get from Amazon Web Services, a branch of Amazon.com

Inc. Datto uses cloud computing, a popular Internet-based technology that is supplanting on-premise data centers. The SMB market can be difficult to crack, however, and founder and Chief Executive Austin McChord took a cautious approach, bootstrapping the business on his credit card before taking venture capital in 2013, six years after its start. By that time, Datto was profitable, he said. General Catalyst led its Series A round, and in November, the Norwalk, Conn., company brought in Technology Crossover Ventures to lead a $75 million investment at a $1 billion valuation.

AVANT INC.

Venture investors loved online lenders in 2015, and one of their big-gest bets was on this Chicago company that courts borrowers with credit scores that aren’t top rate. General Atlantic contributed

most of a $325 million round in September that valued the company at $2 billion. Other Avant investors include August

u STEVE HARRICK, general partner, Institutional Venture Partners

What surprised you the most about 2015? I was surprised by the aggregate amount of investing activity and the persistent pursuit of growth without regard for risk. The capital that was typically reserved for companies when they go public had

been moving to the private markets for several years – and I believe that we witnessed the peak of this trend in 2015, at least for this cycle. Currently, we are seeing numerous signs of price sensitivity and a pullback from traditionally public investors in private growth rounds, but I thought this would have happened before now.

What do you think will be the biggest challenge the industry will face in 2016? Counseling companies to find the right balance between growth and sustainability. For several years, growth companies have been afforded the luxury of abundant capital without the scrutiny that typically comes with milestone-based financings or filing to go public. Accordingly, many of them

have not been forced to ask the difficult questions regarding their expense structures and operating models. In 2016, I believe that burn rate will become a central issue for many of these businesses, and only those that are metrics-driven will thrive.

What do you plan to focus on in the coming year? I continue to be excited by the opportunities for next-generation, enterprise-focused technology companies. The current pace of innovation is accelerating the obsolescence of the traditional vendors and offering startups a foothold in some really important markets. Virtually every business wants to take advantage of analytics at scale, run their networks more securely, support mobility and move applications to the cloud. Entrepreneurs who take a fresh approach to using software to solve problems for businesses will be rewarded with rapid growth and a high percentage of recurring revenue. The recurring revenue (via subscription) makes it easier for these companies to forecast their business more accurately and plan appropriate expense structures for the years to come. If they do this well, they will become the great public companies of the future. IVP’s mission is to help them succeed.

In Their Own Words

Venture Capital

17The 2016


u DAVID PAKMAN, partner, Venrock

What surprised you the most about 2015? First, 2015 was the year where tools that were originally developed for software teams really crossed over into adoption by general knowledge workers. Slack is the lead example here. I was also surprised by how fast artificial intelligence is

appearing in mainstream products. Suddenly, we are all used to talking to our devices, from Siri to Amazon Echo and Alexa, to Google Now or Cortana. AI-powered virtual assistants have spread far more quickly than I would have expected. And we will see many more years of innovation in this area.

What do you think will be the biggest challenge the venture indus-try will face in 2016? Liquidity, liquidity, liquidity. There have been far fewer IPOs in recent years as compared to the voluminous amount of financing activity. This industry cannot survive without liquidity events, and M&A cannot be the only way out. The often tepid public market reaction to tech IPOs was not a welcome development in 2015.

How should venture firms change the way they do business in 2016 and why? Ratcheting back on some of the bad behavior – no more high-priced rounds without thoughtful comps just to get into the deal. No more big employee liquidity events before the company has a scaled business model. And hopefully, much less obsession with the “are we in a bubble or not?” conversation. I also am hopeful there will be more comfort taking big swings on nonconsensus ideas.

u STEPHEN KRUPA, managing partner and chief executive, Psilos Group Managers

What surprised you the most about 2015? The Rock Health data from 2014 [showed there was] $4.3 billion in venture investment in digital health. The data in the first three quarters – $3.3 billion – would suggest we’re going to do at least

that much in 2015. To maintain that pace is not what I expected. It’s representative of a new financing environment for digital health, and it’s sustained itself now for two years.

What do you think will be the biggest challenge the health-care venture industry will face in 2016? The success distribution of deals in venture is not going to change: For one success, there’s often one failure. There’s a significant amount of competition across the board for investment and for customers for these companies. The challenge this industry faces is rationalizing all this investment and carefully [weighing] which companies have a chance to win.

Can the pace of digital health investments be sustained? Digital health is going to evolve like any emerging-technology market, where investment will go through cycles. It’s the first time that computing can step into health care and really make a difference. There’s going to be a lot of optimism and a lot of deals that will be tried, but the trend will be up the next 10 years because digital technologies are going to add a lot of value to the health-care system. It will take time for companies to get their products and value propositions right. I don’t think we can declare any one company [as] getting it right for the long term yet.

u JARED KESSELHEIM, partner, Bain Capital Ventures

What surprised you the most about 2015? The historic announcement made by the Centers for Medicare and Medicaid Services to tie 50% of payments to alternative payment models by 2018. This includes bundled

payments and accountable care organizations. Because Medicare is the single largest payer in the U.S., this announcement has the potential to dramatically accelerate the country’s shift from fee-for-service to value-based care. In addition, the strategy will create substantial opportunities for a new breed of startups, helping the U.S. deliver better care more efficiently and for less capital.

What do you think is the biggest challenge the venture industry will face in 2016? The number one challenge will be finding the talent to enable portfolio companies to scale. The struggle for qualified human capital, particularly in engineering, shows no signs of abating. To cope, both new and mature startups must strongly focus not only on attracting but also retaining talent. A secondary challenge will be heightened pressure on venture capitalists to be more disciplined investors amid robust venture fund raising and soaring valuations.

A record amount of venture funding went into health care in 2015. Can that pace be sustained? Absolutely, and for two reasons. First, health care is undergoing key structural changes in the use of electronic data, reimbursement procedures and the methodology of care delivery, creating a golden era of opportunity for disruptive startups that do these things better. Second, the venture industry is likely to raise as much or more as it did in 2015.

u KATHLEEN UTECHT, managing partner, Core Innovation Capital

What surprised you the most about 2015? The amount of really smart people tackling insignificant problems. This number should be zero and there are hundreds. We have serious challenges in this country and the world, and

there’s marginal utility to another me-too app or ad tech company. I am encouraged by what I see happening in financial services, health, education and space technology.

What do you think will be the biggest challenge the venture industry will face in 2016? Where there is challenge, there is opportunity. Many people are going to lose a lot of money. A lot of dumb money that was filling syndicates will fall out. Companies that don’t have businesses with solid unit economics, fundamentals or another weapon will disappear. Those that came into startups because it was the cool thing to do will happily go back to their corporate job, which we need. Bad investors will fall out. There will continue to be money for solid companies and for disciplined investors. Investors are investing over five years, not 12 months. There’s room to make a lot of money in 2016.

In Their Own Words

Venture Capital


18

H MATTHEW CAINE, Solic Capital Advisors

Mr. Caine has taken a leading role in building the firm’s relationships within the health-care sector, including among community hospitals and for-profit hospital providers. He worked at Robinson-Humphrey Co., then at corporate restructuring

and financial adviser Casas Benjamin & White LLC, which was acquired by Navigant Consulting Inc. He later joined a group of Navigant professionals that struck out in 2013 to form Solic.

Reputation: Solid, calm, makes an effort to keep all parties informed.

Key Deals: The merger of Rockford Health System with Mercy Health System. Mr. Caine helped bring about the deal after Rockford’s merger with another company fell through.

H BRENDAN CARROLL, Victory Park Capital

All three co-founders of Victory Park Capital – Mr. Carroll, Richard Levy and Matthew Ray – previously worked together at hedge fund Magnetar Capital, where they specialized in lending directly to midmarket companies.

Reputation: Mr. Carroll is articulate and self-disciplined, said Yorgo Koutsogiorgas, chief executive of Giordano’s, a Victory Park-backed pizza restaurant chain.

Rising StarsThis year’s list of rising stars features private equity executives investing in a range of industries, including the health-care, consumer and retail sectors, as well as telecommunications, technology and industrial companies. These profiles are excerpted from longer versions that appeared in our regular monthly feature in Private Equity Analyst.

Key Deals: Giordano’s, which Victory Park acquired in early 2012, and online lender Avant Inc., in which Victory Park is both an equity owner and lender.

H ANDY DAWSON, Advent International

Mr. Dawson built his reputation and relationships in the consumer and retail sector, working on many of Advent’s highest-profile deals ahead of his promotion to managing director in December 2014.

Reputation: Has technical and analytical skills that complement his ability to motivate and encourage people.

Key Deals: DFS Trading Ltd., which Advent floated on the London Stock Exchange in March 2015. He also worked on Advent’s acquisition of an $845 million stake in Canadian sportswear brand Lululemon Athletica Inc. in 2014.

H GLENN JACOBSON, Trilantic Capital Partners

The economics major didn’t have knowledge of energy investing or private equity prior to work-ing as an energy-focused investment banker at Lehman Brothers Holdings Inc. in 2003. Fast

forward 12 years, and Mr. Jacobson has been promoted to partner at Trilantic.

19The 2016


Key Deals: He oversaw Blackstone’s acquisition, alongside Hellman & Friedman, of a 70% stake in the German classified advertisement business Scout24 Holding GmbH. He also led the acquisition of corporate services provider Intertrust Group BV and its subsequent merger with European fiduciary manager ATC Group.

H LUCIAN SCHÖNEFELDER, Kohlberg Kravis Roberts & Co.

In 2014, Mr. Schönefelder, a London-based martial arts enthusiast specializing in Krav Maga – a form of self-defense developed for the Israeli military – was tasked with establishing

the European arm of KKR’s new growth equity business.

Reputation: Highly productive, hardworking and versatile, with an impressive deal count over the past two years.

Key Deals: The $55 million acquisition of a minority stake in IT software company Arago GmbH and the firm’s $35 million investment in Israeli Internet business ClickTale Ltd.

H CHELSEA STONER, Battery Ventures

The first female general partner at Battery Ventures, Ms. Stoner has developed a knack for helping portfolio companies grow, often by identifying potential add-on acquisitions that could carry the companies

into new markets, according to colleagues and portfolio company executives.

Reputation: “Her intellect and analytical rigor are off the charts,” said fellow Battery General Partner Neeraj Agrawal.

Key Deals: Battery’s investment in Data Innovations LLC as well as add-on acquisitions for the company. Also add-on deals for Brightree LLC.

H JAY WILKINS, Harvest Partners

The executive oversees Harvest’s health-care team with another senior managing partner, Ira Kleinman. After a six-year period in which Harvest didn’t make any health-care investments, the firm’s senior management

team decided U.S. health-care spending was too large to ignore as an investment thesis. Harvest hired Mr. Wilkins in 2010 and he became a member of the senior management team in January 2015.

Reputation: Straightforward, intense and passionate.

Key Deals: He helped Harvest land an investment in AxelaCare Holdings Inc. in April 2013. The company has doubled its earnings since then. n

Reputation: A wide skill-set, which translates into an ability to learn new skills quickly.

Key Deals: He conceived the idea of setting up an energy platform at Trilantic to buy stakes in nonoperated assets, or assets the owner doesn’t operate.

H CHRIS O’BRIEN, Wynnchurch Capital

Mr. O’Brien was promoted to partner at the firm this year. He began his career in consulting at Deloitte & Touche LLP and IPC Group, joining Wynnchurch in 2000 as an associate and the firm’s third employee. He rose steadily through

the ranks, rejoining in 2005 as a vice president after receiving his master of business administration degree.

Reputation: A laid-back team player.

Key Deals: The 2012 carveout of U.S. Pipe and Foundry Co. from Mueller Water Products Inc., in which he helped the company become independent and make five add-on acquisitions.

H SCARLETT OMAR-BROCA, Goldman Sachs Group Inc.

Ms. Omar-Broca is one of the few women in Goldman Sachs’s principal investments area unit, which houses its private equity and debt investments. She has worked across both

equity and debt investments for the team since joining Goldman in 2007. In 2014, Ms. Omar-Broca was handed responsibility for leading the bank’s private equity investments in France, having already been in charge of European telecommunications and media sector deals.

Reputation: A consistent top performer.

Key Deals: Played a key role in the sale of Get AS, Norway’s second-largest cable operator.

H JUERGEN PINKER, Blackstone Group

German-born Mr. Pinker was promoted to managing director in Blackstone’s London office in late 2013 and has been leading the firm’s investment strategies in Germany, as well as in European industrials, chemicals and logistics.

He started his career in the industrials sector covering German buyouts for Carlyle Group in 2001, relocating to London in 2007 to cover European industrials and chemicals. By 2009, Mr. Pinker had moved to distressed debt specialist Strategic Value Partners before joining Blackstone.

Reputation: He has “an exceptional ability to drive value-adding investment opportunities,” said Lionel Assant, head of European private equity at Blackstone.


20

APRIL14th: Doughty Hanson abandons efforts to raise a new fund.

15th: New Enterprise Associates announces it raised $3.15 billion for a pair of funds, the largest venture capital fundraising of the year.

21st: Lexington Partners says it collected $10.1 billion for its new fund, the largest secondary fund ever raised.

JULY21st: A group of U.S. states and cities ask the SEC to

require more disclosure by private equity firms.

30th: Private equity pioneer Jerome Kohlberg Jr. dies at age 90.

AUGUST3rd: The private equity arm of

Allianz SE leads a group of investors buying German highway services operator Autobahn Tank & Rast Holding GmbH. At the equivalent of $4.4 billion, it’s the biggest European deal of the year.

11th: Symantec Corp. agrees to sell its Veritas Software Corp. data-storage business to Carlyle Group and other investors for $8 billion in the largest deal of the year.

JANUARY21st: Kohlberg Kravis Roberts & Co. says it refunded

money to investors after regulators found it overcharged them.

22nd: Securities and Exchange Commission official Igor Rozenblit says the private equity industry has improved its transparency “markedly.”

FEBRUARY27th: Securities filings show Blackstone Group co-founder

and Chief Executive Stephen Schwarzman collected about $690 million in income for 2014.

MARCH15th: A consortium including

KKR strikes a deal for GE Capital’s Australian and New Zealand consumer lending arm, paying about $6.3 billion, making it the biggest deal in the Asia-Pacific region in 2015.

27th: A judge rules against Ellen Pao in her high-profile sex discrimination suit against Kleiner Perkins Caufield & Byers.

30th: SEC accuses Lynn Tilton and Patriarch Partners of fraud, which Ms. Tilton and the firm dispute.

2015The Year in Private Equity

THE UNDERSIGNED ACTED AS EXCLUSIVE STRATEGIC FUNDRAISING ADVISER

GILDE BUY-OUT FUND V€ 1.1 BILLION

NOV 2015

Raised by Gilde Buy Out Partners to make buyout investments in middle-market companies in the Benelux and DACH regions

THE UNDERSIGNED ACTED AS LEAD LEGAL COUNSEL

THE UNDERSIGNED ACTED AS DUTCH & LUXEMBOURG LEGAL COUNSEL

THE FOLLOWING APPEARS AS A MATTER OF RECORD ONLY


22

12th: Dell Inc., which is backed by Silver Lake, strikes a $67 billion deal for EMC Corp.

15th: KKR’s First Data Corp. lists on the New York Stock Exchange in the largest IPO of the year.

26th: Dow Jones VentureSource reports venture investing in China reached $31.47 billion for the first three quarters of the year, blowing away previous records.

30th: SEC approves rules allowing individual investors to participate in backing startups via crowdfunding.

NOVEMBER23rd: Warburg Pincus says it collected $12 billion from

outside investors for its 12th private equity fund.

25th: California Public Employees’ Retirement System for the first time releases its payment of private equity fees, which amounted to $3.4 billion over 17 years.

DECEMBERDec. 3: Uber Technologies Inc. raises a new round of

funding that could value the company as high as $64.6 billion.

Dec. 3: Thai Union Group PCL cancels its proposed $1.5 billion acquisition of Lion Capital-backed rival Bumble Bee Seafoods LLC following antitrust objections from the Justice Department.

Dec. 7: Terra Firma Capital Partners offers to put up capital to invest alongside secondary investors to secure a deal to purchase secondhand stakes in the firm’s 2007-vintage third fund.

SEPTEMBER8th: Guy Hands says he will share ownership of Terra

Firma Capital Partners with Justin King as part of a succession plan.

9th: Chinese ride-hailing company Didi Kuaidi Joint Co. closes a $3 billion funding round, the largest ever for a venture-backed startup in a single placement.

16th: KKR’s Samson Resources Corp. files for chapter 11 bankruptcy protection, a sign of the distress in the energy sector.

OCTOBER7th: Blackstone agrees to

pay $39 million to the SEC over fee practices.

23The 2016


u BRIAN GALLAGHER, partner, Twin Bridge Capital Partners

What surprised you the most about 2015? I was surprised by how many spinout groups there were coming out of the big bulge bracket firms. It’s an interesting trend. Many of these firms are being founded by experienced but still younger partners

who have made a lot of money, so it is not the classic entrepreneurial risk scenario. These groups are finding very receptive LPs because there is conviction that experienced partners from the largest, most successful firms are very likely to succeed with their own smaller fund. Like most LPs, we have invested in spinout groups and are always looking for the up and coming middle-market firms. It is an area that has to be pursued. I was also surprised by the number of average funds that were oversubscribed. Many groups that raised funds pretty easily did not seem to have elite returns or truly differentiated strategies.

What do you think will be the biggest challenge investors will face in 2016? Right now, the biggest challenge is getting allocations to the best funds. The best funds usually are pretty well known and people are all chasing the same ones. Trying to get the best terms is also a little challenging right now. If you’re going to take a dogmatic approach to terms, you’re going to miss some funds, because they just don’t need you.

What’s an issue that will provoke a tough conversation between LPs and GPs over the next year? The toughest conversations remain re-up decisions. Over the last several years, many LPs have come to realize that their private equity portfolios have too many funds and too many positions. So, the ongoing effort to trim names, while sometimes still selectively adding funds, has led to a lot of “no” decisions on re-ups. This trend is waning, but is still there. These are the toughest conversations because GPs and LPs are people and form relationships and delivering bad news, no matter how justified, is always difficult. As an active fund investor, we always try to remain close to funds where we elected not to re-up and will help them as much as possible. It is the right thing to do as circumstances always change in this industry. You want to make sure it is possible to invest with that sponsor again at some point down the road.

u PETER DENIOUS, head of global venture capital, Aberdeen Asset Management

What surprised you the most about 2015? I’ve been surprised by the persistence of late-stage valuations and the lack of late-stage fear. I am referring to the unicorns and the amount of capital that’s being directed at those companies. This year,

some private companies have gone public at or below private valuations, and this has more recently caused investors to rethink late-stage valuations. I would argue that is a healthy thing.

What do you foresee will be the biggest challenge in 2016? Given high valuations, some of the unicorns will be tested in 2016. The challenge I see on the horizon is one where private capital is getting more expensive, meaning businesses will have

to demonstrate they are viable in that kind of environment. There’s a Warren Buffet saying that “you only find out who is swimming naked when the tide goes out.” There’s a little bit of that phenomenon.

Are there any particular segments of the market in which you expect to see more opportunities and why? We are very early-stage focused, and we believe that we are in an incredibly exciting innovation cycle – the amount of innovation and the velocity of innovation. It really doesn’t cost a lot today to start a company and test and validate an idea without having to build scale right away, whereas 15 years ago, we didn’t have the technology we have today – Web services and the cloud – which dramatically reduces the cost of starting a company.

u KEVIN CAMPBELL, managing director, private markets group, DuPont Capital Management

What surprised you the most about 2015? There have not been many surprises in 2015. The private equity markets remained active. The industry continued to raise capital and maintained a steady pace of new investments and exits. If

anything, given the amount of capital raised over the past two to three years, we were pleasantly surprised to see PitchBook’s data that showed the median purchase price multiple for U.S. leveraged buyouts was 8.3 times earnings before interest, taxes, depreciation and amortization for the nine months ended Sept. 30. In 2014, this number was 10.7 times.

What do you think will be the biggest challenge the industry will face in 2016? Some private equity strategies have raised a significant amount of capital over the past 12 to 24 months. Capital raised for dedicated private equity secondary funds is an example. How this new capital is deployed and absorbed into the system will be a challenge in some areas of private equity.

What’s an issue that will provoke a tough conversation between LPs and GPs over the next year? Fee disclosure. With the Securities and Exchange Commission’s continued scrutiny of private equity firms and their treatment of various fees, LPs and GPs will likely be discussing how future fees will be allocated, how they will flow through the distribution waterfall and, most importantly, the disclosure of these fees.

In Their Own Words

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