PitchBook FUNDRAISING CAPITAL OVERHANG U.S. PE & VC 2H Pg. Pg. Pg. Pg. LPs head to lowermiddle-market. funds; sub-$100m

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1 PitchBook 2H 2014 U.S. PE & VC FUNDRAISING & CAPITAL OVERHANG Pg LPs head to lowermiddle-market Pg. Pg. Pg. funds; sub-$100m 87% of PE $100b Micro VC funds reach remains funds fundraising increasing target in uncalled in (<$50m) 1H PE funds account for 60% of 1H 2014 closings

2 CONTENTS Introduction PE Fundraising Overview PE Fundraising by Fund Size PE Fund Step-up PE Closing Times PE Capital Overhang Funds-of-Funds StepStone Group Q&A Venture Capital Overview VC Fundraising by Fund Size VC Capital Overhang Largest Open PE & VC Funds Methodology WANT TO BECOME A SPONSOR? PitchBook reports reach thousands of industry professionals every month. Contact us for the opportunity to advertise or sponsor. Lisa Helme Danforth Managing Director, Strategic Business Development lisa.helmedanforth@pitchbook.com 1H 2014 PitchBook U.S. PE & VC FUNDRAISING & CAPITAL OVERHANG Pg. PE fundraising Pg. increases for a third 6 Pg. 13 Pg. 15 PE fund VCs closed The average consecutive year 5 sizes swell more funds VC fund to a postcrisis high raised less decade-low in 2013 but size hit a in 2013 capital in 2013 CREDITS & CONTACT PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Senior Director, Analysis Content ALEX LYKKEN Editor MICHAEL REBAGLIATI Sr. Research Assoc. DANIEL COOK Senior Financial Analyst ANDY WHITE Senior Financial Analyst YNNA CARINO Editor Contact PitchBook RESEARCH research@pitchbook.com EDITORIAL editorial@pitchbook.com SALES sales@pitchbook.com COPYRIGHT 2014 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment. 2

3 Introduction Fundraising efforts by private equity (PE) and venture capital (VC) firms provide clues to future investment activity, as LP commitments are awarded with certain strings attached, including limited timeframes and narrow investment focuses. PE and VC firms are hesitant, to say the least, about letting money go to waste, as uninvested capital drags down the overall performance, and eventual returns, of a given fund. LPs, already concerned about unused commitments, are simultaneously worried about historically high valuations, and the diminished returns that might follow an investment. The current landscape is anything but a free-for-all, and requires careful decision-making for GPs and LPs alike, as the data in this report will show. PE firms raised 144 U.S.-based funds through the first half of 2014, amassing $85 billion in commitments. This year will likely decline from 2013 in terms of capital raised, reflecting far fewer mega-funds. A number of namebrand firms like Carlyle, Silver Lake, Apollo and Warburg Pincus all closed new flagship funds of over $10 billion last year; only two funds have closed in 2014 with over $5 billion. Even without new mega-funds, the U.S. PE industry has more money than it can spend. The capital overhang checked in at $486 billion in 1H 2014, which is down a bit from That mountain of dry powder hasn t converted into higher deal flow; new investments have taken a back seat to exits and fundraising, which are booming thanks to record multiples and strong LP demand for PE exposure, respectively. As we ll discuss throughout this report, the PE fundraising trail has changed dramatically in recent years, and is still changing. Several LPs, most notably CalPERS, have decided to reorganize their PE portfolios by paring down their number of GP relationships. LPs are also moving away from some of their traditional investment strategies, including mega-funds, and are experimenting more with PE as its confidence in the asset class improves. Likewise, VC firms are benefitting from renewed LP confidence. Through the first half of 2014, $17.4 billion was raised in U.S.-based VC vehicles, nearly matching the $18.4 billion raised in all of A substantial portion of 1H 2014 fundraising went to six mega-funds closing on more than $1 billion. Later stage firms are raising larger VC funds, as bigger financings are needed to help venture-backed companies win their respective markets. At the other end of the spectrum, the number of microfunds (<$50 million) continues to grow, accounting for more than 60% of all VC fund closings in the first half, its highest percentage on record. Overall, the VC fundraising landscape has improved dramatically, as evidenced by the 84% of funds that reached their targets in 1H 2014, versus in We hope the information in this report proves insightful and informs your decision-making process in the coming quarters. If you have any questions, comments or suggestions, please contact us at research@pitchbook.com. THE PITCHBOOK PLATFORM FOR FUNDS OF FUNDS No one offers more coverage of the private equity and venture capital landscape. Identify topperforming GPs Conduct better due diligence Identify and network with LPs Create customized benchmarks Follow industry trends Benchmark fund performance

4 PE Fundraising Overview The first half of 2014 saw 144 PE funds close, totaling about $85.5 billion. The fundraising trail has been wide open of late, with the last four quarters all seeing at least 70 funds close. No other quarter since the meltdown recorded even one quarter above 70. Total capital raised set a post-crisis record last year, with $206.1 billion, buoyed by 11 funds that closed with at least $5 billion won t be a record-setting year, with few mega-fund closings on the horizon, not to mention increased LP attention toward the middle- and lower-middle-markets. Following the crisis, there was concern about LPs losing confidence in private equity as an asset class. As we re now seeing, the worstcase scenarios didn t come to pass; even 2006 and 2007 vintages, raised at the height of the buyout boom, have distributed substantial amounts of capital back to LPs, albeit at historically low return rates. For those PE firms that withstood the recession remarkably well are now being rewarded with happier LPs U.S. PE FUNDRAISING BY YEAR $300 $250 $200 $150 $100 $ $ $ $ $ $116 and smoother fundraising trails. In addition to the $85 billion of capital that closed in 1H, another $135 billion is being targeted in open funds just in the $1 billion+ range. Mezzanine funds have fallen out of favor with LPs; low interest rates have mostly benefitted high-yield lenders and senior creditors, leaving 178 $ $ $ $ * Capital Raised ($B) # of Funds Closed $ mezzanine investors competing for smaller deals and narrowing spreads. Restructuring funds, largely dormant in the improving economy, appear to be making a comeback. 1H 2014 matched the number of funds closed (10) in all of 2013, as more LPs are placing bets on a possible correction. 0 FUNDRAISING (#) BY FUND TYPE 100% 90% 80% 60% 40% 10% 0% '05 '06 '07 '08 '09 '10 '11 '12 '13 '14* FUNDRAISING ($) BY FUND TYPE 100% 90% 80% 60% 40% 10% 0% '05 '06 '07 '08 '09 '10 '11 '12 '13 '14* Buyout PE Growth Co-Investment Restructuring Mezzanine Energy Other 4

5 PE Fundraising by Fund Size Two things stand out in the graph to the right. One is the recent slowdown in $5 billion+ funds, particularly in 1H Notwithstanding a comeback year in 2013, mega-funds have been few and far between since the crisis, as LPs have increasingly turned to smaller funds instead. The bottom of the chart shows a gradual increase in fund counts in the sub-$100 million category. Through the first half of 2014, 37% of all fund closings have been for under $100 million, compared to just 25% in During the buyout bonanza of , smaller funds had a tougher time competing for LP attention. Marquee names like Carlyle and Blackstone were raising record-setting amounts, seemingly with ease, while firms raising sub- $1 billion funds were viewed with some skepticism. The financial crisis changed that; for LPs that invested at the height of the PE market, heavy exposure to 2006 and 2007 vintage mega-funds has had a lasting effect. CalSTRS, as one example, recently disclosed plans to reduce its commitments to large buyout funds and invest in more small and middle-market vehicles. The pension is eyeing breakout groups at the lower end of the spectrum, citing firms like Palladium Equity Partners, which has returned a top-quartile 18.67% IRR on its 2005 fund ($775 million). At the moment, smaller funds are seen as less competitive and less expensive than larger funds, particularly given the valuations at the upper end of the market. Smaller funds are also more likely to offer co-investment opportunities, which LPs have been pursuing more. There PE FUNDRAISING (#) BY FUND SIZE 100% 90% 80% 60% 40% 10% 0% PE FUNDRAISING ($) BY FUND SIZE $5B+ $1B-$5B $500M-$1B $250M-$500M $100M-$250M Under $100M Funds of $100 million or less accounted for 37% of PE fund closings in 1H % 90% 80% 60% 40% 10% 0% * * $5B+ $1B-$5B $500M-$1B $250M-$500M $100M-$250M Under $100M 5

6 MEDIAN & AVERAGE PE FUND SIZE ($M) $1,200 $1,000 $800 $600 $400 $ * Average Fund Size Median Fund Size The median PE fund size continues to drop, as LPs pursue smaller, less competitive funds. are also questions about where mega-funds will invest their money, especially as firms like Carlyle and TPG have publicized their intentions to make more minority investments, as opposed to headline-grabbing mega-buyouts. Fewer large deals and more small deals will likely mean longer investment timelines, which impact the ultimate returns sent back to LPs. Smaller funds, particularly niche-oriented vehicles, should have an easier time putting capital to use in pre-targeted, overlooked segments. A large amount of dry powder remains in pre-crisis mega-funds, including $17.2 and $16.3 billion in the 2007 and 2008 vintages, respectively. More dry powder hasn t translated into more deal activity, however. Even as firms continue accumulating capital, it may take a few years to see the total capital overhang whittle down significantly, as we ll discuss further on page 9. AVERAGE & MEDIAN FUND SIZE BY PE FUND TYPE AVERAGE ($M) Buyout $718 $890 $1,111 $1,084 $1,005 $648 $583 $678 $807 $642 Growth $246 $298 $315 $252 $230 $152 $269 $299 $205 $709 Co-Investment $125 $569 $298 $301 $266 $56 $148 $177 $428 $204 Restructuring $913 $691 $1,365 $2,355 $325 $1,090 $1,211 $1,003 $1,761 $972 Mezzanine $353 $782 $1,161 $643 $464 $302 $367 $687 $862 $707 Energy $457 $788 $946 $576 $1,830 $921 $1,204 $571 $1,486 $678 MEDIAN ($M) Buyout $300 $300 $300 $250 $240 $286 $232 $205 $219 $180 Growth $90 $175 $115 $160 $118 $56 $90 $45 $97 $300 Co-Investment $41 $450 $138 $156 $142 $29 $110 $98 $150 $78 Restructuring $1,100 $640 $900 $1,140 $179 $346 $668 $812 $900 $875 Mezzanine $156 $310 $218 $250 $199 $207 $227 $200 $171 $873 Energy $392 $182 $710 $375 $820 $906 $200 $363 $250 $42 6

7 PE Fund Step-up Unlike its VC cousin, the PE asset class can scale more manageably; larger fund sizes don t necessarily distort PE s investment focus. Bigger funds can make bigger investments, as we saw all the time between 2005 and The graph to the right shows how increasingly ambitious investors were during the buyout boom; the median step-up in PE fund size was over every year between 2005 and Post-crisis, firms have eased up, and haven t eclipsed the mark since. The big reason behind this is a concerted effort to shrink subsequent funds. After PE firms got their wings clipped by the crisis, prudent fundraising became more normalized in the industry. Today s deal-making environment all but nixes big step-ups in fund sizes, especially as potential megabuyout targets have become increasingly scarce. LPs have welcomed the change, which helps reduce management fees. Furthermore, smaller funds arguably have an easier time posting great returns than bigger funds in this environment, or can at least invest more nimbly. The chart to the immediate right shows how well the change has been received. Through 1H 2014, an impressive 87% of all PE funds reached their fundraising targets. Only half did so in Combined with renewed LP confidence in the PE class, as well as high demand for its investment talents, the fundraising trail has become less onerous than it was only a few years ago. It s also eating up less of PE s valuable time. MEDIAN PE FUND STEP-UP 90% 80% 60% 40% 10% 0% % OF FUNDS THAT REACH FUND TARGET More conservative fundraising efforts have resulted in more PE firms meeting and exceeding their fundraising targets. 100% 90% 80% 60% 40% 10% 0% 86% 41% 44% 56% 79% 56% 42% 58% 83% 84% 78% 75% 60% 33% 67% 81% 28% 72% 65% 36% 64% * Reached Fund Target 36% 64% 41% 59% 75% 43% 35% 65% 73% Missed Fund Target 76% 33% 19% 81% 82% * Median Fund Step Up 37% % of Funds Larger than Predecessor 13% 87% 7

8 PE Closing Times The chart to the right nicely reflects how the PE industry has fared in recent years. The average time it takes to close a fund reveals several things, including the enthusiasm (or lack thereof) of its investors. At the height of the buyout boom, fundraising didn t take up too much time. The process took conspicuously more time as the economy worsened, culminating in an 18.8 month average in 2010, reflecting LP weariness of illiquid assets. As PE has proven itself since, closing times gradually dropped every year until 2013, before taking an unexpected bounce back up in 1H It s hard to pinpoint a cause for the slowdown, especially since LP interest in PE is higher now. One possibility is that, as LPs have cut ties with past managers and are introducing themselves to new ones, the time it takes to build new relationships slows the process down. Similarly, with LPs slimming their relationships, smaller commitments that helped speed-up fundraising aren t as prevalent today, leaving only the bigger, fewer and harder-to-get commitments up for grabs. Smoother fundraising trails have coincided with a decrease in the amount of time firms are taking between funds. Through 1H 2014, the average time between fundraises was 4.3 years, down from 4.9 years in 2013 and 4.5 years in PE firms are going back for seconds (and thirds) at a pace that s approaching the heady days of 2007 and For GPs, the quicker time between fundraises helps offset reduced management fee revenues from smaller fund sizes. AVERAGE TIME TO CLOSE (MONTHS) * Investors are spending less time on the fundraising trail, and going back for seconds more quickly. AVERAGE TIME BETWEEN FUNDS (YEARS) *

9 PE Capital Overhang U.S. PE CAPITAL OVERHANG ($B) $600 $500 $400 $300 $200 $100 $541 $526 $504 Cumulative Overhang Note: The LP reporting cycle is two quarters behind the most recent quarter ended. PitchBook s most recent fund returns data is through 4Q $484 $497 $509 Overhang by Vintage $ * * *as of 12/31/ and 2013 vintages account for 58% of overall dry powder PE CAPITAL OVERHANG BY VINTAGE YEAR % % % % % % % The topic of dry powder has been one of the most widely discussed in the PE industry, and understandably so. In the U.S. alone, about half a trillion dollars in unspent capital has accumulated in PE coffers, a good portion of it in aging funds. Almost $100 billion of combined capital remains uncalled in 2006, 2007 and 2008 funds, even as investors are hitting the fundraising trail and collecting more commitments. Some LPs are worried that sponsors have accumulated too much capital, and will be under pressure to deploy it in an expensive environment. CalPERS, for instance, cited dry powder as one of its biggest concerns after announcing plans to reduce its PE allocation. As of December 31, 2013, PE investors have stockpiled about $486 billion of uncalled capital. That s actually down a bit from $509 billion in 2012, a 5% decline. Since our previous capital overhang check-up, 2008 vintages have been put to work; at the halfway point of 2013, about $52.1 billion of dry powder remained unspent in 2008 funds, including $20.1 billion in mega-funds from that year. Both numbers fell significantly by the end of 2013, down to under $46 billion overall and $16.4 billion for mega-funds. Vintages raised in the immediate aftermath of the crisis, 2009 and 2010, have relatively little dry powder due to weak fundraising environments at the time. That smaller pile of dry powder should help sponsors deploy capital from younger funds relatively quickly. One point worth mentioning is the effect the booming debt market has had on the overhang; less equity has been needed to make deals work, keeping dry powder higher than they would be in a more normal lending environment. 9

10 PE CAPITAL OVERHANG ($B) BY FUND SIZE $160 $140 $120 $5B+ 6% 8% $100 $80 $60 $1B-$5B $500M-$1B 36% 12% $40 $20 $250M-$500M Under $250M 38% $466 billion of dry powder today translates into about four years of deal flow, as opposed to three or so years in a more-typical period. More money, more problems? Despite the amount of aging dry powder, new funds continue to pop up vintages account for almost of all uncalled capital, and 2012 funds another 28%. Yet more capital is being raised in Is the PE industry biting off more than it can chew? Many believe so, especially considering the tough deal-making environment investors are currently facing. It s important to remember, though, that PE firms have some time to deploy the money, about four or five years from the time of commitment. Investors don t anticipate staying on the sidelines for that long, and their current fundraising efforts suggest that, in time, GPs believe investment opportunities will continue to exist. Additionally, as a few industry professionals have pointed out, optimal fundraising conditions aren t permanent. It wasn t long ago that investors were struggling to raise capital, and memories from 2009 and 2010 haven t been forgotten. In that light, it isn t surprising to see firms raising as much money as they are, while LPs are flush with capital and eager to reinvest it in one of the best performing asset classes available. Whether that turns out well for LPs remains to be seen, of course, but while the window is open, GPs are taking advantage of the optimism. PE CAPITAL OVERHANG ($B) BY FUND TYPE $160 $140 $120 $100 $80 $60 $40 $20 Other Energy Mezzanine Restructuring Co-Investment PE Growth Buyout 10% 9% 2% 4% 7% 4% 64% 10

11 Funds-of-Funds Overall, funds-of-funds continued to decline in capital raised through the first half of At $4 billion, capital raised is at least on pace to finish the year roughly on par with capital levels from However, the total number of funds closed paints a grim picture with only 12 funds wrapping up so far. Moreover, of the few funds that have closed this year, smaller funds are dominating; larger LPs are becoming more sophisticated in fund selection, and funds-of-funds have pivoted toward smaller LPs that don t have the resources of major pensions. Beyond the oft-cited double fee layer, funds-of-funds may also be waning due to the rise of the secondaries market. With regulatory pressure forcing certain LPs to divest alternative asset holdings, other less-restricted buyers have the opportunity to gain exposure to a diverse basket of proven funds at a discount to NAV. What s more, secondary fund purchases often hold the promise of faster distributions, since the fund s capital is already partially deployed. If the secondaries market continues to mature, these transactions may gradually erode the diversification benefits of funds-of-funds. FUNDS-OF-FUNDS FUNDRAISING BY YEAR $30 $25 $20 $15 $10 $ $18 $15 $23 $27 $23 $6 $8 $7 $12 $ * Capital Raised ($B) # of Funds Closed FUNDS-OF-FUNDS (#) BY FUND SIZE 2014* 49% 16% 12% 9% 12% 2% % 22% 15% 11% 9% 3% % 19% 14% 13% 10% % 22% 14% 12% 10% % 18% 8% 8% % 25% 16% 10% 10% % 19% 14% 11% 2% 0% 40% 60% 80% 100% Under $100M $100M-$250M $250M-$500M $500M-$1B $1B-$5B $5B LARGEST OPEN U.S. FUNDS-OF-FUNDS INVESTOR FUND NAME FUND TARGET ($M) Adams Street Partners Portfolio Advisors BlackRock Private Equity Partners Abbott Capital Management BlackRock Private Equity Partners Mesirow Financial PineBridge Investments Adams Street 2014 Global Fund Portfolio Advisors Private Equity Fund VIII BlackRock Diversified Private Equity Program V Abbott Capital Private Equity Fund VII Vesey Street Fund V Mesirow Financial Private Equity Partnership Fund VI PineBridge Private Equity Portfolio VI $1,050 $900 $750 $500 $500 $500 $500 11

12 Q&A: StepStone s Jay Rose Discusses PE, FoF Fundraising Landscapes Q: Private equity has more money than it can spend right now, about a half trillion dollars in dry powder in U.S.-based funds alone. Jay Rose At the same time, investors have shunned mega-buyouts in the $10 billion - $30 billion range. How do you see that dynamic playing out over the next few years, particularly if valuations stay high and investors remain cautious? A: Though long-term investors should always remain steadfast across different market and interest rate cycles, there are several structural components to today s market that should put the headline capital overhang number in perspective. First and foremost, private equity firms have had more capital available to them for the last two decades than they could prudently invest. These significant capital flows into private equity are the result of institutional investors seeking higher risk-adjusted returns by exploiting inefficiencies in the private markets. As long as this arbitrage opportunity exists, there will continue to be capital overhang in the asset class. Second, drypowder has historically ranged between four and five years of deal volume. The current capital overhang falls within this historical range. Third, the relatively low annual fundraising amounts following the global financial crisis have resulted in a younger capital overhang. As such, general partners are not under time pressure today to deploy capital like they were over the last few years due to record fundraising amounts in 2006, 2007 and Finally, it is important to recognize that general partners are paid management fees on committed capital, not invested, and therefore are held accountable for the timing of capital deployment over the five year investment periods. According to a recent Bain study, approximately $427 billion of the overhang coincides with buyout funds raised since 2011 that have plenty of time to diligently and patiently deploy capital. In 2012, your firm acquired Parish Capital, a fund-of-fund manager known for its expertise in small, niche-focused private equity funds. Do you see a viable future for these smaller, specialized funds? Or do you expect these smaller funds to struggle with generating deal flow in the future as mega-funds regain their traction in the fundraising market? We continue to believe smaller, niche-focused funds represent a highly attractive area of the private equity market that can provide LPs potential for meaningful outperformance. Investors have historically benefited from exposure to this segment based on its less efficient nature relative to the larger end of the buyout market (e.g., high number of target companies, relative lack of capital in this space, less efficient coverage by intermediaries), as well as the favorable exit environment made available by the well-funded large cap space. In addition, smaller funds generally provide LPs with attractive alignment dynamics as the economics for the managers of these funds tend to be oriented more towards carried interest than management fees. These dynamics are very much at play today, and we have seen a growing appetite from our client base for exposure to this segment. However, the risk at the small end of the market is the much wider dispersion of returns compared to the mid- and large-cap segments. Whereas many LPs historically turned to fund-of-funds such as Parish Capital for help navigating this risk, investors have been moving away from the fund-of-funds model due to their double layer of fees, carry, and inflexible structures. As a consequence, we see a very robust fundraising market for smaller, niche funds, but one that is in transition as managers raise capital increasingly on a direct basis from LPs as opposed to through fund-of-funds. CalPERS recently stated its disappointment in the FoF asset class and has clearly been reducing its exposure to funds-of-funds over the last 4 years. Given this negative sentiment, as well as the increasing in-house expertise of many larger pensions, do you think funds-offunds will decline as an asset class in the near future? Due to their size, CalPERS has a unique challenge deploying capital in the private equity asset class that cannot easily be linked to other investors in the space. However, their experience has been an indicator of both what works and what has changed in the fund-of-funds space. Smaller investors use fund-of-funds to gain exposure to a particular region, strategy, or investment type which they cannot commercially achieve independently. As these smaller investors in the asset class are limited in their ability to either staff internally or gain access to a broad funnel of global investment opportunities, the funds-of-funds model will continue to exist for such investors. >> To read the full interview, which includes a discussion on the importance of specialization, the Brazilian PE landscape and StepStone s big year in real assets operations, click here. >> Jay Rose is a member of StepStone Group s board of directors and the firm s Executive and Investment Committees. Mr. Rose manages U.S.- based middle-market buyouts, global distressed investments and directs the firm s portfolio management and analytics activities. 12

13 Venture Capital Overview VC FUNDRAISING BY YEAR While VC fundraising appears healthy on the whole, significant structural changes may be underway. $40 $35 $30 $25 $20 $15 $10 $ $22.4 $35.4 $37.4 $29.4 $12.8 $19.9 $25.5 $21.1 $18.4 $ * VC fundraising through 1H 2014 challenges the trends seen in the previous three years. In terms of number of funds raised, the market is on pace for a fourth straight annual increase dating to 2011, but at a much higher rate of increase in Yet, while saw successive drops in total capital raised, 2014 may shatter last year s fundraising total, with capital raised in the first half of the year representing almost 95% of capital raised in all of It is important to note that the second half of 2014 may see some slow-down in fundraising, as much of this year s surge is due to high profile mega-fund closings. Nevertheless, the VC fundraising market also appears extremely active at the lower end of the fundraising spectrum with micro-funds representing a record proportion of funds raised. Investors propensity for micro-funds looks likely to continue as there are currently over 170 open U.S.-focused venture funds targeting $50 million or less. The first half of 2014 also saw a record pace set in first-time fundraising with 44 first-time funds closing year to date a total that almost matched the 48 raised in all of The quick proliferation of these funds further underscores the optimistic state of the market, which is driven in part by the ample exit opportunities afforded by the continued strength of the public markets. However, while VC fundraising FIRST-TIME VC FUNDS $5 $4 $3 $2 $1 46 $2.1 $3.8 Capital Raised ($B) $3.6 $4.4 $ $2.3 # of Funds Closed appears healthy on the whole, significant structural changes may be underway within the market. The resurgence of VC mega-funds and the number of micro-funds suggest that mid-sized VC funds may be squeezed out of the fundraising market. This shift may create an environment in which VCs must either be niche investors or have the ability to jump between small and large sized deals in order to thrive '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14* Capital Raised ($B) $1.9 $ $ $2.6 # of Funds Closed 44 $

14 VC Fundraising by Fund Size The VC fundraising market set a breakneck pace in the first half of the year. At $17.4 billion, total capital raised has already nearly surpassed the total for all of The resurgence of venture mega-funds is a key driver of this astronomical fundraising level. In the first half of 2014, six VC funds closed on totals north of $1 billion, exceeding almost every year since the recession with the exception of While mega-funds dominated total capital levels, this does not necessarily mean that mega-funds are the new structural norm of the VC landscape. In fact, in the first half of the year alone, 73 funds closed on amounts less than $50 million. This is an astounding first half number considering that 2012 and 2013 had already shown large numbers of micro VC funds, with 93 and 90, respectively. Beyond the number of funds raised, trends in fund size also suggest an overall shift towards smaller VC funds. While the average fund sized increased sharply in the first half of 2014 due to the outsized influence of the six mega-funds, median fund size has actually declined to less than $25 million. Additionally, the median size of a follow-on fund raised in 2014 was only 18.4% larger than its predecessor. While still a noteworthy increase, this is a smaller step-up than for funds raised in 2013 and is far smaller than that seen in funds raised prerecession. Furthermore, boasting an 84% success rate, VC s have been very successful in hitting their fundraising targets in 2014, far surpassing the previous high of set in The decline in VC FUNDRAISING (#) BY FUND SIZE 100% 90% 80% 60% 40% 10% 0% Mega-funds and micro-funds are beginning to dominate the VC industry. VC FUNDRAISING ($) BY FUND SIZE 100% 90% 80% 60% 40% 10% 0% * * $1B+ $500M-$1B $250M-$500M $100M-$250M $50M-$100M Under $50M $1B+ $500M-$1B $250M-$500M $100M-$250M $50M-$100M Under $50M 14

15 median fund size and the declining rate of follow-on growth should also be considered in light of this fundraising target success. If VCs are raising more small funds while simultaneously hitting their fundraising targets more often, this would suggest that, in general, the VC industry is shifting its focus towards smaller fundraises. Given that the average closing time continues to decline in 2014, it may be that VCs are being rewarded for their conservative fundraising goals with more agility, i.e. they can spend less time on the fundraising trail and begin deploying capital more quickly. Nonetheless, the entrance of 6 mega-funds into the marketplace cannot be ignored. Theoretically, a bifurcated pool of VC capital makes sense. A few large funds could focus on the less-frequent but more capital-intensive later stage venture investments, while a wider base of small, agile funds focuses on a diverse range of seed and early stage bets. Such a structure may yet evolve; however, several of the recently closed mega-funds were raised by firms that do a substantial amount of early stage investing, such as Andreessen Horowitz and Founders Fund. Thus, the VC industry may see heightened competition for deal flow in the coming years before this fundraising model stabilizes. MEDIAN & AVERAGE VC FUND SIZE ($M) $250 $200 $150 $100 $ * Average Fund Size Median Fund Size % OF FUNDS THAT REACH FUND TARGET 100% 90% 80% 60% 40% 10% 0% 56% 39% 52% 46% 46% 35% 36% 34% 16% 44% 61% 48% 54% 54% 65% 64% 66% 84% * Reached Fund Target Missed Fund Target WE VE GOT IT COVERED PITCHBOOK FOR LIMITED PARTNERS: No one offers more coverage of the private equity and venture capital landscape. Identify top-performing GPs Conduct better due diligence Track industry trends and more! Find out more by ing demo@pitchbook.com or visiting pitchbook.com 15

16 VC Capital Overhang U.S. VC CAPITAL OVERHANG ($B) $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $94 $92 $85 Note: The LP reporting cycle is two quarters behind the most recent quarter ended. PitchBook s most recent fund returns data is through 4Q Cumulative Overhang $78 $76 $69 Overhang by Vintage * $ * Dry powder will likely be top-heavy going forward, as 6 new mega-funds enter the market. VC CAPITAL OVERHANG BY VINTAGE YEAR % % % % % % % Dry powder levels have continued to decline, totaling just over $58 million at the end of Despite an exceptionally high year to date for fundraising totals, capital invested still outpaced capital raised at $28.9 billion versus $17.4 billion, though the $28.9 billion figure includes new late-stage investors like hedge funds and PE firms. Looking at this declining capital overhang by vintage year, 68% of dry powder resides in vintage funds. Additionally, for any given pre-2011 vintage year, dry powder levels are less than 10% of total VC overhang. These figures are a healthy sign for the industry, suggesting that VC financing activity may be able to keep up with the fast pace of fundraising. Yet, while dry powder by vintage year points towards a healthy capital structure, dry powder by fund size raises questions about the stability of VC fundraising. Specifically, much of the industry s dry powder is tied up in mid-sized fund buckets. Of the $58 billion in VC dry powder, almost is still locked up in funds between $100 million to $500 million in size. With the sharp rise in the number of micro VC funds, as well as the recent closings of mega VC funds, these mid-sized funds may face especially stiff competition trying to put their remaining capital to work. Furthermore, while the chart on page 17 indicates reasonable levels of mega-fund dry powder, these figures do not account for the six megafunds that closed in the first half of In aggregate, those six funds will add $8.65 billion of dry powder to the market. Absent exceptional investment rates in 2H 2014, it is very possible VC capital overhang will be substantially more top heavy by the end of the year. However, several nuances in VC fundraising structure and strategy indicate that the VC fundraising environment may be 16

17 more sustainable than the top level numbers suggest. First, mega-funds are not necessarily homogenous, late-stage investment vehicles. Some firms have implemented a dual strategy fund structure in which a mega-fund s capital is split between a primary fund that does early stage deals and a parallel vehicle dedicated to larger, late-stage opportunities. This flexible structure could allow VCs to pivot between investment levels depending on deal flow, preventing a static buildup of dry powder at the top end of the market. Moreover, a VC that can access both ends of the market also has the opportunity to invest in the same portfolio company at different growth levels potentially using early stage capital to invest in a Seed or Series A round and then using later stage capital to double down on successful companies with late round follow-on investments. Thus, while mid-sized VC funds may face substantial challenges in deploying capital, the proliferation of microfunds and the evolving flexibility of mega-funds, as well as strong public markets, all point towards a dynamic future for the VC investing space. VC CAPITAL INVESTED VS. CAPITAL RAISED ($B) $50 $40 $30 $20 $10 -$10 -$20 -$ * Net VC Capital Capital Invested ($B) Capital Raised ($B) With the addition of six new mega-funds, VC capital overhang may be substantially more top-heavy by the end of the year. VC CAPITAL OVERHANG ($B) BY FUND SIZE $16 $14 $12 $1B+ 21% 7% $10 $8 $6 $500M-$1B $250M-$500M $4 $100M-$250M 25% $2 Under $100M 27% 17

18 Largest Open PE & VC Funds BUYOUT INVESTOR FUND NAME FUND TARGET ($M) Apollo Global Management TPG Capital Hellman & Friedman First Reserve Centerbridge Partners Vista Equity Partners BDT Capital Partners Natural Gas Partners Lindsay Goldberg Mount Kellett Capital Management Apollo Overseas Partners VIII TPG Partners VII Hellman & Friedman Capital Partners VIII First Reserve Fund XIII Centerbridge Capital Partners III Vista Equity Partners Fund V BDT Capital Partners Fund II NGP Natural Resources XI Lindsay Goldberg IV Mount Kellett Capital Partners III $18,500 $12,000 $10,250 $6,000 $5,750 $5,750 $5,200 $4,500 $4,000 $4,000 GROWTH INVESTOR FUND NAME FUND TARGET ($M) Olympus Partners General Atlantic Elevation Partners Neuberger Berman Panda Power Funds Sequoia Capital Essex Woodlands TPG Biotech John Thomas Financial Inflection Equity Partners Olympus Growth Fund VI General Atlantic Investment Partners 2013 Elevation Partners II Dyal Capital Partners II Panda Power Fund II Sequoia Capital U.S. Growth Fund VI Essex Woodlands Fund IX TPG Alternative & Renewable Technologies Partners JTF Multi-Opportunity Fund II Inflection Partners Fund $2,500 $2,000 $1,900 $1,500 $1,000 $1,000 $750 $625 $600 $500 VC INVESTOR FUND NAME FUND TARGET ($M) Intellectual Ventures JMI Equity Duff Ackerman & Goodrich Telefónica Ventures Columbia Capital Menlo Ventures Clarus Ventures ClearSky Power & Technology Fund Founders Circle Capital Spring Lake Equity Partners Invention Investment Fund III JMI Equity Fund VIII DAG Ventures V-QP Amérigo Columbia Capital Equity Partners IV Menlo Ventures XII Clarus Lifesciences III ClearSky Power & Technology Fund I Founders Circle Capital I Tudor Ventures IV $3,000 $1,000 $500 $485 $425 $400 $375 $350 $350 $300 18

19 Methodology PRIVATE EQUITY FUNDS The following fund types are used in PitchBook s PE fundraising data: buyout, co-investment, mezzanine, restructuring/distressed situations, energy and PE growth/expansion. This report only includes U.S.-based funds that have held their final close. VENTURE CAPITAL FUNDS In addition to traditional VC funds, PitchBook also includes corporate VC funds and seed-stage funds in our VC fundraising total. Funds that identify themselves as growth-stage vehicles are classified as PE funds in this report. Only U.S.- based funds that have held their final close are included in the fundraising numbers. CAPITAL OVERHANG Calculated using the most recently available fund cashflow data, the capital overhang in this report is updated through June 30, The capital overhang is based on vintage year and only capital that is held in closed funds is considered (i.e. evergreen funds are not counted). If a fund closed on July 1, 2013 or later, it is only included in the dry powder figure if it previously held a first close and has cashflow data available. FUND LOCATION A fund s location is determined by the country or region where the majority of its investments have been, or will be, made. Only U.S.-based funds are included in this report. CLOSE DATE AND VINTAGE Unless otherwise noted, the fundraising data in this report is based on a fund s close date. The vintage year is based on the vintage year reported by the GP and LPs, otherwise the year in which a fund holds its final close is used. GREAT DATA MEANS BETTER LEVERAGE PITCHBOOK FOR LENDERS: No one offers more coverage of the private equity and venture capital landscape. Grow your pipeline Target aging portfolio companies Expand your professional network Identify equity partners Run public & private comparables Find imminent capital restructurings

20 PitchBook Bet ter Data. Bet ter Decisions. PitchBook for Private Equity Firms pitchbook.com INTELLIGENCE IN ACTION No one offers more insight on the private equity landscape than PITCHBOOK FOR PE FIRMS What will you do with it? Source & filter investment opportunities Monitor peer activity & industry trends Identify the right LPs for your next fund Benchmark your fund performance Run public & private comparables Augment portfolio executive teams