Superabundance and shadow capital at AVCJ forum

Terms frequently heard in the conversations at AVCJ in Sydney this year included “superabundance” and “shadow capital”.

By Colin McKinnon, Executive Director, NZVCA

Themes from the AVCJ conference in Sydney 4-6 March, 2015.

Bain & Company reported an expectation of a decade ahead with high asset prices and a “superabundance” of capital. Hold periods are expected to be longer.

The term “shadow capital” referred to LP appetite for investment strategies including co-investment; a topic that reverberated through many of the speaker sessions. Bain estimate that freshly committed dry powder hit a global record of US$1.2 trillion last year. The outlook for mid-market was positive with some new interest in NZ from LPs at the conference.

Venture has performed well in the US market and there are some green shoots for a rejuvenation of globally connected Series-A funds in Asia Pacific, including Australia.

PE performance
PE is best performing asset for many LPs. Speakers from Sun Super, QIC and Future Fund were among the LPs acknowledging that PE had been their best performing asset class over the last 10-15 years. A comment from a leading GP lamented that recent excellent returns from PE investment in significant Australian companies had seen the returns go to offshore investors because Australia pension beneficiaries are poorly served by Australian LPs not being invested in Australian GPs.

Analysis showed that Australian PE over the last 15 years had provided a 38% greater return compared with other regional markets with a 60% lower variability than any other market including the US. With this track record, how could the Australian LPs justify not included Australian GPs in their portfolio?

The Bain report noted that shadow capital had gained momentum and was reshaping the GP-LP relationship. Bain comment that LP direct investing was not a threat to GPs because LPs will lack the capability to effectively invest directly and replicate GP competency in-house.

Co-investment accounts for roughly 10% of PE assets under management. Bain notes that “LPs need GPs to help them put capital to work and demonstrate the disciplines for success”.

LPs have appetite for venture but do not find any funds that meet the criteria in Australasia. The view was expressed that good start-up companies are self-selecting to find venture capital offshore. Seed and Series-A rounds are available in Australia.
International VC trends include the prospect of no boundaries, with US VC prepared to travel beyond the 50k from home.

In the past VC contributed only a little bit to growth of companies; the companies grew much more once they were listed; in recent times the VC funded period has funded much more of the revenue
growth. Time to $50m revenue was 11 years before 2000; in 2005-2008 it was 4 years to $50m revenue.

The quality of entrepreneurs has improved in last 5 years; there are more entrepreneurs living a global lifestyle. VC is now a global opportunity and there is a flywheel of repeat entrepreneurs.

In Japan the failure of Sony released a large number of engineers on the market; and caused young people to not trust big companies for their career prospects and seek roles with start-ups.

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