Introduction To Private Equity & Venture Capital #1: Ecosystem & Industry Dynamics

Summary

Claudia Zeisberger, a professor at INSEAD, introduces the world of private equity (PE) and venture capital (VC), highlighting their growth from a niche market to a significant asset class. She discusses the expansion of PE from the 70s to the present, comparing it with public equity markets, and notes the substantial 'dry powder' of undeployed capital. The lecture also touches on regional differences in PE investment, the impact of increased capital on deal pricing, and the fundamentals of PE investing: acquiring, growing, and selling companies for profit.

Takeaways

• 👋 Claudia Zeisberger introduces herself as a professor of entrepreneurship at INSEAD, focusing on private equity (PE) and venture capital (VC).
• 📈 Private equity has evolved significantly from a small industry in the 70s and 80s to a fast-growing and important asset class.
• 💹 From 2000 to 2019, the value of PE-owned companies has grown more than eight-fold, outpacing public market equities.
• 💼 Despite its growth, public debt and public equity still dominate global assets under management.
• 📊 Private equity sits within the broader financial market context alongside asset classes like real estate, commodities, debt, and public equity.
• 🏢 Key investors in PE and VC funds include sovereign wealth funds, pension plans, university endowments, investment banks, high net worth individuals, and sometimes retail investors.
• 🌍 The distribution of PE assets under management varies by region, with the US and Europe having a large proportion in buyouts, while Asia has a more balanced mix including significant VC investments in China.
• 💰 The concept of 'dry powder' refers to capital raised by PE funds but not yet deployed, amounting to about $1.5 trillion currently.
• 📉 Increased capital in the market has driven up entry pricing for PE deals, affecting returns.
• 🔄 Private equity involves acquiring an equity stake, growing the company, and exiting at a profit within the fund's lifetime.

Q & A

What is Claudia Zeisberger's role at INSEAD?

Claudia Zeisberger is a professor of entrepreneurship at INSEAD, focusing on private equity and venture capital.

What topics will be covered in the initial lectures of the video series?

The initial lectures will provide a high-level introduction to the institutional private equity market, applicable to both early stage venture capital funds and late stage private equity funds.

How has the private equity market grown since the 70s and 80s?

Private equity has grown from a cottage industry in the 70s and 80s to a fast-growing environment and a significant asset class for all limited partners (LPs).

How does the growth of private equity compare to public market equities from 2000 to 2019?

The value of private equity-owned companies has grown more than eight-fold, far outpacing the growth of public market equities.

What is the significance of dry powder in the private equity industry?

Dry powder refers to the capital raised by private equity funds that is still waiting to be deployed. It is significant because it indicates the amount of available capital looking for investment opportunities, which affects deal pricing and market dynamics.

What are the main types of investors in private equity and venture capital funds?

The main types of investors include sovereign wealth funds, pension plans, university endowments, investment banks, high net worth individuals, and sometimes retail investors.

How has the composition of private equity investments in Asia changed over recent years?

The composition of private equity investments in Asia includes one-third buyout, one-third growth equity, and one-third venture capital, with a significant portion of venture capital being concentrated in China.

What is the typical investment approach of growth equity funds?

Growth equity funds invest in fast-growing, often profitable companies by acquiring a minority stake. They are typically invited to invest for their experience and talent rather than for capital needs.

What impact has the increase in private equity dry powder had on market valuations?

The increase in dry powder has led to higher competition for deals, driving up entry valuations and EBITDA multiples for private equity acquisitions.

What are the three primary steps in the private equity business model?

The three primary steps in the private equity business model are acquiring an equity stake, growing the company, and exiting the investment, ideally at a profit.

Outlines

00:00

📈 Introduction to Private Equity and Venture Capital

Claudia Zeisberger, a professor at INSEAD, introduces the world of private equity (PE) and venture capital (VC), focusing on their growth from a niche market in the 70s and 80s to a significant asset class today. She provides an overview of the institutional PE market, highlighting its impressive growth over the past two decades, which has outpaced public market equities. The lecture aims to cover both early-stage VC funds and late-stage PE funds, explaining the different types of investors in PE and VC, including sovereign wealth funds, pension plans, and retail investors. The summary also touches on the role of angel investing and its distinction from institutional private capital.

05:01

🌏 Global Private Equity Landscape and Dry Powder

This paragraph delves into the regional differences in private equity, with a focus on the distribution of assets under management (AUM) in buyout, growth equity, and venture capital funds across the U.S., Europe, Asia, and Latin America. It highlights the significant growth in private equity, especially in China's venture capital sector, and the prevalence of growth equity deals in Latin America, often involving family businesses. The concept of 'dry powder' is introduced, referring to the undeployed capital raised by PE funds, which currently stands at approximately 1.5 trillion U.S. dollars. The impact of this capital on deal pricing and the increase in entry multiples for PE firms are discussed, along with the tapering off of PE returns and the challenges of maintaining historical performance levels.

10:03

🔍 The Essence of Private Equity: Buy, Improve, Sell

The final paragraph summarizes the key takeaways from the session, which include the comparison between public and private equity markets, the significant growth in the private equity sector, the role of dry powder in affecting valuations, and the fundamental process of private equity investing. The session concludes with an invitation to the next session, which will explore the detailed mechanics of private equity investment, encapsulated by the simple yet strategic approach of buying, improving, and selling companies for profit.

Keywords

💡Entrepreneurship

Entrepreneurship refers to the process of designing, launching, and running a new business, which typically involves taking risks and being innovative. In the video, Claudia Zeisberger, a professor of entrepreneurship, introduces the topic and its relevance to the world of private equity and venture capital, which are crucial for funding entrepreneurial ventures.

💡Private Equity (PE)

Private Equity is an investment strategy that involves acquiring a significant ownership stake in a company, often with the intent to improve its operations and financial performance. The script discusses the growth of the private equity market and its importance as an asset class for various investors, illustrating its significance in the financial ecosystem.

💡Venture Capital (VC)

Venture Capital is a type of financing that investors provide to startups and small companies with perceived long-term growth potential in exchange for equity. The video mentions venture capital funds, indicating that they are part of the early-stage investment landscape, which is a key area of focus for the professor.

💡Asset Class

An asset class is a group of similar assets that are believed to perform in a similar way under various market conditions. In the context of the video, private equity is described as an important asset class, highlighting its role as a significant category of investment for investors such as pension funds and sovereign wealth funds.

💡Total Assets Under Management (AUM)

Total Assets Under Management refers to the total market value of investments that a manager supervises. The script uses AUM to demonstrate the growth of private equity and its comparison with public market investments, showing the scale and impact of private equity in the investment world.

💡Buyout Funds

Buyout funds are a type of private equity fund that focuses on acquiring controlling stakes in companies with the intention of improving their operations and financial performance. The video script discusses how buyout funds represent a significant portion of the private equity market, particularly in the U.S. and Europe.

💡Growth Equity Funds

Growth equity funds invest in companies that are already successful and have demonstrated strong growth potential. The script explains that these funds are distinct from buyouts and venture capital, often investing in companies that are profitable and seeking minority investments for strategic growth.

💡Dry Powder

In the context of private equity, dry powder refers to the capital that has been raised by funds but has not yet been invested. The video script highlights the substantial amount of dry powder available in the market, which is a key factor influencing deal pricing and competition among investors.

💡EBITDA Multiples

EBITDA Multiples are a measure of the price paid for a company in terms of its Earnings Before Interest, Taxes, Depreciation, and Amortization. The script mentions that the multiples have increased due to increased competition and capital in the market, indicating the higher valuations that private equity firms are paying for companies.

💡Portfolio Company

A portfolio company is a firm in which a private equity firm or venture capital firm has invested. The script uses the term to describe the companies that private equity firms acquire stakes in, with the intention of growing and eventually exiting the investment for a profit.

💡Investment Process

The investment process in private equity involves identifying potential investments, conducting due diligence, making an investment, and eventually exiting for a return. The video script promises to delve into the details of this process in a subsequent session, emphasizing the structured approach to private equity investing.

Highlights

Introduction to private equity and venture capital by Claudia Zeisberger, professor at INSEAD.

Overview of private equity market growth from a cottage industry in the 70s and 80s to a significant asset class.

Private equity value has grown more than eight-fold from 2000 to 2019, outpacing public market equities.

Despite growth, public debt and equity still outpace private markets in total assets under management globally.

Explanation of various asset classes and the position of private equity in the financial market context.

Introduction to growth equity funds, which invest in fast-growing, often profitable companies without acquiring a majority stake.

Comparison of private equity allocation in different regions: US, Europe, Asia, and Latin America.

Asia's private equity market is evenly split between buyout, growth equity, and venture capital.

Latin America's private equity deals are primarily growth equity investments in family businesses.

Discussion of 'dry powder'—capital raised but not yet deployed in private equity, currently at about $1.5 trillion.

Dry powder levels typically range between 25-35% of total assets under management in private equity.

Increasing competition has driven up EBITDA multiples paid by private equity firms.

Private equity returns have started to taper off due to more capital looking for attractive deals.

Fundamental private equity process: acquiring equity, growing the company, and exiting at a profit.

Summary of session: comparison of public vs. private equity markets, growth trends, impact of dry powder, and basic private equity operations.

Transcripts

hello my name is claudia zeisberger

i'm a professor of entrepreneurship at

insead where i focus

on private equity and venture capital if

you are intrigued by the world of pe and

ec

then this video channel is for you i

will start with a high level

introduction

of the institutional private equity

market

and the first lectures will apply to

both early stage venture capital funds

as well as late stage private equity

funds

in part one we will start with a broad

market

overview and we will see

how private equity really has grown

from a cottage industry in the

70s and 80s to a very fast growing

environment and a very important asset

class

for all the lps

so what we see here is uh the

uh the growth or the development of the

public equity markets

in the last two decades from 2000

till 2019. so

i've indexed the data for private equity

to 2000 so let's have a look how private

equity has grown

over the same time as you can see the

value of

pe-owned companies has grown more than

eight-fold in the last two decades by

far outpacing the public market equities

growth

now being realistic though in terms of

total assets under management globally

public debt and public equity by far

still outpaces the private market

so even if i include infrastructure real

estate

and private debt into that so

let's have a closer look at the um

let's have a closer look at private

equity in the financial market context

so here we look at the uh the various

asset classes from real estate

commodities debt and equity

and as you can see in the green box here

this is where private equity sits

there we also have angel investing we

will not

tackle this in the context of this uh

video lecture

but because angel investing is

does not fit into the institutionalized

space of private capital

and obviously down here we have the

public the capital markets meaning

the public equity markets investors in

pe and vc

funds are sovereign wealth funds pension

plans university endowments

investment banks high net worth

individuals and nowadays at times

even retail investors we have seen

products or platforms being launched

that allow retail investors

to allocate to private equity usually

with pretty steep fees but we will

we should mention that as well here so

let's have a look at

the uh the private capital space so this

is only a venture growth buyout

from 2000 till 2019

and as you can see it's grown about

seven times if i now

add to that the distressed private

equity funds real estate funds

infrastructure natural resources

mesoline direct lending co-investment

and secondaries the growth rate has been

about 10.5

times in the last two decades so that is

clearly impressive for the private

equity space

now private equity around the world

can it can be quite distinct so what

i've done here i just simply

look at the total assets under

management in percent

and i'm asking myself how much of the

total aum

in the various regions around the world

are

invested in buyout funds venture capital

funds

the red box and growth equity funds

so what are growth equity funds whilst

buyout and venture is often quite well

known

growth equity funds are private equity

funds

that invest in fast growing companies so

not in startups often those companies

are actually quite profitable

but private equity invests and acquires

a minority stake so not a buyout

they're a minority investor in those

fast growing companies

more often than not they are being

invited to invest

not so much for because of a need of

capital but

much more because of the experience

and the talent that they contribute to

the portfolio company now as you can see

the u.s and europe are reasonably

similar

so we have a very reasonably large 70 to

80 percent

of aum uh invested in buyouts

whereby in europe the majority of those

are mid-market buyouts

meaning smaller companies that are being

acquired by private equity

whilst in the us the buy outside

by far the largest percentage of aum is

allocated to very large buyouts

we then have um some growth equity

happening

and obviously we see more venture

capital in the us than we see

in europe no surprise there now when we

look at asia and latin america the two

examples that i rolled out

for um for emerging markets you can see

that

asia is about one-third buyout one-third

growth equity and then one third venture

which is quite surprising

let me start with venture the venture

side by far the majority of the

adventure bucket

is venture capital in china so this uh

graph would have looked very different

even four or five years ago

so nevertheless also i should say

in latin america um and i

basically did this graph in um it's

it's a best guess i would argue together

with the latin american venture capital

association

by far the majority of deals private

equity deals in latin america

are growth equity deals and we see some

buyouts

and a little bit of venture capital

happening but in terms of percentage of

aum

the majority is invested in very often

family businesses

very often second or third generation

family businesses that are just not

willing to give up majority stakes

now in private equity

and the data you're looking here right

now is purely venture growth and buy out

what is being very often discussed is

the dry

powder dry powder being defined

as the capital that has been raised

by private equity funds but is still

waiting to be deployed

and as you can see we have right now

about

1.5 trillion u.s dollars

sitting on the sidelines waiting to be

invested in

venture growth or buyout deals so that's

a substantial amount of capital and it

has given the press a lot of

food for thought and it's being

discussed quite regularly

nevertheless let me just add the

industry as

a model can never run out of dry powder

so dry powder will

de facto never go to zero now

where is dry powder usually as the aum

the total assets under management and

private equity has grown no surprise dry

powder has grown as well

and usually dry powder over the last 20

years has been somewhere between

25 and 35 percent of total aum so right

now

we may be upper bound of that of that

range nevertheless we're by far not in

let's say extreme territory

now of course you can imagine more money

coming to the market

more dry powder looking for suitable

attractive deals

that has an impact on pricing and as we

have seen the

the increasing competition has clearly

in the last uh

eight years driven up the multiples

ebitda multiples that private equity

firms

are paying on entry when acquiring

portfolio companies

so on a global basis 11 times ebitda

11 to 12 times ebitda seems to be right

now the number to go for

um clearly this was initially the same

on the m a side

m a we've seen tapering off in the last

two years so we will need to see

how this will evolve further as more

money is being raised by private equity

nevertheless you will appreciate more

capital

joining in looking for attractive deals

has an impact so and no surprise

that pe returns have started to

taper off now if i look at the average

over the last

two decades on a decade by decade

comparison

then the last decade has still been

attractive no doubt

nevertheless lp's asking questions as

well

can private equity continue to deliver

the returns that it has delivered in the

past

given that we have so much capital

basically looking for attractive deals

now what actually is private equity and

this is just a sampler

for the upcoming lecture private equity

is a simple business

you acquire an equity stake whether it's

a minority or a majority stake at this

point doesn't matter

one grows the company and

one exits the company all within the

lifetime of one fund obviously one hopes

to exit at a profit

and obviously there's a lot more to be

said when it comes to

buying growing and selling nevertheless

what we will do we will have a closer

look at the investment

process in our next session where we

look at

the nuts and bolts of private equity

investing

so what have we basically what have we

learned

in our session today we had a compar we

had a look at the public equity markets

versus the private equity markets

we took a gross a closer look at the

growth and the development in the last

two decades

we understood that there's plenty of dry

powder and that

dry powder in the industry has had an

impact on

the valuations that private equity is

paying on entry

and we have understood that private

equity is a simple business

we buy we improve we sell if you like

this session give it a like below

and join me for the second session where

we have a closer look at the nuts and

bolts of private equity

[Music]

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