Why venture capital will out perform pe over the next 5 years
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Why Venture Capital Will Out Perform PE Over The Next 5 Years Why Has PE done so well this decade? PE Salad Days of 2000-2007… Massive liquidity in the economy 17 rate cuts by the fed 2000 to 2004 Low equity risk premium Attractive public market valuations post bubble

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PE Salad Days of 2000-2007… Years

  • Massive liquidity in the economy

    • 17 rate cuts by the fed 2000 to 2004

    • Low equity risk premium

  • Attractive public market valuations post bubble

  • Permissive lending environment

  • Smaller PE funds, less capital available…. and less competition


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Buyout Mezzanine Environment Years2000

Economic Situation

Confidential

4



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PE Environment Today Years

  • Debt markets virtually shut down….

  • Will eventually re-open but….

    • ultra favorable conditions of recent years will not return soon

  • Massive un-invested capital overhang….


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Buyout & Mezzanine Fundraising Has Increased 8x Since 2003 Years

Buyout & Mezzanine fundraising up 29% through 3Q07, versus 2006

*2007 figures are based on actuals through 3Q07 and estimates for 4Q07

Source: DowJones VentureSource, Buyouts Magazine, Clearstone analysis

Confidential

7


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VC Fundraising – and Performance Dropped Significantly After Similar 8X Increase

Source: DowJones VentureSource, NVCA

Confidential

8


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Buyout Mezzanine Environment After Similar 8X Increase2008….Troubling

Economic Situation

Confidential

9


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Signs of Problems Ahead… After Similar 8X Increase

  • Leveraged buyouts require robust credit markets

    • That existed the past 7 years…but no longer

  • Banking regulators giving greater scrutiny to leveraged lending practices

  • No takers for leverage loan participations

    • Banks hold nearly $300B of debt needing to be sold!


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Classic Buyout Candidates Under Pressure…. After Similar 8X Increase

  • Mature companies in mature markets

    • Retail, Manufacturing, Materials, Financials

  • Don’t do we well in slowing economy…signs already evident

  • Shrinking cash flows restrict leverage potential….

  • Defaults rising….driving lenders to demand higher risk compensation


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PE Firm Behaviors Driving Returns Lower…. After Similar 8X Increase

  • Large increases in # and size of PE funds

  • Aggressive deal pricing

    • From 5X to 8-10X cash flow multiples

  • Strong incentives to deploy capital rather than return it

  • Rising % of exits from inter-firm sales

    • 2007: 60% of PE exits done through sale to another PE firm




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    Venture Capital Environment extraordinary difficult times2000

    Economic Situation

    Confidential

    15



    Venture capital fundraising l.jpg
    Venture Capital Fundraising in capital and firms…..

    Venture Capital fundraising down 11% through 3Q07, versus 2006

    *2007 figures are based on actuals through 3Q07 and estimates for 4Q07

    Source: DowJones VentureSource, Buyouts Magazine, Clearstone analysis

    Confidential

    17


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    Only The Strongest Firms Survived The Post-Bubble Shake-Out in capital and firms…..

    Median Fund Size increased 2x

    – $100MM in 2000 versus $200MM in 2006

    Source: DowJones Venture Capital Industry Report 2007

    Confidential

    18


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    Attractive Conditions Ahead… in capital and firms…..

    • Venture capital fund commitments flat for past 3 years

      • contra-indicator

    • Early stage valuations stable…

      • while late stage and IPO valuations growing

    • Strong public market appetite for growth stories

      • Recent IPOs in the enterprise and consumer services sectors well received


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    Venture Capital Environment in capital and firms…..2008

    Economic Situation

    Confidential

    20


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    More so than earlier tech cycles, private investors are being rewarded for potential break out value at IPO….


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    More Value Accruing to Venture Investors at IPO being rewarded for potential break out value at IPO….

    - $ Billions -

    Earlier Tech Cycles

    New Tech Cycle

    *Facebook Pre-Money IPO valuation rumored to be greater than $50B

    Confidential

    22


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    Why Are Early Stage Companies Capturing More Value? being rewarded for potential break out value at IPO….

    • Companies are able to hit critical mass faster

      • Impact of Internet, new communication technologies, leveraging managed services

    • Addressing global opportunities earlier in their life cycle

      • From 300M to 2.5 billion consumers

    • Sourcing gains from China and India

    • Capital markets much better informed

      • More willing to factor in growth potential


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    It’s a very attractive market for early stage investing….particularly in the enterprise and consumer markets….


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    Extremely Favorable Trends in the Enterprise Sector investing….particularly in the enterprise and consumer markets….

    • Post bubble IT austerity has reached practical limits

      • Major upgrades needed to replace outdated computing and communication systems

        • Wireless networks – Meru, Divitas

        • Digital archival and storage – Kazeon, Mimosa

    • Web and digital media opportunities require new technology investments

      • Content monitization – eForce, Rubicon


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    Compelling Enterprise 2.0 Venture Opportunities investing….particularly in the enterprise and consumer markets….

    • Managed services

      • Unified communications monitoring – Communicado

      • Mobile network access - SoonR

  • Predicative analytics and decision support systems

    • Real time analytics for IT networks - Integrien


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    Appendix Slides investing….particularly in the enterprise and consumer markets….


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    Venture Capital Environment investing….particularly in the enterprise and consumer markets…. 2000 Versus 2008

    Confidential

    28


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    Buyout Mezzanine Environment investing….particularly in the enterprise and consumer markets…. 2000 Versus 2008

    Confidential

    29


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