Introduction To Private Equity & Venture Capital #1: Ecosystem & Industry Dynamics
Summary
TLDRClaudia 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
📈 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.
🌏 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.
🔍 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.
Mindmap
Keywords
💡Entrepreneurship
💡Private Equity (PE)
💡Venture Capital (VC)
💡Asset Class
💡Total Assets Under Management (AUM)
💡Buyout Funds
💡Growth Equity Funds
💡Dry Powder
💡EBITDA Multiples
💡Portfolio Company
💡Investment Process
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]
you
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