THE EVOLUTION OF
LIQUIDITY
Shifting exit strategies for
private market investors
Page 14
2Q 2018
Private vs. public market investors:
Who's reaping the gains from the rise
of unicorns? Page 4

New horizons for PE Page 52

A SPOT of secondary activity Page 56
1
PitchBook Private Market PlayBook 2Q 2018
2
PitchBook Private Market PlayBook 2Q 2018
Perspectives
Private vs. public market investors: Who's reaping the gains
4
from the rise of unicorns?
Billionaires, buyouts and basketball: The Gores brothers
8
take on private equity
Barbarians left behind: How predictive analytics are
12
upgrading PE's playbook
A letter from the Editor
2
Contents
4
2
14
24
46
The Feature
The evolution of liquidity: Shifting exit strategies
14
for private market investors
As market dynamics change, investors within private equity
and venture capital are finding new and diverse ways
to exit their investments
Market Trends
US Venture Capital
26
US Private Equity
30
European Venture Capital
34
European Private Equity
38
Global M&A
42
Analyst Insights
Sources of impact capital
46
New horizons for PE
52
A SPOT of secondary activity
56
Additive dealmaking
58
Twin Brook Q&A: Hot middle market lending environment
20
comes with competition and new challenges
20
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2
PitchBook Private Market PlayBook 2Q 2018
Predictable outcomes through changing market cycles.
And a certainty of execution that our clients have come to
expect from a market leader. Through 20+ years of innovative
financing, our consistency is what makes us different.
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George Gaprindashvili
Editorial Director
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Vice President, Market

Development & Analysis
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Senior Analyst
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Associate Editor
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Senior Analyst
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Private Market PlayBook
A letter from
the Editor
Private equity and, to an extent, venture capital can be seen as relatively
stagnant industries, utilizing core investing strategies that haven’t changed
much in decades. But these industries have actually evolved dramatically
over the last few years, not just from the perspective of overall market
trends but from that of investors. Of course, by “investors” we’re referring
not only to the general partners (GPs) that make the deals but also to the
limited partners (LPs) that fund the GPs, and even the employees who
invest years of their life to help grow companies.
Considering PE and VC are highly illiquid asset classes, one of the biggest
challenges for fund managers is executing the right strategy to achieve
an exit and return capital to themselves and their investors, the LPs. And
for LPs, the biggest concern is getting a return on their investment in
a reasonable amount of time. The path to liquidity has shifted rather
significantly recently. Massive capital availability in the private markets has
contributed to lengthening company lifecycles and investment hold times,
and sky-high valuations and deal multiples have driven exit volume down,
to name a couple factors. Investors have weathered these market shifts
and have found new and diverse ways to achieve liquidity.
As companies stay private for longer, activity has grown in direct
secondary markets, which has fostered enhanced liquidity for investors
and employees in ways we haven’t seen before. This has also enabled
enhanced price discovery, which in turn has fueled innovation in listing
mechanisms, such as Spotify’s recent direct public listing. LP secondaries
have proliferated and GPs are buying these stakes at an unprecedented
clip, no longer seeing these transactions as a red flag. Moreover, there’s
been a considerable rise in GP stake deals, which provide liquidity to GPs
by selling minority positions in their underlying management companies.
The feature article in this issue of our magazine outlines the approach and
drivers of some of these shifting strategies, highlighting the evolution of
liquidity through the LP, GP and transactional perspectives. This issue’s
liquidity theme also comes through in the Perspectives section, where we
compare the value creation of public and private unicorns to see who’s
reaping the gains from their rise. Finally, in the Analyst Insights section we
dive deeper into Spotify’s innovative listing and its potential implications.
Cover illustration: Alessandro Gottardo
5
PitchBook Private Market PlayBook 2Q 2018
4
PitchBook Private Market PlayBook 2Q 2018
Perspectives
Private vs. public market investors:
Who's reaping the gains from the rise
of unicorns?
By Adley Bowden, Andy White
729.3
337.8
303.8
102.3
73.9
71.6
18.7
17.3
14.8
10.4
0
100
200
300
400
500
600
700
800
Facebook (FB)
Workday (WDAY)
Wayfair (W)
Twitter (TWTR)
FireEye (FEYE)
Zynga (ZNGA)
Groupon (GRPN)
GoPro (GPRO)
LendingClub (LC)
Leaf Group (LFGR)
Average monthly market cap index by time public
Source: PitchBook
*As of May 9, 2018
A slow drama is currently playing
out that’s radically altering the
financial market landscape: the
number of publicly listed companies
in the US is steadily shrinking.
This trend has raised alarm bells
across Wall Street and attracted
attention from policymakers and
capitalists alike. From our vantage
point as a data and information
provider on the private markets,
we believe this is evidence of an
ongoing transition into a new
capital markets paradigm that
includes a significantly more robust
institutional private market.
To better understand this change
we decided to look at a prominent
collision point of this paradigm
transition—IPOs and unicorns,
which are defined as privately
venture-funded companies with
valuations of $1 billion or more. That
unicorns exist, let alone flourish with
240 globally when this story went
to print, is just one of the facts we
submit in support of this shift. We’ll
save the full manifesto on the new
paradigm for a future edition of
this magazine and, until then, share
what we found as we pored over
our data on unicorns and IPOs.
Not your 1990s’ IPOs
For ease and consistency of
analysis, we focused on US-
headquartered, venture-backed
technology companies, and what
we found confirmed some of our
hypotheses, overturned others and
opened our eyes to new ideas.
One trend that has been inarguable
is venture-backed companies
staying private for much longer
than ever before. Since 2010,
companies have been going
public more than nine years after
founding, compared to around
five years in the mid to late ‘90s.
That increase has meant these
companies have gone public at
a very different stage in their
lifecycles—they’re much larger,
they’re more sophisticated, they
have a larger investor base and
they're often global in reach. It
also means that there are fewer of
them, as it’s a lot harder to stay in
business and/or independent for
nine years versus five.
There are several drivers behind the
trend of staying private longer, and
a few commonly cited causes are
the increased cap on investors from
the JOBS Act (from 500 to 2,000),
new deep-pocketed entrants into the
venture market (e.g., SoftBank Vision
Fund, PE firms, mutual funds) willing
to fund nine-figure investments
into these companies, and SOX
compliance expenses. Another
interesting theory put forth by Dr.
Jay Ritter (aka “Mr. IPO” from the
University of Florida’s department of
finance) is that private companies are
moving so fast that a better route for
them to reach their potential is to be
acquired by an incumbent with scale,
as opposed to building it themselves.
We also believe many founders are
intrigued by the relative freedom
of the private markets, versus the
scrutiny—and quarterly targets—
demanded by public markets. As
long as these factors stay in place, we
don’t foresee the current IPO timeline
changing.
Which investors see the value?
Some of the world’s most highly
valued public tech companies
entered the public markets with
quite modest valuations, at least
by today’s standards. Microsoft,
Amazon, Oracle and Cisco all
debuted with market caps south of
$1 billion. Of those, only Microsoft
topped $500 million. This translated
to relatively modest gains for their
private market investors, compared
to the massive value appreciation
they have all experienced post-IPO.
By comparison, the current crop of
unicorns is creating massive gains
for their private market investors.
When we first started compiling
data for this article, we had a
hypothesis that delayed IPOs meant
a greater portion of the financial
value that unicorns generate was
being captured by private market
investors instead of their public
market counterparts. That turns
out to be mostly the case but isn’t
exactly the full truth. The reason
being that the power law dynamic
of venture investing economics
carries through into the public
markets post-IPO.
For this analysis, we started with 10
tech unicorns in the US that went
public between 2009 and 2014
(for at least three years of trading
data). We based their market caps
at IPO to 100 and then charted
their average monthly market
caps up to May 9, 2018. We were
surprised to see that only four of
the 10 are currently valued above
what they were at their debut. This
means that, to date, six companies
reached their peak valuations within
the private markets and have only
declined in value for any public
market IPO investor.
If you had taken $1,000 and
invested $100 into each of these
companies at its IPO, you would
have $1,679.88 today. Not a
terrible return, but not great. The
interesting reality is that 58% of that
gain comes from just Facebook.
Then 22% from Workday, 18% from
Wayfair and 0.2% from Twitter.
If you had instead invested that
7
PitchBook Private Market PlayBook 2Q 2018
6
PitchBook Private Market PlayBook 2Q 2018
Private valuation appreciation by year
$31M
$43M
$71M
$153M
$169M
$172M
$201M
$375M
$378M
$456M
$471M
$492M
$500M
$551M
$560M
$585M
$597M
$695M
$707M
$761M
$839M
$893M
$1.0B
$1.1B
$1.3B
$1.3B
$1.3B
$1.4B
$1.4B
$1.6B
$1.6B
$1.9B
$2.7B
$2.8B
$3.4B
$3.6B
$3.9B
$7.8B
$9.8B
Oracle
Cisco Systems
Microsoft
Amazon.com
Box
Etsy
Tanium
GreenSky
Apple
Houzz
Charter Communications
Akamai Technologies
Outcome Health
Red Hat
Machine Zone
Slack Technologies
Wish
Instacart
SoFi
Dropbox
Moderna Therapeutics
Magic Leap
Lyft
VMware
Pinterest
Samumed
Stripe
Zenefits
Zynga
SpaceX
Palantir Technologies
Twitter
Snap
WeWork
Groupon
Airbnb
Alphabet
Uber
Facebook
Currently private
Currently public
Source: PitchBook
*As of May 9, 2018
-$5.2B
-$1.5B
-$587M
$543M
$544M
$650M
$1.4B
$2.1B
$3.4B
$4.1B
$5.8B
$7.8B
$23.0B
$24.3B
$25.6B
$37.0B
$51.8B
$72.4B
Snap
Groupon
Zynga
Box
Akamai Technologies
Etsy
Red Hat
Twitter
Charter Communications
VMware
Oracle
Cisco Systems
Microsoft
Apple
Dropbox
Amazon.com
Alphabet
Facebook
Market cap appreciation by year
Source: PitchBook
*As of May 9, 2018
$1,000 in just Facebook, it would
be worth $7,292 today. A sample
size of 10 isn’t exactly exhaustive
enough to draw solid conclusions
from, but it certainly raises some
questions about unicorn IPOs and
to whom the gains accrue.
How today’s unicorns stack up
To get a better sense of private
market value creation, we took
a group of private tech unicorns
in the US and divided their most
recent private valuation by the
number of years from founding to
latest financing. This shows us how
much value is being created per
year private, while accounting for
companies that have been private
longer, and thus have had more
time to accrue value.
We also selected a group of public
tech companies and used their
market caps on the day of IPO,
then dividing that by the time from
founding to IPO. Here are the results:
Uber is the only current unicorn
that comes close to Facebook’s
rate of value gain as a private
company, possibly boding well for
the ridehailing company’s planned
listing next year (or beyond).
The remainder of the group shows
an interesting trend: the companies
having accrued private value
the quickest tend to be younger
companies, while the legacy tech
titans accrued relatively little value
while private. Amazon, Microsoft,
Cisco and Oracle are barely visible
at the bottom of the chart, yet all
currently have market caps over
$150 billion. As a comparison, the
billions of dollars in value accruing
these days to private investors is
staggering. So, clearly the private
market investors are profiting
significantly more than public
investors, right?
Wrong, kind of. Again, a mixed
picture emerges where the top
companies only accelerate in
the public markets, accruing
significantly more value to the
public markets than the private
ones. However, there is a larger
number of companies that see
marginal or even value destruction
while in the public markets.
Clearly, Facebook is in a league
of its own, but we also see the
true explosion in value that the
legacy tech titans have enjoyed
since being public, dwarfing even
Facebook’s value gains while
private. We also see that some
of the more recent entrants into
the public arena have not fared
so well. To be sure, it’s still far too
early to make a definitive judgment
on many of these businesses, but
it does beg the question: Have
some companies exhausted their
potential value growth in the
private markets?
Our original hypothesis was that
the changing paradigm between
the public and private markets
means that private market investors
are capturing a significantly
larger chunk of venture-backed
companies value creation than in
the past, and potentially even more
than public market investors. It
turns out, like most things in life, it’s
complicated. For many companies,
that looks to be the case—causing
us to be suspect of the ultimate
performance of many of today’s
unicorns, should they go public.
There are a select handful of
unicorns, however, that will emerge
from the private markets with
the scale and momentum to only
accelerate their growth post-IPO
and bring with it majestic returns
to their public market investors, as
well.
9
PitchBook Private Market PlayBook 2Q 2018
8
PitchBook Private Market PlayBook 2Q 2018
Billionaires, buyouts and basketball:
The Gores brothers take on
private equity
By Kevin Dowd
Who’s the most interesting person
in private equity? That’s open
to debate. Who are the most
interesting brothers? To that
question, we have an answer.
Alec and Tom Gores are both the
founders of their own firms: Alec
leads The Gores Group, while Tom
is the CEO of Platinum Equity. The
pair are also the owners of two of
the largest homes in Los Angeles:
Alec has an 11-bedroom mansion on
2.2 acres in Beverly Hills, while Tom
bought a palatial estate in Holmby
Hills in 2016 as part of a reported
$100 million deal.
In his spare time, Tom’s activity of
choice is basketball. He’s been the
owner of the NBA’s Detroit Pistons
for the past seven years and has
become a major presence within
the franchise, often sitting courtside
at its shiny new arena in downtown
Detroit. Alec, meanwhile, is said to
prefer a different game. In 2012,
The Daily Beast reported he lost
$17.4 million to an Irish gambler in a
“serious backgammon match” that
spanned three days.
With a net worth of $2.1 billion, per
the latest Forbes estimate, he can
afford it. Forbes assigns Tom a net
worth of $3.9 billion, giving the
brothers a combined value of an
even $6 billion.
And did we mention the wire-
tapping? A dozen years ago, Alec
and Tom were at the center of a
federal investigation of a private
investigator in Hollywood, when
reports emerged that Alec had
hired the PI in 2000 to determine
whether his wife at the time was
having an affair with Tom. The
detective had proceeded to install
listening devices on the pair’s
phones, and Alec’s suspicions were
reportedly confirmed.
Neither Gores Group nor Platinum
responded to interview requests,
and neither brother is known for
being an open book with the media
when it comes to their private
equity activities. But the Alec and
Tom still manage to make their
share of headlines. And lately, so
have their firms.
* * *
The Goreses were born in Israel—
Alec in 1953 and Tom in 1964—
and moved as kids to Michigan.
(A middle brother, Sam, is the
chairman of Paradigm Talent
Agency. The Gores genes aren’t
effective only in private equity.)
Growing up in the Rust Belt was
a far cry from the brothers’ future
positions in Hollywood’s upper
crust. And it wasn’t long before
they began showing a desire to
transcend their humble beginnings.
Alec founded his first company in
1978, dealing computers out of their
parents’ basement, and sold the
business eight years later for some
$2 million. A career had begun. The
next year, in 1987, he founded The
Gores Group, making the move
from selling products to selling
companies.
His younger brother followed suit
eight years later, launching Platinum
Equity in 1995. These days, Platinum
is the larger firm—it boasts $13
billion in AUM compared to about
$2 billion for Gores Group—and
generally pursues larger deals.
But both firms are operationally
focused, seeking out investments
that allow in-house teams to use
their expertise to create value.
Tom Gores and Platinum completed
20 new investments last year, their
most since at least 2006, according
to PitchBook data. The firm
continued its buyout spree during
the early months of 2018, executing
11 transactions during 1Q alone.
That ranked in the global top 20 for
activity during 1Q and put Platinum
on pace to more than double last
year’s firm record. The biggest price
tag from those 2018 deals was the
takeover of Husky Injection Molding
Systems from Berkshire Partners
and OMERS Private Equity in an
SBO worth $3.85 billion.
To finance that increase in activity,
Platinum is ascending to new
fundraising heights. The firm
closed its fourth flagship fund on
a $6.5 billion hard cap last March,
representing a 73% step-up in size
from its $3.75 billion predecessor,
a rare increase for a firm that’s
already raising billions.
Things have been a bit slower on the
investment front at Gores Group.
Alec’s shop completed six new deals
last year, per PitchBook data, down
from a recent high of 14 in 2014.
But the firm has been active in
other ways. Reports emerged in
February that Gores Group planned
to forgo raising a new fund, opting
instead to gather cash and invest
on a deal-by-deal basis. Not long
before that, the firm was involved
in an unconventional deal that
departed from the normal paradigm
of private equity—and that played
a role in the revitalization of one of
America’s most iconic brands.
* * *
In 2012, Hostess Brands was on
its death bed. Weighed down by
debt from a buyout gone bad, the
company shut down its operations
entirely and auctioned off its assets.
The next year, though, an investor
group bought several of the
company’s major brands—including
Twinkies and Ding Dongs—for a
reported $410 million. And three
years after that, Gores Group lent
a hand for the next stage of the
rebirth.
Founder
Founded
HQ
Other offices
2017 investments*
1Q 2018 investments*
2017 exits*
Alec Gores
1987
Los Angeles
Boulder, CO
6
0
3
Tom Gores
1995
Los Angeles
Boston, Greenwich, CT,
New York,
London, Singapore
20
11
3
*Source: PitchBook
11
PitchBook Private Market PlayBook 2Q 2018
10
PitchBook Private Market PlayBook 2Q 2018
In November 2016, a special purpose
acquisition company sponsored by
Gores Group acquired Hostess and
took the company public through
a reverse merger. Coming with a
reported valuation of $2.3 billion, the
move allowed Hostess to reap the
benefits of being a public company
without having to navigate a tough
market for IPOs. And in the months
since, Hostess’ stock price has
trended generally up. Gores Group, in
any event, seemed pleased with the
deal: In January 2017, the company
took a second blank-check company
public in the hope of pursuing a
similar deal in the future.
Other instances of Gores Group’s
recent activity involve some
brotherly love. Back in 2002, a
feature in The Wall Street Journal
on Alec and Tom Gores highlighted
that the two brothers were at the
time bidding for the same business,
telecom company Global Crossing.
In the years since, though, their
firms have become less inclined to
compete with one another—and
more interested in teaming up.
In September 2010, Platinum and
Gores Group acquired Alliance
Entertainment, a wholesale
distributor of music, movies and
other media that worked with
retail giants like Barnes & Noble
and Amazon. The firms exited
the business three years later to
fellow wholesaler Super D after
conducting a pair of add-ons.
Tom and Alec next partnered on
a deal in June 2016, when they
recapitalized Data Blue, a supplier
of various IT services for enterprise
clients in North America. Once
again they pursued inorganic
growth, as Data Blue added on
cloud specialists LPS Integration
and Williams & Garcia last year.
* * *
Despite all those buyouts for
companies in the IT, media and
plastics industries, it’s possible that
Tom Gores and Platinum’s best
investment this decade involves
sneakers and hoops. In 2011, Tom
paid a reported $325 million to take
a 51% stake in the Detroit Pistons
franchise, with Platinum’s second
flagship fund buying the other 49%.
Four years later, Gores bought out
the stake owned by his firm to take
100% ownership.
At the time of the original 2011
purchase, an industry source
described it as a “shocking” bargain
to business publication Crain’s.
Several years later, it only looks
better: Forbes’ latest estimate pegs
the Pistons’ enterprise value at $1.1
billion.
And there are other, indirect
benefits. Like the fact that the
Platinum Equity logo now occupies
a prominent place on the Pistons’
home floor, the firm name written in
script on either side of midcourt—
the kind of prime brand-building
real estate most private equity firms
could only dream about.
It’s the sort of thing that would
make an older brother proud. Even,
perhaps, if that older brother is also
a part-time rival.
Year closed
Size
Predecessor size
Step-up%
Thoma Bravo Fund X1
2014
$3.65B
$1.25B
287%
Vista Equity Partners Fund IV
2012
$3.5B
$1.3B
269%
BDT Capital Partners II
2016
$6.2B
$3B
207%
Clearlake Capital Partners II
2018
$3.6B
$1.4B
157%
Marlin Equity Partners IV
2013
$1.6B
$600M
146%
Genstar Capital Partners VII
2017
$4B
$2.1B
90%
Clayton, Dubilier & Rice Fund X
2017
$10B
$6.4B
56%
Source: PitchBook
Platinum's got company: Other notable recent US buyout fund step-ups
60
PitchBook Private Market PlayBook 2Q 2018
Copyright © 2018 Deloitte Development LLC. All rights reserved.
Awaken your portfolio
Acceptable performance can make it seem like potential is being achieved. But look again.
Small adjustments in effi ciency, leadership development, or how capital is used can provide
a jolt. With services from audit to consulting, Deloitte can advise private equity investors on
such issues across their portfolios, and help open their eyes to what true potential might be.
See our services for private equity investors and portfolio companies
at deloitte.com/us/privateequity.

12
PitchBook Private Market PlayBook 2Q 2018
Barbarians left behind:
How predictive analytics
are upgrading PE's
playbook
By Alex Lykken
Imagine you’re a private equity
investor. You focus on the US
middle market, with a specialty in
food-related sectors.
Your investment team finds a
possible target, a trendy ice-cream
maker based in California. A big
hit with millennials, the brand
has a cult-like following in San
Francisco and Los Angeles. The
company has already tried to
expand, with varying results at
new retail locations. Restaurant
and grocery store sales, however,
were up double digits the past
three quarters but disguised by low
in-store revenues. It turned out that
demographics helped explained the
discrepancy; younger customers
were behind stagnating in-store
sales while older customers were
fueling grocery sales. To optimize
overall growth, the company
needed to account for both
trends, and reallocate its resources
accordingly.
Armed with this insight into
consumer behavior, your firm can
bid competitively even as others
question your team’s valuation.
What does this have to do with
technology? Not much on the
surface—tech poses no immediate
threat to the ice cream industry.
But technology is playing an
increasingly important role when it
comes to evaluating a company’s
growth potential, and it is quickly
changing the nature of private
equity due diligence.
This is particularly true as it pertains
to the use of predictive analytics,
which, in PE context, commonly
boils down to analyzing how
specific clients or users interact
with a target company’s products
or services.
Combining high doses of leverage
with cost-cuts is no longer a
reliable playbook, and focusing
on efficiency measures in a sector
like retail, for example, can be like
catching a falling knife.
That’s where harnessing data and
technology comes in.
“Where we’ve seen a lot of
improvement with private equity-
backed companies comes back
to reporting capabilities,” says
Chris Stafford, senior manager in
West Monroe Partners’ Mergers &
Acquisitions practice.
Private equity owners are expecting
to see value coming from those
efforts quickly, he added, in as little
as six months. More broadly, PE
increasingly emphasizes knowledge
sharing among portfolio company
leaders with regard to technology
capabilities.
“We’ve seen private equity mature
on the operating side,” Stafford
said. “CIOs are becoming more
aware of what their portfolios
need within a certain market.
Investors and advisors are hosting
more conferences where they can
share those ideas. And beyond
knowledge sharing, we’re seeing
more centralized services being
developed within PE firms. In
addition, investors and CIOs
are hiring specialists to run
portfolio diagnostics and provide
recommendations to their CTOs to
identify any gaps or opportunities
to drive revenue growth.”
In some cases, leveraging
technology has allowed PE
sponsors to better identify add-on
targets earlier in the process, and
many add-ons today are being
negotiated ahead of the platform
acquisition itself.
In other cases, it’s more about
getting answers to more insightful
questions, like which customers
buy more or more often, and which
customers are less active? Which
clients or client-types come with
higher margins, and which are
costlier to serve? Perhaps most
important, how are company
resources being allocated to those
specific products, services or
clients?
This line of thinking isn’t quite
the same as identifying a factory
to close or a business line to
shut down. Those were blunt
instruments that worked effectively
in the past, when those situations
were more common. But PE
has been active for almost 40
years, and after such a long and
profitable run, the emphasis on the
turnaround play is losing ground to
expansion efforts.
Opportunities today are less
obvious in a crowded market and
more likely to hinge on boosting
specific revenues or margins by
as little as 10%. That might not
seem like much, but knowing that
certain resources can be allocated
differently can make the difference
between bidding confidently for a
target versus passing altogether.
Even as buyout multiples won’t
always be this high and auctions
this competitive, predictive
analytics are likely here to stay.
That would be a good thing for
an industry looking to upgrade its
image while uncovering even more
opportunities in the years ahead.
By Garrett James Black
14
PitchBook Private Market PlayBook 2Q 2018
15
PitchBook Private Market PlayBook 2Q 2018
The evolution
of liquidity
Shifting exit strategies for
private market investors
continued >
Liquidity is the lifeblood of financial markets. For players in private
markets, it is perhaps even more so, and yet is much more complicated
to achieve. Illiquidity is a hallmark of alternative investments. But it is not
just the relative infrequency of liquidity for private funds that compli-
cates matters; rather, even the method of achieving liquidity can be
difficult, as there have typically been only so many options for managers
to exit holdings. As a result, predicting liquidity trends is complicated,
especially considering the protracted lifecycles of private funds.
Over the past several years, however, a handful of key trends have
emerged amid the general liquidity landscape that suggest private markets
players of all types are opening their minds to new ways of realizing value
from their investments.
17
PitchBook Private Market PlayBook 2Q 2018
16
PitchBook Private Market PlayBook 2Q 2018
These key shifts represent clear
signposts of how the current
liquidity market is gradually
evolving. Not all types of liquidity
are equal; the incentives for and
routes to liquidity differ for each
type of investor. Therefore, taking
a snapshot of the current state
of liquidity evolution requires
considering those signposts from
three perspectives: the LP’s, the
GP’s, and the company’s.
A quick primer
In the wake of the financial crisis,
it took fund managers some time,
but eventually they embarked upon
a period of massive distributions
to their investors, finally realizing
the largesse dispensed in the pre-
crisis buyout boom era—private
equity funds alone distributed
well over $300 billion per year
between 2013 and 2016. The bull
market in financial assets that got
well underway in the early 2010s
contributed to a spree of M&A
as well as initial public offerings
(IPOs). But every bull market
spawns its own particular issues,
and this latest was no different. PE
funds sold off their most-valued
assets to corporate acquirers
hungry for acquisitive growth;
venture investors took their hottest
software platforms public; and both
kept on investing from larger and
larger funds, per their mandates,
aided by their recent success.
Assets became pricier. Competition
stiffened. Liquidity became an even
more important consideration,
relatively speaking; a recent survey
of LPs by 17Capital revealed 60% of
LPs are dissatisfied with the pace of
liquidity from 2007-2009 vintage
funds, for example.
Such a sentiment is highly
reflective of the impact of cyclical
factors, of which two categories
primarily affect private markets:
macroeconomic and structural,
with secular also often playing a
significant role. The macroeconomic
is straightforward: Since 2016,
there has been an oft-challenged
narrative of global synchronous
growth that, depending on which
factors are considered, could be
weakening or persisting. Recalling
2007 and 2008, many investors
are fearful of missing out on
potentially unprecedented rallies in
financial markets that could mark
their assets even higher, as well as
potential collapses if they hold on
for too long. Although 2017 marked
the fourth consecutive year of
at least $2.9 trillion in M&A value
across North America and Europe,
volume has ceased to increase,
either trending downward or at
best persisting.
Enter the structural factors: Assets
in the private market are inherently
illiquid. The trick for investors
concerned about liquidity is either
creating or finding a market to clear
their assets with the participation
of all stakeholders. PE and VC
managers have traditionally exited
their holdings via three main routes:
M&A or trade sales, IPOs and
buyouts by financial sponsors. The
key differing features of each to
emphasize from the perspective of
private markets investors are speed,
scale and time.
IPOs have trended downward in
volume among both PE and VC
firms, likely due to two secular
factors: the gradual disappearance
of small-cap companies on
public indices as markets have
inexorably marched upward and
mega-companies have grown
via consolidation; and better
alternatives for additional funding
or liquidity events in private
markets in general.
But to reiterate, not all liquidity
events are equal. Different investors
hold different perspectives, and
each major category of player in
the private markets has tinkered
with their approach to liquidity.
1. The limited partner perspective:
Secondary markets as portfolio
management
A stake in a fund is a claim to the
fund’s assets. Liquidity of any
stake is simply a matter of finding
a market and settling the sale to
the satisfaction of all stakeholders.
Consequently, it is natural that
stakes in PE and VC funds
themselves would eventually enter
their own marketplace and become
bought or sold by LPs. Whatever the
motivation, the global secondaries
market is growing—the first three
quarters of 2017 alone saw over $34
billion raised in such strategies. More
recently, New Enterprise Associates
made headlines for its plan to sell
roughly $1 billion worth of stakes
in around 20 startups to a new
vehicle, which would then manage
those ongoing investments. That
last attribute is a departure from the
norm but only further emphasizes
how such secondary vehicles
and markets have become more
common. Looking forward, such
arrangements are likely to become
more popular among a coterie of
firms, as only certain large firms like
NEA will possess both the means
and the incentives.
It is best to view this increased
usage of secondaries from a
portfolio management perspective.
For example, it’s difficult enough
to craft a compelling investment
thesis and find the right portfolio
companies, so trying to align
incentives by assembling exposure
to certain GPs’ portfolios can be
much more complicated. However,
with the burgeoning popularity of
the secondaries market, LPs now
have an additional tool with which
to manage exposure to certain
funds, particularly within VC—
hence the NEA plan, which would
provide liquidity for LPs clamoring
for returns while offering stakes
to those who desire exposure in
more mature tech companies. It
should be noted that different fund
types currently trade at different
discounts to NAV, with buyout
vehicles trading flat and VC pools
at a discount, down to 80 cents
on the dollar in some cases. Such
pricing is tied more to the relative
risk profiles of funds, hence the
disparity in discounts. Those
ranges of discounts also evidence
the maturation of the market;
according to recent PitchBook
research, secondary fund stakes
typically sold at a 20% discount just
a few years ago, when their sale
was more stigmatized as a last-
ditch effort for distressed sellers. As
the market has matured and new
buyers have emerged, pricing has
risen significantly.
This is perhaps the most
momentous of the signposts of
evolution. LP liquidity concerns
have ebbed and flowed, as they
always will, but rendering liquidity
options more efficient by using
secondary markets will not only aid
in price discovery but also, again,
overall portfolio management, from
an LP’s perspective. That could
make private funds even more
alluring to LPs, helping mute typical
concerns around illiquidity and
access. In short, this trend retains
some of the most substantial,
potential implications for players in
private markets on the whole.
2. The general partner/owner
perspective: Hustle & cash flow
The GP perspective can be viewed
as analogous to that of a company
founder or owners of significant
equity, in some ways. Through
this lens, which emphasizes direct
ownership, there are two primary
trends of innovation: the sale of GP
stakes in management companies
and the maturation of secondary
transactions, as well as secondary
sales on private exchanges.
While GPs are typically assessed
through the funds they manage,
there is also an underlying
0
5
10
15
20
25
30
35
40
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Capital raised ($M)
Fund count
*
Global LP secondary fundraising
Source: PitchBook
*As of October 10, 2017
19
PitchBook Private Market PlayBook 2Q 2018
18
PitchBook Private Market PlayBook 2Q 2018
management company that
oversees the investment funds. In
its simplest iteration, the sale of
minority stakes generates cash to
redeem shares in the management
company held by founders,
many of whom are at or nearing
retirement age; such cash can be
used in several additional ways,
including launching new strategies
and helping junior professionals
fulfill their obligation to commit
capital alongside LPs to funds they
manage.
This strategy remains fairly
niche, with only the largest,
most experienced firms typically
embracing the formation of new
GP stake-targeted vehicles, such
as Goldman Sachs. But, however
niche it may appear for now, it does
represent yet another incarnation of
liquidity options for direct owners
of equity in firms themselves. And
it is growing in popularity, with
the roster of firms that sold stakes
expanding to include TPG, Silver
Lake, Vista Equity Partners and
more. However, it’s not just owners
of shares in funds that are desirous
of additional liquidity options these
days; direct equity owners in some
of the most prominent private
companies that have emerged in
the past decade are increasingly in
need of alternative liquidity options
as well.
Exemplified most notoriously
by the unicorn phenomenon,
unprecedented capital inflows
into mature companies that have
elected to grow privately have led
to early employees and investors
alike requiring liquidity prior
to later investors. Accordingly,
private exchanges such as those
operated by SharesPost or Nasdaq
Private Market have evolved to
accommodate those who wish to
buy or sell exclusive interests to
meet their individual needs. Growth
has been significant, with Nasdaq
Private Market reporting $3.2 billion
in private secondary transactions in
2017, a 3x increase from 2016.
Secondary sales can achieve
a similar outcome while also
qualifying as an additional
fundraising round. Uber’s recent
secondary sale is perhaps the best
example of such a deal, with some
early employees and investors
being able to redeem part of their
ownership as SoftBank plied Uber
with additional capital.
3. The transactional perspective:
Secondhand news
Secondary buyouts, buyouts of VC
portfolio companies
Secondary buyouts (SBOs) have
become more popular recently,
accounting for half of all PE-
backed exits in the US in 2017—the
highest level we’ve seen. There
are a variety of factors at play
here. Record levels of dry powder
(unspent capital) have left PE
funds with massive sums of capital
to deploy. Paired with favorable
lending terms, financial sponsors
have been able to bid more
aggressively to win deals against
strategic buyers. PE funds are also
facing a particularly competitive
dealmaking environment, where
quality targets are fewer and
deal multiples are sky-high.
Pressured by LPs to invest their
high levels of capital and facing
difficulties in sourcing original,
proprietary targets, sponsors
have increasingly turned to SBOs.
Sellers, on the other hand—who
have traditionally preferred selling
to strategic buyers—have been
happy to offload their holdings at
accommodative prices, especially
at the prompting of aging inventory
needing to be off the books, so to
speak.
But these deals aren’t last-ditch
efforts. Large funds often make a
case for purchasing the portfolio
companies of smaller firms
simply because they can provide
better scale than the current
owners. On the other hand,
large generalist firms may sell to
smaller niche firms that have the
sector-dedicated resources and
growth strategies that can take
the portfolio company to the next
level. While these transactions
can cause potential conflict for
LPs who may be exposed to both
the selling and buying fund, as
long as buyers can continue to
deploy effective value creation
strategies and sellers can secure
the prices and multiples they are
content with, all parties can be
satisfied.
It’s not just buyout GPs that
can exit via a sale to a fellow
financial sponsor, but also VC fund
managers. Much has changed on
this front as well recently. 2017 saw
a record 20% of exits via buyout
relative to all other major types of
VC sales, nearly double the levels of
the several years prior. This further
illustrates how exit strategies are
evolving. Much like PE firms turning
increasingly to their competitors
to sell, VC firms who have seen
the IPO option narrow have found
diverse exit routes as well.
Alternative routes to public markets:
Spotify & SPACs
Due to lengthening exit timelines,
investors are finding more creative
ways to achieve liquidity through
the public markets. Spotify’s direct
listing and the increasing popularity
of special purpose acquisition
companies (SPACs) represent
prime examples of this evolution.
Rather than undergo a traditional
IPO process, Spotify elected to
simply list on public exchanges.
Such a novel approach led to some
head-scratching, as some feared
excessive volatility in share price
could occur without underwriting
support or having a prebuilt book
of demand. The twist is that such a
change from typical price discovery
processes and potential volatility
was worth it to Spotify, as all it
really sought was liquidity and
adherence to its founders’ principles
of transparency and equality.
Mitigating swings in share prices
by ramping up private secondary
markets trading prior to the listing,
Spotify enjoyed an ostensibly
cheaper way of going public.
But such a novel form of price
discovery and embrace of potential
volatility is not necessarily to the
liking of all, especially as Spotify
had to put in a lot of time and work
to pull it off, potentially offsetting
IPO commission expenses with
internal efforts. More critically, not
every company enjoys Spotify’s
status as the sole significant
independent contender in the
cutthroat music streaming world,
as monoliths Amazon, Google
and Apple loom in the offing. So
while Spotify’s direct listing may
not change the traditional IPO
process dramatically right away, it
does illustrate how other unicorns
can find creative avenues to go
public, with modifications to typical
processes that can suit each to their
preferences.
By design, SPACs are intended
to purchase one company for
one purpose—offer exposure
to that particular business for
investors in the SPAC. Of course
the acquisition of a controlling
stake in a private company by a
SPAC is also a method to take the
company public. Investors want
access to companies like Airbnb
and Pinterest, which traditionally
would have likely been public
by now but have been able to
scale with massive amounts of
capital in the private markets.
From a transactional perspective
on liquidity, the salient point is
reaching an agreement that can
satisfy all participants. Accordingly,
more bespoke SPACs targeting
specific unicorns are likely to ensue.
4. Signposts in a shifting land
Confronted with a challenging,
competitive marketplace, as of
late, GPs, LPs and even employees
have increasingly employed
creative methods to get what
they want—their money back and
then some. Clear signs of change
have emerged from the shifting
landscape, hinting at which seller
preferences are taking priority and
the top choices of owners of equity
in not only private companies but
also investment firms themselves.
The upshot is that, promisingly
enough, all the ways and means
enumerated here aren’t likely to
be the end-all, be-all of how fund
managers get capital back to their
investors and employees finally
cash out of the companies they’ve
spent years building. Rather, they
represent a current snapshot of
how the entirety of private markets
players are opening their minds
to new ways of buying and selling
pieces of value in multiple markets,
trying to find the right matches
for the right assets. The signposts
of this snapshot are clear, and yet,
it is always worth bearing in mind
that the evolution of liquidity in
private markets all around them will
continue, slowly and gradually.
21
PitchBook Private Market PlayBook 2Q 2018
20
PitchBook Private Market PlayBook 2Q 2018
2018 has set the economy on a
new course. Recent legislative
changes lowered corporate taxes;
tensions among trade partners
have stirred into the possibility
of a trade war; and interest rates
have risen. These shifts present
challenges throughout the financial
Hot middle market lending environment
comes with competition and new
challenges
impact of tax change. Since then,
much of the activity has been
driven by repricings, refinancings,
and add-on acquisitions. We
expect strong M&A activity
through the remainder of the year.
Senior stretch and unitranche are
the favored structures utilized
by sponsors given the ease of
execution for the original platform
and for future acquisitions to
support the growth strategy. First-
lien/second lien structures provide
the most leverage for transactions
with higher purchase multiples.
However, given the rise in LIBOR
rates, fixed-rate mezzanine debt is
becoming more cost competitive
relative to second lien.
Before we get granular, what’s
your opinion of where we are at in
the credit cycle and how that will
impact middle market lending?
What about broader economic
trends?
2018 has been a strong year to
date, and we expect positive
performance through the course
of the year. It seems everyone is
on pins and needles waiting for a
downturn based on where we are
in the current credit cycle along
with noise around inflation, interest
rates, rising trade tariffs, and a
potential trade war. You cannot
mitigate an economic correction,
however, you can back the right
company, management team and
sponsor, particularly those that
have experience working through
(and emerging from) an economic
downturn. The senior professionals
at Twin Brook have been focused
on the middle market for the last
20+ years and have been through
multiple cycles. We are not afraid
of another downturn because
of that experience. Unlike many
new entrant middle market firms,
we have invested in staff and
resources that follow a “credit first”
mentality in both a down market
as well as a bull market. We are
committed to a long-term strategy.
We strongly believe that the lower
end of the market is in a much
better position as it relates to the
basic protections that exist in our
credit agreements, which makes
us far more resilient in the face of a
market correction.
Given the level of competition
in the current environment,
particularly with newer entrants
into private debt, what do you
think will help firms achieve
differentiation?
The reality is that most of the new
money we see coming into the
middle market is directed to the
upper end of the market. Why?
This is where more syndicated
transactions occur that require
participants who are happy to
Jessica joined Twin Brook Capital Partners in 2015 and is a Director on the Capital Markets team.
She is responsible for structuring, underwriting, documenting and syndicating leveraged finance
transactions for middle market private equity sponsors.
Previously, Jessica was in the underwriting group at Twin Brook. Prior to joining the firm, Jessica held
various roles at BMO Harris Bank, Antares Capital and GE Capital. Jessica earned a B.S. in finance and
accounting from the University of Wisconsin-Madison and received an M.B.A. in finance and economics
from the University of Chicago Booth School of Business.
play that role. New entrants are
not staffed for a direct origination
model, nor do they have the depth
of sponsor relationships or years
of experience in middle market
cultivating those relationships. If
you review the top 15 lenders in
the middle market league tables,
you will notice that all of those
lenders have been in existence for
more than 10 years. There are no
new entrants that are taking share
in the middle market. To that end,
we believe what matters most
are reputation, relationships, and
the strength of the originations
platform. As we continue to grow
our portfolio and increase the
number of relationships, being the
incumbent is also meaningful.
Across the Twin Brook platform
to date, we are the Administrative
Agent/Co-lead Arranger in 89% of
our transactions. The incumbent
lender has the advantage of
knowledge of the business,
familiarity with the management
team, and speed of execution. In
summary, Twin Brook’s sponsor
relationships and experience in the
lower middle market, our role as
an administrative agent, and our
desire to stay focused on the same
strategy that we have pursued for
15+ years differentiates us from a
competitive perspective.
You cannot mitigate
an economic
correction; however,
you can back the
right company
We strongly believe
that the lower end
of the market is
a much better
position
What matters
most is reputation,
relationships and
the strength of
the originations
platform.
Jessica Nels
Director
Twin Brook Capital Partners
world, including the debt market,
where lenders will have to adapt
in order to succeed. Jessica Nels
provides thoughts on how recent
changes will affect the overall
lending marketing, with a special
focus on the middle market.
Thus far in 2018, what is your take
on lending activity within the US
middle market?
2018 has been a busy year. The
beginning of the year was marked
by deal flow carried over from the
fourth quarter of 2017, particularly
as the community questioned the
A Q&A with Twin Brook Capital Partners
23
PitchBook Private Market PlayBook 2Q 2018
Within the middle market, are you
seeing increased stratification
across structures, terms and the
like according to each segment,
i.e. lower, core and upper middle
market segments? If not, what are
your conclusions?
We see the middle market divided
up into three categories based
on EBITDA size. First, the upper
middle market we define as
borrowers with greater than $40
million of EBITDA. This segment of
the market is effectively a broadly
syndicated loan (BSL) market, i.e.
cov-lite transactions, very loose
structures (negative covenants,
EBITDA definitions, etc.), arrangers
that negotiate credit agreements
but hold less than 10% of the paper,
broadly distributed and, in this
market, oversubscribed resulting
in yield compression. Second, the
core middle market, is generally
comprised of issuers with EBITDA
between $25 million and $40
million. This segment of the market
tends to have a single covenant
but generally at large (35%-40%)
cushions with little to no step-
downs (commonly referred to as
covenant-wide). The core middle
market tends to derive its credit
agreements from the BSL market,
so the overall protections are weak.
Finally, the lower middle market
(where Twin Brook focuses) is
dramatically different in terms
of overall structure and financial
covenants (multiple covenants with
lower cushions and step-downs).
The credit agreements are much
tighter than the aforementioned
segments of the market and
arrangers typically hold 50%-100%
of the transaction. The yield on
these deals reflects the size of the
issuers but more importantly there
tends not to be the bake-off or
auction-type process that dictates
About Twin Brook Capital Partners
Twin Brook Capital Partners is a finance company focused on providing cash-
flow based financing solutions for the middle market private equity community.
The firm is managed by highly experienced, dedicated professionals who have
successfully worked together throughout their careers at leading middle market lending institutions. Twin Brook’s
flexible product suite allows for tailored financing solutions for leveraged buyouts, recapitalizations, add-on
acquisitions, growth capital and other situations.
Twin Brook focuses on loans to private equity-owned companies with EBITDA between $3 million and $50 million,
with an emphasis on companies with $25 million of EBITDA and below. Since inception in the fourth quarter of
2014, Twin Brook has acted as Lead/Co-Lead Arranger on 89% of deals funded (2015-2018), acquired $5.8 billion
of committed capital, and closed 195 transactions.
For more information, visit twincp.com
the pricing in the core and upper
middle market.
What concerns you the most when
you consider what could impact
your firm’s prospects in the rest
of 2018?
The primary challenge that any
lending firm has in a “hot” credit
environment is that there are far
more sub-optimal transactions that
come to market. When (i) leverage
markets are awash with money, (ii)
PE firms are eager to deploy capital,
and (iii) purchase price multiples
are at an all-time high, these weaker
borrowers stand a much better
chance of trading and/or getting
financed. The outcome of this is
that we need to say “no” more often
to our sponsors or possibly deploy
resources triaging deals that we
would not normally spend time
on. Twin Brook maintains its credit
discipline and prides itself on being
highly selective, generally booking
less than 4% of the transactions it
sees in any given year. The flood
of weaker deals can put pressure
on resources and underwriting
bandwidth.
See how the PitchBook Platform can
help VCs invest smarter.
demo@pitchbook.com
We do
pre-money valuations,
cap tables,
series terms,
custom search,
growth metrics.
You invest
in the next big thing.
Twin Brook
maintains its
credit discipline
and prides itself
on being highly
selective
25
PitchBook Private Market PlayBook 2Q 2018
24
PitchBook Private Market PlayBook 2Q 2018
Drawn from our flagship industry reports covering private equity,
venture capital and M&A, this section of the PlayBook contains
analysis and datasets summarizing the primary trends shaping
each market.
US Venture Capital
26
US Private Equity
30
European Venture Capital
34
European Private Equity
38
Global M&A
42
Market Trends
27
PitchBook Private Market PlayBook 2Q 2018
26
PitchBook Private Market PlayBook 2Q 2018
With over $28 billion invested into
the US venture ecosystem, 2018 is
pacing to extend the trends we’ve
grown accustomed to over the last
few years of total capital invested
figures soaring to unprecedented
levels. While the top-line count of
completed financings declined
significantly on a quarterly basis
in 1Q, we maintain our conviction
around the health of investment
activity because of the stability of
completed financings at both the
early and late stage. The primary
driver of the decline in round
counts can be attributed to the
angel market, which has continued
to see the pace of investment
decline rapidly since mid-2015.
However, we see the proliferation
of pre-seed investment activity
as a key driver in the market that
can be rather elusive from a data
perspective as many of these deals
happen under the radar. Thus,
activity across some of the earliest
stages of investment activity may
be understated, and we think
entrepreneurs are finding novel
avenues to finance new ideas and
business ventures.
Late-stage activity remains poised
for another notable company
fundraising year. Unicorn activity
represented over 21% of all
venture capital invested in the
US in 2017, with more than $17.5
billion deployed into companies
valued over $1 billion during the
period. Through the first quarter
of 2018, activity in that subset
of the market remains on track
to surpass 2017’s record total.
Investors have piled roughly $5
billion in net new** capital into such
companies, accounting for over 18%
of all capital invested in the US last
quarter.
While late-stage investments in
unicorn companies have become
more prominent given the growing
age of privately held businesses,
round sizes of $1 billion+ certainly
have not. That said, 1Q alone saw
three such transactions close, with
both Lyft and Faraday Future
holding final closes on rounds
launched in 4Q at $1.7 billion and
$1.5 billion, respectively, and Uber
closing a $1.25 billion round. For
comparison, 2017 in its entirety saw
just three completed financings of
$1 billion or more. Moving forward,
we think rounds of this magnitude
will still remain outliers. Moreover,
as behemoths such as Uber tap
investors for massive rounds, one
item to note is that not all of that
money is primary capital being
used to fund operations. Rather, an
increased proportion of some of
these rounds represents secondary
capital where certain investors and
employees are finding avenues to
generate liquidity as hold periods
have lengthened and exit processes
have been delayed.
1Q marks fourth consecutive quarter with more than $20B invested
US VC activity
PitchBook-NVCA Venture Monitor
0
500
1,000
1,500
2,000
2,500
3,000
$0
$5
$10
$15
$20
$25
$30
1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017 2018
Deal value ($B)
# of deals closed
Angel/seed
Early VC
Late VC
Last, private equity continues
to play an increasing role in the
venture market. $8.5 billion worth
of transactions last quarter involved
PE investors, the highest quarterly
figure we’ve tracked since mid-2012,
despite these firms participating
in just 8% of VC financings. On
the exit front, the proportion of
completed VC-backed sales to PE
declined relative to 2017, during
which the highest percentage of PE
buyout exits were completed we’ve
ever tracked. Given we are still
early in the year, however, we fully
expect to see increased activity by
PE groups in the venture markets
similar to what we saw in 2017 for
the following reasons.
Through the first quarter of the year,
15% of all completed PE transactions
were done in the software space,
which is up relative to the 12% we’ve
seen historically. Further, the PE
transaction ecosystem continues
to support such deals, particularly
as companies have been able to
establish recurring revenue, cashflow
positive and cash-efficient software
businesses that fit nicely with the
debt structures PE firms typically
utilize to complete leveraged
buyouts. As roughly 40% of all
venture transactions consistently
occur in the software space, the
venture markets will continue to
provide a fertile sourcing ground
for PE firms looking to locate quality
software targets.
$1.0
$1.4
$6.0
$9.2
$11.1
$15.0
$0
$2
$4
$6
$8
$10
$12
$14
$16
2008 2009 2010 2011
2012
2013
2014 2015
2016 2017 2018*
Angel/seed
Early VC
Late VC
Early-stage rounds grow in size by roughly 50%
Median deals size ($M) by stage
$11.0$6.8$6.6$12.2$9.1$9.9$19.3$26.6$25.7$23.1$8.5663
451
424
515
556
619
749
764
652
642
139
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Deal value ($B)
# of deals closed
$6.6$2.4$2.6$13.6$17.0$18.6$17.5$7.2**7
7
9
28
24
23
71
81
55
75
17
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Deal value ($B)
# of deals closed
Strong start to year for unicorns
US unicorn activity
PE continues to be highly involved
US VC activity with PE participation
PitchBook-NVCA Venture Monitor
*As of March 31, 2018
PitchBook-NVCA Venture Monitor
*As of March 31, 2018
PitchBook-NVCA Venture Monitor
*As of March 31, 2018
**two rounds previously closed in 4Q
have been adjusted to a 1Q 2018 close
due to more capital being added
US Venture Capital
Overview
29
PitchBook Private Market PlayBook 2Q 2018
28
PitchBook Private Market PlayBook 2Q 2018
$9.1$4.8$7.9$9.9$8.8$9.2$7.8$8.6$6.8$26.3$11.9$10.5$3.9$8.9$11.4$13.1$14.0$11.6$18.2$36.8$8.7$10.5$14.5$15.3$11.1$16.7$15.9$9.3$17.2$13.0$14.3$12.6$8.10
50
100
150
200
250
300
$0
$5
$10
$15
$20
$25
$30
$35
$40
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
2010
2011
2012
2013
2014
2015
2016
2017
2018
Exit value ($B)
# of exits closed
Exit slide during three of past four quarters
US VC-backed exit activity
$31.7$12.2$20.0$25.9$24.1$21.3$36.2$36.1$40.9$33.3$7.9192
123
161
156
203
224
295
283
300
235
54
2008 2009 2010
2011
2012
2013
2014
2015
2016
2017 2018*
Capital raised ($B)
# of funds closed
2018 pacing as another $30B year for VC funds
US VC fundraising activity
PitchBook-NVCA Venture Monitor
PitchBook-NVCA Venture Monitor
*As of March 31, 2018
$45M
median US VC fund
size ($M) closed
in 1Q 2018
Exits
Fundraising
Exit flow in 1Q 2018 came in a bit
weaker than the same quarter a
year ago, with $8.1 billion exited
across 188 deals, representing a 19%
decrease year-over-year in deal
count. While this is a material drop,
it is important to remember that
exit timing is largely idiosyncratic
and can be delayed for a multitude
of reasons. Most recently that
reason has been larger VC deals,
which supply a longer cash runway
for VC-backed companies and can
decrease the sense of urgency to
exit.
To that point, direct secondary
sales of venture shares have
become an increasingly popular
way to give existing shareholders
partial liquidity without a full exit
event. Though this volume is not
represented in the aggregate exit
data, it is becoming a substantial
source of alternative liquidity. The
monster $8 billion the SoftBank
consortium invested in secondary
Uber shares in addition to the
primary round is an extreme
example, but illustrates how such
a transaction can provide liquidity
for early employees and investors.
This capital returned back to VCs
is more important now as portfolio
company hold periods increase,
because these secondary sales will
flow through as distributions back
to LPs.
Because of these aforementioned
shifts in VC toward financing larger
companies, it’s no surprise that exits
over $100 million are driving the
aggregate exit market on both a
value and count basis. Additionally,
due to VC’s reliance on “home-
runs,” these are also the exits that
drive the majority of returns back
to LPs. While Ring’s $1.2 billion
acquisition by Amazon was the
largest exit in terms of deal size,
the most valuable company to exit
in the first quarter was Dropbox
with its $756 million IPO, which
valued the company slightly under
their 2014 private valuation of $10
billion. We see the positive early
performance from some of the
larger VC-backed IPOs, during a
more volatile and slightly negative
broad stock market during the first
quarter, as a potential bellwether
of strong demand for these
listings throughout the remainder
of the year. However, sustained
volatility throughout 2018 would
likely cause some companies to
pull their IPO plans or discourage
those companies that are on the
fence. That said, Smartsheet and
DocuSign have filed for IPOs, which
points toward more positivity
around highly valued technology
firms exiting to the public markets
heading into 2Q.
So far in 2018, VC funds have
closed on roughly $8 billion in
commitments across 54 vehicles,
putting both capital raised and fund
count on pace to dip slightly from
2017. A strong showing from micro-
funds (vehicles smaller than $50
million) has pulled down the median
fund size, though we expect a surge
of larger funds closing later in the
year to provide a boost in fund sizes
and total capital raised. With two
billion-dollar funds closed already
and up to four more in the pipeline,
2018 could still surpass last year in
terms of total capital raised.
In the first quarter of 2018, micro-
funds made up 50% of fund count
for the first time since 2015. Driven
by seed and early-stage vehicles
with niche strategies or regional
focuses, the representation of
smaller funds speaks to continued
development of innovative
strategies and emerging venture
ecosystems. True Wealth Ventures
Fund I, for instance, focuses
exclusively on female founders,
while Illinois Ventures’ Emerging
Technologies Fund III seeks to
capitalize research spin-outs from
the University of Illinois. First-time
funds have also made a strong
showing with 11 vehicles closed in
1Q 2018, putting this year on track
to reach 2014’s decade high number
of funds closed.
Though capital raised is tracking
lower so far, the outsized effects of
mega-funds (vehicles $500 million
or greater) will likely lift capital
raised in the remainder of 2018, as
four vehicles including Lightspeed
Venture Partners and Social Capital
have all announced intentions to
raise funds of $1 billion or more in
the near future. The impact from
mega-funds is clear, as these funds
made up 47% of all capital raised
by venture funds in 2018, despite
representing 5% of all closed
vehicles. While three funds of over
$1 billion were closed in all of 2017,
three strategies have already closed
in the beginning of 2018: Norwest
Venture Partners’ $1.5 billion and
General Catalyst Partners’ $1.37
billion fund, as well as $1.25 billion
raised across two complementary
vehicles from Battery Ventures.
VCs have taken to raising larger
funds to garner the capital
necessary to maintain a competitive
stance against deep-pocketed
investors, such as SoftBank, as
deal sizes and valuations continue
to rise. But strong fundraising is
only possible if there is sufficient
LP demand, and many institutional
investors have been looking to
allocate more to private market
strategies—including VC—while
trying to consolidate their allocation
to fewer managers, resulting in
larger but fewer fund commitments.
While these mega-funds may offer
GPs competitive advantages, they
also bring into question whether
their managers can deliver venture-
like returns, as GPs run the risks of
overpaying in outsized rounds and
overcapitalizing startups.
US Venture Capital
31
PitchBook Private Market PlayBook 2Q 2018
30
PitchBook Private Market PlayBook 2Q 2018
1,101
0
1,000
2,000
3,000
4,000
5,000
$0
$100
$200
$300
$400
$500
$600
$700
2010
2011
2012
2013
2014
2015
2016
2017
2018*
Deal value ($B)
Estimated deal value ($B)
# of deals closed
# of estimated deals closed
$175.0
$560.4
$0
$100
$200
$300
$400
$500
$600
$700
$800
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Median
Average
1,1861,3931,5731,5001,9642,0602,0962,0314579261,0161,1739681,1721,2431,1711,17319756%
58%
57%
61%
63%
62%
64%
63%
70%
2010
2011
2012
2013
2014
2015
2016
2017
2018*
Non add-on
Add-on
Add-on % of buyout
PE activity likely to be healthier than initial numbers suggest
US PE deal flow
Median deal size continues to grow
Median and average buyout size ($M) in US
Source: PitchBook
*As of March 31, 2018
Buy-and-build strategies here to stay
Add-ons (#) as % of US buyouts
70%
of all buyout activity in
1Q 2018
ADD-ON
ACQUISTIONS
ON THE RISE
Source: PitchBook
*As of March 31, 2018
Source: PitchBook
*As of March 31, 2018
US PE activity remained robust, but
deal value took a hit through the
first quarter of the year, with 1,101
completed transactions totaling
$88.8 billion in deal value, 4.0% and
32.8% decreases, respectively, from
1Q 2017. Despite the slowdown, we
expect reported deal flow figures to
tick upward in the coming months
due in part to the 124 deals worth
an estimated $94.3 billion that have
been announced but not yet closed
in 2018. In addition, private market
data is often slower to come
to market. As such, we suspect
there are many deals—particularly
secondary buyouts—completed
in 1Q that may not appear in this
dataset.
Add-ons accounted for 70% of
all buyout activity in 1Q 2018,
shattering any previous notions
that they may have reached a
ceiling at two-thirds of all buyouts.
Buy-and-build strategies account
for a significant portion of the
operational improvements on
which managers pride themselves.
These strategies have become
more common in the last decade
as competition has intensified
for private assets, rendering the
paydown of debt and multiple
expansion less useful than they
once were. Nearly one-third of PE-
backed companies now undertake
at least one add-on acquisition,
compared to only about 20% in the
early 2000s. However, while add-
ons have grown more pervasive, a
relatively small number of the most
prolific buy-and-build investors
have increasingly driven activity;
roughly one-quarter of the add-on
deals completed since 2014 were at
least the fifth deal in the platform’s
buy-and-build strategy.
Growth/expansion deals accounted
for 25% of all PE deals in 1Q 2018,
a modest uptick from the 22%
recorded during the entirety of 2017.
Growth equity represents one of the
ancillary private capital strategies
that have become more common
in recent years as both GPs and
LPs look to branch out from the
traditional buyout model. The
ascendance of the growth strategy
has been driven in part by PE’s
heightened interest in the software
sector, which has traditionally been
an area of relative underinvestment.
Growth deals allow the founder
and/or management team to retain
some control over the operations—
an oft-cited concern of software
founders. In 1Q 2018, software deals
accounted for 21% of growth equity
rounds, but only 13% of buyouts.
We expect this corner of the market
to continue growing over the
medium term, particularly as PE
and VC investors begin to interact
more often. For example, nearly
one-fifth of all VC-backed exits in
2017 were via PE firms.
As more competition has moved
in and fund sizes have continued
ballooning, multiples have
expanded and LBO sizes continue
to grow. The median buyout size
in 1Q 2018 reached $175 million, a
17% increase over the $150 million
recorded during the entirety of
last year. For further context, the
full-year median buyout size has
doubled since 2007, when it was
just $75 million. We expect this
trend to continue for as long as
public equities remain in a bull
market and PE firms continue to
raise larger funds.
These larger funds are also enabling
an increase in take-privates,
many of which are carveouts
and corporate divestitures. Last
year saw 382 PE transactions
sourced via carveouts, corporate
divestitures and asset divestitures,
totaling $86.5 billion in deal value—
levels not seen since the financial
crisis. Carveouts and divestitures
often serve as a means of finding
companies at lower multiples, with
the assumption that the seller
parent company underutilizes
and/or undervalues some of their
assets. This momentum continued
into 1Q; of the 13 announced deals
of $1 billion or more in 1Q, 10 were
either take-privates or some sort of
carveout/divestiture.
Overview
US Private Equity
33
PitchBook Private Market PlayBook 2Q 2018
32
PitchBook Private Market PlayBook 2Q 2018
48%
of PE-backed exits via
secondary buyout in 1Q
2018
0
50
100
150
200
250
300
350
400
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
2010
2011
2012
2013
2014
2015
2016
2017
2018
Corporate acquisition
IPO
SBO
US PE-backed exits (#) by type
Source: PitchBook
After a strong back half of 2017, exit
activity slowed in 1Q 2018. At the
sector level, the proportion of exits
coming from the B2C space has
been waning. Similar to what we’ve
observed on the dealmaking front,
IT is commanding a greater share
of the exit market, representing 17%
of activity in 1Q 2018, compared to
15% in 2017.

IPOs were a relatively popular exit
route for PE-backed companies
in 1Q 2018, despite the volatility in
equity markets. The 12 offerings
in the first quarter marked the
third-highest total over the last two
years. An IPO is typically viewed
as the exit route of choice for large
companies, with the assumption
being that they are too big for
an acquisition, but half of the
PE-backed IPOs in 1Q 2018 had
valuations of less than $1 billion.
Another interesting wrinkle in
recent exit activity is that many of
the massive club deals from the
buyout boom that have plagued
investors for years have finally been
put to bed. Following its Chapter
11 bankruptcy in 2014, investors in
Energy Future Holdings—perhaps
the most notorious buyout in
history—finally washed their hands
clean by selling the remaining assets
to Sempra Energy. To be sure, this
was unequivocally a poor outcome
for investors, but it is preferable
to Toys R Us—another cautionary
tale of PE exuberance—which filed
for Chapter 7 bankruptcy in March.
While these high-profile failures have
garnered significant attention, we do
not think that they should be viewed
as a harbinger for the industry going
forward.
$185$262$184$121$70$92$115$197$192$198$229$242$37275
313
263
164
161
191
218
292
327
312
298
267
55
2006 2007 2008 2009 2010 2011
2012 2013 2014 2015 2016 2017 2018*
Capital raised ($B)
# of funds closed
Coming off the strongest year in a
decade, PE fundraising decelerated
sharply in 1Q 2018, totaling just $36.6
billion raised across 55 vehicles.
Bifurcation continues to define the
fundraising landscape. On one hand,
successful GPs are aggressively
Firms raise more capital across fewer funds
US PE fundraising
$116$158$72$48$126$122$181$172$236$292$215$213$37758
928
634
427
829
905
1,127
1,051
1,313
1,360
1,249
1,179
196
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Exit value ($B)
# of exits
Exit activity decelerates early in 2018
US PE-backed exits
raising their target fund sizes
and many LPs have upped their
allocations to PE while spreading that
capital across fewer managers. To
that end, large funds remain popular,
with vehicles of $1 billion or more
taking in more than half of the capital
raised in the first quarter. We expect
this trend to continue throughout the
year, with at least eight open funds
targeting $1 billion or more.
While LPs ingratiate themselves
with established managers, there
is also a desire to tap into the
next generation of talent. Indeed,
first-time fundraising has enjoyed
a resurgence in recent years, with
first-time managers accounting for
nearly 10% of vehicles in 2017. One
hurdle for many LPs considering
first-time managers, however, is that
the vehicles tend to be small, which
can make it difficult for sizable
investors to write meaningful checks.
A group of investors, including the
Alaska Permanent Fund Corporation
and Wafra, have combined to create
Capital Constellation—a joint venture
that will provide capital to new
alternative managers. Not only is the
group looking to generate financial
returns, but the consortium is also
seeking insight into direct investing.
Source: PitchBook
*As of March 31, 2018
Source: PitchBook
*As of March 31, 2018
Source: PitchBook
*As of March 31, 2018
Source: PitchBook
*As of March 31, 2018
Exits
Fundraising
US Private Equity
Small funds gaining share
US PE fundraising (#) by size
Mega funds see a pullback in 1Q
US PE fundraising ($) by size
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012 2013 2014 2015 2016 2017 2018*
$5B+
$1B-$5B
$500M-
$1B
$250M-
$500M
$100M-
$250M
Under
$100M
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012 2013 2014 2015 2016 2017 2018*
$5B+
$1B-$5B
$500M-
$1B
$250M-
$500M
$100M-
$250M
Under
$100M
35
PitchBook Private Market PlayBook 2Q 2018
34
PitchBook Private Market PlayBook 2Q 2018
Capital invested is on track to nearly match 2017 total
European VC deal activity
Larger financings account for a growing share of
capital invested
European VC activity by size (¤)
Capital invested by European
VCs continues to sustain elevated
levels despite another quarter of
sliding deal count. With ¤4.4 billion
invested across 571 rounds, 2018
is on pace to nearly match last
year’s aggregate capital investment.
However, the first quarter’s 49%
decrease in closed deals YoY
indicates the fifth consecutive
quarter deal count has trended
downward. We do note that as
we continue to collect data after
quarter-end, deal count will likely
show greater numbers later in the
year.
Both first-time financings and
rounds closed at the angel &
seed level have declined rapidly,
accounting for much of the overall
decrease in deal count. While some
of this decline can be accounted
for by under-reporting by investors
and startups, the data suggests that
capital is being invested in fewer,
more mature startups at the angel
& seed stage. The number of years
from company founding at time of
angel & seed round has increased
to 1.1 years in 2018, up from just
six months in 2014. In the same
period, median angel & seed deal
size saw a 2.9x increase, reaching
¤981,000 in the first quarter of 2018,
an indication that investors are also
cutting larger checks to startups at
this stage. The shift toward fewer,
larger early financings (as well as
the diminishing number of micro-
funds raised in recent quarters)
appears to be a driving factor in the
depressed angel & seed deal count
in recent years. This trend is having
knock-on effects throughout the
VC funding lifecycle, as companies
mature at subsequent financing
stages. Consequently, larger check
sizes have also become prevalent
at the late stage, driving elevated
levels of capital investment in
recent years. The median late-
stage deal size for European
startups reached ¤8.1 million in the
first quarter of 2018, a 62% jump
from 2017. Additionally, the 10
largest deals in 1Q accounted for
34% of capital invested, up from
18% in 2017. German automobile
marketplace platform AUTO1 Group
raised the largest round in 1Q,
receiving a ¤460 million investment
from industry titan SoftBank.
With European and global VCs
increasingly raising larger funds,
we expect to see these trends
proliferate throughout the rest of
the year.
Deal value (€B)
# of deals closed
€3.5€4.9€5.5€4.5€7.0€6.9€8.3€8.8€12.4€16.9€15.3€18.3€4.41,051
1,431
1,609 1,615
2,182
2,717
3,308
4,235
5,039 5,033
4,568
3,701
571
2006 2007 2008 2009 2010 2011
2012 2013 2014 2015 2016 2017 2018*
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20082009201020112012201320142015201620172018*€25M+
€10M -€25M
€5M-€10M
€1M-€5M
€500K-€1M
Under €500K
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20082009201020112012201320142015201620172018*€25M+
€10M -€25M
€5M-€10M
€1M-€5M
€500K-€1M
Under €500K
¤4.4B
total amount of VC
invested across 571 deals
in 1Q 2018
¤1.5B
1Q 2018 European VC-
backed exit value
¤8.1M
median late-stage deal
size during 1Q, the largest
figure we have tracked
Deals smaller than ¤1 million dwindle in 1Q
European VC deal activity by size (#)
Source: PitchBook
*As of March 31, 2018
Source: PitchBook
*As of March 31, 2018
Source: PitchBook
*As of March 31, 2018
Overview
European Venture Capital
37
PitchBook Private Market PlayBook 2Q 2018
36
PitchBook Private Market PlayBook 2Q 2018
Subdued exit totals so far in 2018
European VC-backed exit activity
Capital raised on track for another strong year
European VC fundraising
0
20
40
60
80
100
120
140
160
180
€0
€1
€2
€3
€4
€5
€6
€7
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
2010
2011
2012
2013
2014
2015
2016
2017
2018
Exit value (€B)
# of exits closed
Just ¤1.5 billion of value exited
across only 64 deals in 1Q 2018. This
is a low total for both exit value and
count; however, we don’t see any
immediate source of worry due to
the asymmetric timing of VC exits.
Because acquisitions and IPOs
require a mix of complex transaction
structures, reliance on market
conditions and long negotiations,
these transactions can be prone to
delays or long closing processes.
Two of the largest deals completed
in the first quarter were the ¤905
million acquisition of Preston
Therapeutics (developer of drugs
to treat Parkinson’s) by Danish
pharma Lundbeck, and Integrated
Financial Arrangements exiting
via IPO, raising ¤201 million at a
¤735 million valuation. These deals
illustrate the sustained strength of
the exit ecosystem for software and
pharmaceutical firms but also the
outsized effect on total exit value, as
these two deals make up 73% of our
current recorded total.
Further depression of exit statistics
can be partially attributed to capital
availability, which has afforded some
VC-backed companies the ability
to scale into large multinational
corporations without completing a
traditional liquidity event.
The Spotify direct listing is a prime,
though unconventional, example of
this phenomenon. As the company
opted to list publicly without raising
any new capital, the transaction
brought some excitement to the
European VC exit environment and
has the potential to significantly
affect future exits.
From the company’s perspective,
we categorize the transaction as
a success. Though the first trade
was delayed due to the scarcity of
guidance prior to the price discovery
process, Spotify priced 5.6 million
shares at $165.90 each, clearing
nearly a billion dollars of value
at a price 25.7% higher than the
reference price of $132 (provided
by Morgan Stanley, based on recent
private secondary trading).
Even though Spotify shares closed
lower on both its first and second
days of trading, the price has found
some stability at around $150, easing
worries about initial price volatility.
Furthermore, this stability comes
in the face of low trading volume
relative to the percentage of shares
that were eligible to sell immediately.
For illustration, more than 90% of
Spotify shares were and are eligible
to be registered and trade at any
time, but on the first day of trading
volume representing less than 17% of
shares changed hands, much lower
than the long-term average first-day
IPO turnover of 42%.
Private secondary market trading
likely played a substantial role in
both the volatility and volume of
trading during the first few days, as
these private trades allowed insiders
with pressing liquidity needs the
opportunity to lock in a price and
allowed some new investors to
begin building a position before the
public debut. A direct listing will not
be a solution for every company,
however, as Spotify’s situation was
unique with regard to its global
reach and financial position.
Source: PitchBook
With 18 vehicles closed by
European VCs totaling ¤2.1 billion
in commitments, 2018 appears to
be on track to fall slightly short of
2017’s fundraising metrics. However,
should European VCs close larger
funds than they have in recent
years, capital raised in 2018 could
still match or exceed 2017’s total.
Median fund size has trended up to
a decade high of ¤86 million in the
first quarter of 2018, reflecting VCs’
shift toward writing larger checks to
mature companies. Additionally, a
push by the European Commission
and the European Investment Fund
to seed European fund managers
with their fund-of-funds program,
VentureEU, will also provide a
boost to fundraising. VentureEU
estimates that after its aggregate
commitment of ¤410 million, the
select funds will aim to raise an
additional ¤1.7 billion, which could
boost fundraising by a total of ¤2.1
billion over the next few years.
The number of larger funds raised
by European managers has been
low historically, but recent activity
suggests this trend is beginning
to shift in 2018. Only in the peak
fundraising cycle of 2016 have there
been at least nine funds closed in
the ¤250 million and ¤500 million
range. This year, however, three
funds in this echelon have closed
already, almost halfway to 2017’s
count. These larger vehicles will
no doubt be a vital resource for
growing the European venture
ecosystem. Eight Road Ventures
Europe cites the large fundraise
of its $375 million (¤303 million)
growth capital vehicle as necessary
for filling the gap in funding to
support ever-growing venture-
backed startups.
While larger funds will be helpful
to mature startups, the dearth of
early-stage capital may hinder the
development of next-generation
entrepreneurs seeking out small
funding rounds. In the first quarter
of 2015, VCs raised 19 micro-
funds (vehicles smaller than ¤50
million). In 2018, however, only
four have been closed, as early-
stage investors have continued to
raise larger funds. London-based
Kindred Capital, for instance, raised
a ¤90 million seed investment
vehicle—significantly larger than
what traditional seed funds once
looked like. While large funds are
an important step forward for
the maturing European venture
ecosystem, a shortage of capital
for smaller investments may create
an imbalance in available funding
sources.
€9.1€4.0€6.0€6.2€8.5€7.0€5.5€9.6€10.0€8.8€2.1156
122
122
137
118
119
101
97
82
72
18
2008 2009 2010 2011
2012
2013
2014
2015
2016
2017 2018*
Capital raised (€B)
# of funds closed
119
¤110M
average European VC
fund closed in 1Q 2018
18
total number of fund
closings across Europe
in 1Q
¤345M
size of largest European VC
fund closed in 1Q (Edmond de
Rothschild Investment Partners)
Source: PitchBook
*As of March 31, 2018
Exits
Fundraising
European Venture Capital
39
PitchBook Private Market PlayBook 2Q 2018
38
PitchBook Private Market PlayBook 2Q 2018
Proportion of deal flow increases in UK & Ireland
European PE deal activity (#) by region
Central & Eastern Europe see a smaller share
of deal value
European PE deal activity (¤) by region
Completed deal flow slows in 1Q
European PE deal flow
€324€209€90€171€194€185€208€290€395€333€381€510
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
€0
€50
€100
€150
€200
€250
€300
€350
€400
€450
2007 2008 2009 2010
2011
2012
2013
2014
2015
2016
2017 2018*
Capital invested (€B)
Estimated # of deals closed
# of deals closed
Estimated deal value (€B)
¤33.9M
median European PE
deal size
¤62.5B
total European PE deal
value in 1Q 2018
36%
percentage of completed
deals located in the UK or
Ireland
Source: PitchBook
*As of March 31, 2018
Source: PitchBook
*As of March 31, 2018
Source: PitchBook
*As of March 31, 2018
Following three consecutive years
of strong activity, European PE deal
flow declined substantially in 1Q
2018. Only 690 deals totaling ¤62.5
billion were completed across the
region, representing 7% and 21%
quarter-over-quarter decreases,
respectively. Though completed
deal flow was stagnant, a flurry of
deals announced in 4Q 2017 and 1Q
2018 have yet to close, which should
aid completed counts through the
remainder of the year. Notable
announcements include Unilever’s
planned ¤11.8 billion divestiture of
its spreads business to KKR, as well
as Advent International’s ¤1.7 billion
take-private of electronics firm Laird.
As fundraising and dry powder
have grown in recent years, so too
has the necessary check size for
efficient deployment of capital. The
median deal size increased to ¤33.9
million for deals completed in 1Q
2018, higher than any full-year total
since 2006. By comparison, the
median size of PE deals completed
in the US this quarter clocked in
at ¤175.0 million. Nonetheless, the
private capital ecosystem is poised
to continue growing, aided by the
availability of alternative lenders
and a relatively healthy economy.
Eurozone GDP grew by 2.4% in
2017—the fastest in the last decade—
though early estimates from 2018
point to a modest deceleration in
growth.
The UK and Ireland accounted
for 36% of completed deals in 1Q
2018, having grown from 33% last
year and 30% in 2016. In the UK,
Brexit’s direct impact is the obvious
explanation for the proportionally
strong deal flow, with worries about
eventual exclusion from the single
market leading to carveouts and
branch relocations, but Brexit’s
knock-on effect of GBP depreciation
relative to the EUR is also a factor.
In the UK, GBP-denominated
assets are currently viewed by
outside investors as temporarily on
sale, with the hope that prices will
bounce back once the UK economy
re-establishes itself outside the EU.
This is especially the case for EUR-
denominated investors, while the
USD’s recent weakening has made
this trade less appealing for US-
based investors.
On a sector basis, B2B investments
still accounted for a plurality (37%)
of transactions in 1Q, consistent
with trends over the last decade.
Meanwhile, IT investments have
become more popular, rising from
12% of deals in 2011 to 20% in the
most recent quarter. In particular,
SaaS businesses have caught
the attention of GPs due to their
scalability and recurring revenue
models. The healthcare sector
accounts for 7% to 8% of deal flow
over the last decade—about half
the 12% to 16% it accounts for in the
US—likely due to the prevalence
of government-backed healthcare
systems in Europe.
Overview
European Private Equity
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20082009201020112012201320142015201620172018*UK/Ireland
Southern
Europe
Nordic
Region
DACH
France/
Benelux
Central &
Eastern
Europe
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20082009201020112012201320142015201620172018*UK/Ireland
Southern
Europe
Nordic
Region
GSA
France/
Benelux
Central &
Eastern
Europe
41
PitchBook Private Market PlayBook 2Q 2018
40
PitchBook Private Market PlayBook 2Q 2018
0
200
400
600
800
1,000
1,200
1,400
1,600
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Corporate acquisition
IPO
SBO
€0
€50
€100
€150
€200
€250
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Corporate acquisition
IPO
SBO
SBOs constitute a growing proportion
European exits (#) by type
IPOs off to a slow start this year
European exits (¤B) by type
€77€21€61€113€81€100€160€193€138€178€26700
509
730
963
858
1,065
1,170
1,389
1,259
1,210
218
2008 2009 2010 2011
2012 2013 2014 2015 2016 2017 2018*
Exit value (€B)
# of exits closed
Exit activity decelerates in early 2018
European PE exit activity
Despite just 15 funds closing in
1Q 2018, total fundraising came
in at ¤28.8 billion as the median
fund size leapt to ¤410.6 million.
The migration to larger vehicles is
occurring in other regions as well,
but the trend is particularly strong
in Europe. Funds of ¤5 billion+ took
in a record ¤29.3 billion in 2017, and
with ¤22.9 billion already closed
in 1Q, 2018 is the second-highest
annual total ever.
If we assume this pace sustains
throughout 2018, it would mark a
new European fundraising record
and the first time that annual
capital raised eclipsed ¤100
billion; however, we believe that
fundraising will decelerate through
the rest of the year.
When looking at the 1Q data, it’s
important to recognize that EQT
closed on ¤10.75 billion for its
eighth buyout fund—making it the
third-largest European buyout
fund in history and only the fifth to
surpass the ¤10 billion mark—but
there are no comparable funds
on the horizon. Including the EQT
vehicle, European PE firms closed
on three funds of ¤5 billion+ in 1Q,
which ties the annual record. Of
the 10 firms that raised the most
capital since 2006, nine have closed
a fund of at least ¤1 billion since
the beginning of 2016. The lone
exception is Bridgepoint, which is in
the market seeking ¤5.5 billion for a
new buyout vehicle.
To that end, we expect some mean
reversion in the fundraising data
because most of the largest firms
are now sitting on large stockpiles
of dry powder. That being said,
there is evidence that LP appetite
for these vehicles remains strong,
with The Carlyle Group recently
announcing a first close of ¤3.3
billion for Carlyle Europe Partners V,
which has a target of ¤5 billion. And
while there are still 15 open funds
seeking ¤1 billion or more, most of
the targets are less than ¤2 billion.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20082009201020112012201320142015201620172018*€5B+
€1B - €5B
€500M- €1B
€250M- €500M
€100M - €250M
Under €100M
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20082009201020112012201320142015201620172018*€5B+
€1B - €5B
€500M- €1B
€250M- €500M
€100M - €250M
Under €100M
Firms close three ¤5B+ funds in 1Q 2018, tying
annual record
European PE fundraising (#) by size
Mega-funds account for majority of capital raised in
1Q 2018
European PE fundraising (¤) by size
Source: PitchBook
*As of March 31, 2018
Source: PitchBook
*As of March 31, 2018
Source: PitchBook
*As of March 31, 2018
Source: PitchBook
*As of March 31, 2018
Source: PitchBook
*As of March 31, 2018
Both exit value and exit count in 1Q
2018 fell to the lowest levels in the
last four years; however, several
signs suggest that activity will
accelerate through the rest of the
year. First, while just five exits of
¤1 billion or more were completed
in 1Q, there are an additional eight
exits of this size that have been
announced but not yet closed.
In addition to the drop-off in ¤1
billion+ exits, we also observed a
relative decline in upper-middle-
market exits (¤500 million to ¤1
billion) that resulted in a precipitous
decline in the median exit size. For
exits via corporate M&A, the median
exit size plummeted to ¤47 million
in 1Q 2018—the lowest point since
2010. Secondary buyouts in 1Q
were smaller, too, while the median
PE-backed IPO was only ¤70 million,
down from ¤120 million in 2017.
SBOs, which represented a plurality
of European PE exits for the first
time ever in 2017, continued to play
a prominent role in 1Q, accounting
for 52% of all exits. Their increasing
importance is also apparent when
looking at capital exited; six of the
eight largest exits in 1Q came via
SBO, including Scandlines and
Albéa.
Though exit activity was down across
Europe in 1Q, the steepest declines
came from Southern as well as Central
and Eastern countries. The UK and
Ireland proved most resilient on an
exit count basis; however, quarterly
exit activity still fell to the lowest point
in the last year and a half.
Exits
Fundraising
European Private Equity
43
PitchBook Private Market PlayBook 2Q 2018
42
PitchBook Private Market PlayBook 2Q 2018
After a strong 2017, M&A activity
got off to a sluggish start in the first
quarter of this year. Across North
America and Europe, 4,867 deals
were completed in 1Q 2018, totaling
$616.7 billion in value—18% and
25% YoY decreases, respectively.
Though completed deal count slid
substantially, an additional 973
deals totaling an estimated $451.3
billion have been announced but
have yet to close. On that account,
combined with the knock-on effects
of corporate tax cuts in the US and a
relatively stable European economy,
we expect completed deal flow
to increase through the remainder
of the year. Notable transactions
announced in the first quarter
include Keurig Green Mountain’s
$23 billion take-private of Dr Pepper
Snapple Group and Blackstone’s $17
billion carveout of Thomson Reuters’
financial and risk business. Both
transactions reflect two prominent
themes in today’s M&A landscape:
the growing influence of PE and the
interplay between public and private
markets.
The IT and B2B sectors saw their
shares of M&A activity increase
in 1Q, accounting for 19.5% and
38.6% of completed transactions,
respectively. The IT sector continues
to play a more prominent role for
strategic and financial acquirers alike,
commanding a greater share of
both deal flow and capital invested.
Fast-changing technology continues
to pose a threat to existing business
models, forcing incumbents to either
ramp up R&D or to acquire more
nimble competitors. In addition,
IT companies are increasingly
being acquired by businesses in
non-tech sectors, accounting for
45.4% of deal flow. Meanwhile, B2C
transactions accounted for just 15.9%
of deal flow in 1Q 2018. Interest in
traditional B2C assets has dwindled
as tech-focused firms continue
making inroads into consumer-
facing segments. Further, businesses
that were once thought of as being
traditional B2C, such as retail, are
now created as tech-focused
ecommerce firms.
The number of intercontinental M&A
deals has also trended upward in the
last decade, particularly in Europe.
In 1Q 2018, 13.6% of European
M&A transactions involved a non-
European buyer—having increased
from last decade’s nadir of 9.0% in
2009. By contrast, the proportion
of North American transactions
with an acquirer from another
continent has grown more slowly,
from 6.4% in 2009 to 8.2% in 1Q
2018. Intercontinental activity in
Europe is higher due in part to
the prevalence of North American
buyers, particularly US-based PE
firms and Canadian LPs executing
direct investments, with substantial
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
2014
2015
2016
2017
2018
Materials &
resources
Healthcare
Financial
services
Energy
B2C
B2B
IT
Deal count continued to slide in 1Q
M&A activity in North America & Europe
$3,002$1,942$1,101$1,682$2,025$2,158$2,231$2,988$3,444$3,437$3,081$5260
5,000
10,000
15,000
20,000
25,000
30,000
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
2007 2008 2009 2010 2011
2012 2013 2014 2015 2016 2017 2018*
Deal value ($B)
Estimated deal value ($B)
Deal count
Estimated # of deals closed
operations across the Atlantic. On
the other hand, European investors
have traditionally exhibited a
propensity to invest close to home.
Nonetheless, both regions have seen
an increase in activity from foreign
buyers, partially driven by the fact
that such acquisitions serve as an
efficient way to expand a company’s
footprint in today’s global economy.
B2C clout continues to shrink
M&A (#) by sector in North America & Europe
B2B commands a growing share of capital
M&A ($) by sector in North America & Europe
Source: PitchBook
Source: PitchBook
$617B
total value across North
America and Europe M&A
in 1Q 2018
$149B
total value of
announced divestitures
15.9%
proportion of total deal
flow attributed to B2C
companies in 1Q 2018
Source: PitchBook
*As of March 31, 2018
Overview
Global M&A
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
2014
2015
2016
2017
2018
Materials &
resources
Healthcare
Financial
services
Energy
B2C
B2B
IT