PE fundraising. adapting to current environment. Secondhighest. 76% of VC funds in 2015 outmatched predecessor in size. total raised for the decade

Transcription

1 PE fundraising 8 adapting to current environment Shortest closing time for PE funds since 2008 Secondhighest VC total raised for the decade 76% of VC funds in 2015 outmatched predecessor in size

2 Credits & Contact PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Market Development & Analysis Contents Content GARRETT JAMES BLACK Senior Analyst NIZAR TARHUNI Analyst BRIAN LEE Data Analyst JENNIFER SAM Senior Graphic Designer JESS CHAIDEZ Graphic Designer Contact PitchBook pitchbook.com Introduction 3 PE Fundraising Overview 4 5 PE Fundraising by Fund Size 6-7 PE Closing Times 8 PE Capital Overhang 9 Secondaries 10 VC Fundraising Overview VC Fundraising by Fund Size Micro VC Funds 15 Venture Capital Overhang 16 Select Open U.S. Funds 17 Methodology 18 RESEARCH reports@pitchbook.com EDITORIAL editorial@pitchbook.com SALES sales@pitchbook.com COPYRIGHT 2016 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 How is fundraising evolving? Introduction Investors perception of risk matters as much as the degree to which risk has materialized. Over the past month, we ve detailed how the private equity and venture capital investment landscapes have been evolving in response to macro concerns, volatility and corrections in public markets and more. Yet, when we come to fundraising for PE and VC, we must consider the perspectives of both fund investors and managers and how they are adapting to the current environment. In some ways, PE fund managers have become victims of their own success. They must contend with an immense overhang of dry powder in a competitive dealmaking environment, generated by the vast number of commitments collected over the past few years from limited partners drawn by the asset class s strong historical performance. To assess how PE fundraisers have responded to not only that overhang s impetus to invest, but also investment trends, we examine multiple datasets ranging from fundraising across different fund types to fund size metrics. MAKE WAY FOR SMARTER, ON-THE-FLY MEETING PREP Introducing PitchBook Mobile. The same excellent data, technology and service from the PitchBook Platform, now available on a mobile device. When it comes to VC, currently, there is a general consensus that the venture industry is experiencing the onset of cooling after overheating to the point of overexuberance, with investors scrutinizing the fundamentals of startups more closely than in years prior, primarily in response to concerns about liquidity and growth. Venture fundraisers have had a stellar run as of late, judging by the number of vehicles and sums of capital raised, yet how will they respond to the cooling of the investment climate? In the following pages, we explore trends across the venture fundraising market, particularly the micro fundraising segment, given its especially rapid development in the past few years, to analyze the nature of their potential responses. One last thing to note: We have included brand-new datasets in this report, including breakdowns of capital called compared to capital raised across both PE and VC, among others. We hope this helps inform your decision-making in the coming months, and feel free to reach out with any questions. Available for Search: PitchBook GARRETT JAMES BLACK Senior Analyst US UK +44 (0) demo@pitchbook.com pitchbook.com 3

4 A shifting environment PE fundraising overview In an environment where cheap debt contributed to a significant rise in activity and LPs flocked to GPs to reap outsized returns, PE managers have amassed an enormous war chest of capital over recent years. With too much capital chasing a limited amount of transactions, competition has become fierce, with strategics often able to win out in auction processes. As dry powder levels have continued to grow, 2015 finally saw the fundraising trail begin to slow. The massive vehicles raised just prior to the financial crisis weren t able to deploy their forecasted amount of capital during their respective investment periods, leading to lagging returns, an outcome that GPs and LPs alike are working fervently to avoid in present day saw GPs close on just over $185 billion in committed capital across 281 vehicles, a year-over-year decline of near 7% and 14%, respectively. On a historical basis, these figures are certainly still strong, yet they fall short of what we ve seen in in the past couple of years. U.S. PE fundraising (#) by fund type 100% 80% 60% 40% 20% 0% 2006 Buyout Given the shifting deal environment, GP fundraising efforts were also driven by evolving strategies last year as more niche vehicles were raised to focus on emerging opportunities including distress, direct lending and energy. The broader syndicated loan market has seen a bit of a crunch, and U.S. PE fundraising ($) by fund type 100% Energy Mezzanine Restructuring Co-Investment PE growth 80% 60% 40% 20% 0% Other 2015 Last year saw a divergence between capital raised and called U.S. PE capital raised versus capital contributed by year $350 $300 Net PE capital Contributions ($B) Capital raised ($B) $250 $200 $150 $100 $50 $0 -$50 -$100 Note: The LP reporting cycle is two quarters behind the most recent quarter ended. PitchBook s most recent fund returns data is through 2Q 2015, with capital raised figures through the end of

5 with that direct lenders and mezzanine players have seen opportunity to step in to fill funding gaps, albeit continued competition in that realm. We saw a 22% jump in mezzanine vehicles that came to market in 2015, yet total capital raised for such funds was actually down more than 25% at $4.7 billion. We think this reinforces some of what we ve noticed of new managers spinning out and coming to market with smaller targets around very concentrated strategies. Moving contrarily to this was the energy space, where we saw total fund counts down some 24% during that same period, yet total capital raised for that avenue came in at $35 billion, a 55% YoY increase. Clearly this space is much more capital intensive, so bigger checks will be written to fund deals in the distressed sector, however, operational experience will be vital in a persistent low-price oil environment, contributing to the decline in aggregate fund counts there. Over the past few years, co-investment vehicles have risen in popularity as they serve both LPs and GPs in different ways. LPs benefit from lower fee structures, while GPs gain a couple of things the ability to access larger pools of capital for larger transactions and the ability to split deals between a flagship fund and a co-invest fund when the LPAs of select vehicles may not allow for certain deals. From 2010 to 2014, the amount of yearly coinvestment funds coming to market more than tripled and the aggregate amount of capital being raised for such funds each year has grown by nearly 10x saw a reversal, with the number of these vehicles dropping by half. With quality deal flow remaining an issue for investors across the board, co-investors are strapped as well for deployment opportunities, which is why we ve seen that decline. What does become a bit more interesting, however, is that the amount of capital raised in 2015 across half as many co-investment funds was only down around 6% to $5.2 billion. With the Fundraisers last year saw significant success in terms of reupping size Median U.S. PE fund step-up 83.8% 85.0% 78.6% 60% 84% 65% 71.7% 38% 64.7% 22% 77.3% 71.4% 77.3% 42% 29% Record proportions of funds continue to hit their targets U.S. PE funds (#) that hit target 41% 76.9% 80.4% Median fund step-up % of funds > predecessor 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Hit target drop-off in high-yield and debt accessibility for larger transactions, mangers looking at deals in the megasize range may be forced to deploy more equity. In order to do this they may not be able to finance those hefty equity portions alone and thus, larger co-invest funds are also being raised in mitigation. General opportunities are scarce, yet pockets of prospective quality have emerged and moving forward we think we ll see the same. Capital will be deployed across select opportunities Missed target % 41% including direct lending opportunities, distress, energy and non-core carveouts. Strategies will also continue to evolve. We saw an Apollo Global Management-led consortium agree to a $1.1 billion deal without the proper debt financing in hopes of accessing that debt at a later time while Carlyle just raised a vehicle with a lifecycle of twice the traditional length. PE investment is evolving to the environment and fundraising efforts will do the same. 5

6 Small funds remain popular PE fundraising by fund size As fundraising by both count and capital invested subsided a bit lower last year, the space experienced similar trends. Sub-$100 million vehicles continued to represent the highest percentage of total vehicles raised, with 104 vehicles coming to market last year. Those funds accounted for 38% of all PE vehicles raised during the period, which still was a decline from the 126 sub-$100 million funds raised in In an environment of lofty multiples, many GPs were forced to move lower down the chain into the lower middle market in order to find attractive quality. At this stage, various companies are simply smaller or are still at relatively early stages in their lifecycles to attract auctiontype competition. As strategies have begun to incorporate more operational components, companies in the LMM can significantly benefit from experienced GPs to sustain U.S. PE fundraising (#) by fund size U.S. PE fundraising ($) by fund size $350 $350 $300 $300 Under $100M $100M-$250M $250 $250 $250M-$500M $500M-$1B $200 $150 $200 $1B-$5B $5B+ $100 $150 $50 $100 $0 $50 Under $100M $100M-$250M $250M-$500M $500M-$1B $1B-$5B $5B+ $0 U.S. PE fundraising (#) by fund size and proportion 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Under $100M $100M-$250M $250M-$500M $500M-$1B $1B-$5B $5B+ U.S. PE fundraising ($) by fund size and proportion 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Under $100M $100M-$250M $250M-$500M $500M-$1B $1B-$5B $5B+ 6

7 growth; fund managers recognize that many of these companies may need a qualified partner to help underpin growth if we face continued economic uncertainties. Further, as owners in that realm might begin looking for liquidity in the face of a down cycle, PE players can be valuable partners in that scenario. At the high end of the spectrum, funds raising between $1 billion and $5 billion in capital remained relatively flat by count, while total capital raised dropped a bit. We did see, however, funds at the largest fund bucket $5 billion+ experience a surge in capital raised, attributable to a record amount of capital being raised for energy. Mean fund sizes reflect a greater number of large vehicles Average & median U.S. PE fund size $780 $280 $976 $887 $250 $275 $752 $184 $525 Median ($M) $548 $594 $771 Average ($M) $625 $675 $229 $200 $204 $187 $174 $187 Average U.S. fund size by PE fund type Fund type Buyout $846.1 $1,218.4 $888.9 $889.7 $635.2 $557.8 $617.0 $891.1 $692.4 $671.4 PE Growth $301.3 $243.2 $245.0 $226.1 $202.1 $244.5 $380.7 $281.4 $448.9 $392.1 Co-Investment $568.8 $305.3 $486.6 $289.1 $71.4 $143.8 $145.9 $285.9 $154.8 $306.9 Restructuring $760.8 $1,426.3 $2,399.8 $250.3 $811.9 $1,140.8 $974.8 $1,327.4 $1,805.4 $1,062.7 Mezzanine $768.8 $1,118.3 $701.1 $443.8 $286.7 $364.7 $652.8 $639.0 $374.3 $215.2 Energy $1,264.4 $1,031.2 $799.3 $2,093.8 $767.3 $1,317.1 $825.4 $1,163.9 $944.6 $1,949.0 Median U.S. fund size by PE fund type Fund type Buyout $305.0 $270.0 $266.0 $221.0 $285.0 $200.0 $205.0 $216.5 $187.2 $152.5 PE Growth $162.0 $107.5 $150.0 $118.0 $86.0 $90.0 $49.0 $134.5 $130.9 $131.7 Co-Investment $450.0 $154.0 $168.8 $192.0 $60.4 $110.0 $97.9 $108.8 $80.2 $55.0 Restructuring $750.0 $900.0 $1,550.0 $179.0 $229.0 $753.4 $575.0 $550.0 $1,210.5 $825.4 Mezzanine $307.0 $217.5 $300.0 $243.0 $195.0 $227.0 $204.0 $150.0 $227.0 $162.5 Energy $566.0 $1,020.0 $434.8 $820.0 $807.3 $600.0 $376.0 $400.0 $325.0 $

8 Niche strategies succeeding PE fund closing times In what may seem counterintuitive given an increasingly sluggish deal environment, GPs coming to market with new vehicles in 2015 found success in terms of the time it took to hold final closes on those funds. Median and average fund sizes were up relative to what we saw in 2014, yet at $187.4 million, the median U.S. PE fund size came in fairly low on a historical basis. Further, only growth and energy vehicles posted increases in YoY median fund sizes, highlighting a dataset that was skewed by the 14% decline in the population of vehicles coming to market. The median close time for vehicles completing raises in 2015 came in at 12.8 months, the lowest figure we ve seen since 2008, which saw GPs able to close in just 12 months. With a record amount of capital being raised that year, those fund IRRs are under significant pressure stemming from the recession and, subsequently, GPs coming to market in the few years following had faced some difficulties in persuading various LPs. In light of scarce deal flow, we think that GPs were able to find success in rounding up capital quickly last year due to niche and targeted strategies, as well as a greater focus on the process they employed to chase LP dollars. As LPs have become more sophisticated, the opportunities that have presented themselves in light of a global slowdown across equities and fixed income have made certain PE strategies fairly attractive. LPs are certainly aware of the profits that can be realized when deploying capital in a downturn, and the long-term horizon these investors employ match well with the investment strategy of new, niche managers. Further, GPs have been able to increase the amount of targeted investor relations campaigns they utilize to court LPs, which becomes a vital component of the fundraising trail during a period where LPs have also begun shrinking the number of managers they work with and instead writing bigger checks to fewer managers. The median time between funds rose significantly in 2015 to 5.4 years from just 4.3 years in 2014, a further testament to the difficulty managers have faced in deploying ample amounts of legacy dry powder. Fundraisers have enjoyed fairly rapid closes to new vehicles as of late Average & median U.S. PE fund time to close PE firms have had little need to raise quickly, given the amount of dry powder Time between U.S. PE funds (years) Median Average Median (months) Average (months)

9 Peak overhang? U.S. PE capital overhang PE capital overhang remains an issue for the industry, with cumulative dry powder growing nearly 2% in 2015 to $543.4 billion. In an uncertain environment, we think that GPs continued to come to market to insure they could access capital before an adverse series of events may dry up the amount of LP commitments available. While we understand that the PE asset class still remains highly sought, the newer strategies we ve seen from GPs can take a considerable amount of time before the opportunities are ripe for capital deployment, slightly inflating the amount of dry powder remaining in PE coffers. Although the energy sector has raised by far the most amount of capital in 2015 outside of traditional buyout vehicles, we ve seen slim deal flow in the space. As GPs continue to wait for the opportune moment and potential bankruptcies, not much capital has been called down on that front. Given the capital-heavy nature of those transactions, we think we ll see overhang begin to slip over the next 12 to 18 months as more opportunities arise. Interestingly, 2012 vintages hold at minimum 103% in the $100 million to $250 million range more dry powder than 2011 vintages, with mega funds that raised over $5 billion sitting on 337% more unused capital than funds making their first investment in That discrepancy appears fairly uncharacteristic, which is likely due to distributions being recycled back into those vehicles saw capital raised jump 76%, while the median time to close came in at nearly 15 months, again highlighting redistributions as LPs began committing capital to many funds that closed in 2013 at least a year prior. Lastly, with the ability to overcome stretched valuations becoming an issue for various GPs last year, buyer-to-seller discrepancies became more pronounced, in turn dragging deals out longer. Our overhang datasets are lagged by two quarters, and thus, transactions that close after that lag aren t yet subtracted from our reported dry powder number. As our data continues to roll in, the next iteration of this report will give the most complete snapshot of 2015 aggregate PE capital overhang. Note: The LP reporting cycle is two quarters behind the most recent quarter ended. PitchBook s most recent fund returns data is through 2Q H 2015 and 2016 numbers are from vehicles that have begun reporting yet have not fully closed. U.S. PE capital overhang ($B) by year $600 $500 $400 $426 $539 $509 $501 $470 $474 $499 $530 $533 $ $300 CUMULATIVE OVERHANG 2012 $200 $100 OVERHANG BY VINTAGE $0 * *As of 6/30/15

10 Capitalizing on opportunities Secondaries The popularity of secondary investment funds in 2015 continued with $15.6 billion being raised across six vehicles. While total capital raised for such funds was similar to what we saw in 2013 and 2014, those years saw total secondaries counts come in at 17 and 13, respectively, far greater than what we saw this year. Regardless, the flow of capital into these types of funds speaks to the opportunities the current shaky investment market can offer, along with the risk-averse sentiment many LPs are set to express. As commodity prices rapidly moved lower in 1H 2015 and global equities began to experience significant volatility, private portfolios were forced to mark various assets lower, allowing for secondaries pricings to move to more attractive levels for many investors. The ability to mitigate the J-curve effect in what appears to be the later stages of a cycle becomes extremely vital for LPs looking to acquire stakes. Further, while we don t think we re at a time where a denominator effect should become a major concern, the ability to find liquidity for LPs looking to address asset allocations as they assess their future investment landscapes can also be vital; we think this may help supply inventory to secondaries GPs. Since 2013, over $47 billion has been raised in secondaries U.S. secondaries fundraising by year 13 $10 6 $5 10 $8 21 $18 14 $9 Last year saw a few large secondaries close, boosting total capital raised U.S. secondaries (#) by fund size Capital raised ($B) 11.8% 23.1% 33.3% 11.8% 36.4% 42.9% 15.4% 17.6% 16.7% 8 $9 7.7% 7.7% 9.1% 35.3% 28.6% # of funds closed 12 $5 33.3% 36.4% 17 $ % 14.3% 13 $ % 9.1% 16.7% 6 $16 9.1% 14.3% 5.9% % 33.3% 8.3% 25.0% % 11.1% 16.7% 27.8% 22.2% 5.6% Under $100M $100M-$250M $250M-$500M $500M-$1B $1B-$5B $5B+ 10

11 Second-highest sum raised VC fundraising overview A massive $35.5 billion was raised in 2015, second-highest of the decade U.S. VC fundraising by year 191 $ $34.1 $ $11.7 $19.2 Capital raised ($B) # of funds closed $ $24.3 $ $ $35.5 VC fundraisers have been on a tear recently. From 2014 through the end of last year, 500 venture vehicles were closed on a gargantuan $69.4 billion in commitments alone saw a staggering $35.5 billion in total capital committed to VC funds, the second-highest total of the decade. On a quarterly basis, fund counts slid in the back half of 2015, with the 53 pools closed in 4Q the lowest tally since 3Q 2013, even though capital raised remained hefty. In short, investor uncertainty that has been evidenced by the decline in activity on the dealmaking side has yet to substantively lead to a slowdown in VC fundraising as firms take longer to cut deals. Such elevated fundraising as of late had to keep pace with the Nontraditional investors raising large vehicles geared toward venture investing help explain the disparity U.S. VC raised versus capital contributed ($B) by year $40 Net venture capital Contributions ($B) Capital raised ($B) $30 $20 $10 $0 -$10 -$20 Note: The LP reporting cycle is two quarters behind the most recent quarter ended. PitchBook s most recent fund returns data is through 2Q 2015, with capital raised figures through the end of

12 increasingly massive sums dealt out by VCs. The disparity between the two is also explained by the entrance of nontraditional VCs into the investment and fundraising scene, as well as the resurgence of mega funds. The venture boom of the past few years also spawned a surge in first-time fundraising, primarily centered in the smaller reaches of the market. LPs have been markedly willing to back even such emerging fund managers, judging by the slide in both the average and median times to close, despite the sheer number of vehicles on the fundraising road. Further underscoring LP enthusiasm are the percentages of successful fundraises in the past two years; 84.8% of all 2014 vehicles hit their target, while last year saw no less than 85.9% do likewise. Such success is partially attributable to more targeted investment strategies as well as an abundance of capital seeking returns pensions have increasing payouts to meet given demographic shifts, for one but by and large, LPs have been piling into VC in particular, entranced by the promise of outsized returns generated by high-profile VC firms. After all, VCs did return $21 billion in the first half of But the dealmaking climate has cooled. Liquidity has become a chancier prospect, particularly for many latestage, heavily financed startups. Fundraisers are forward-looking, but LPs are cautious, still open to commit but wishing to see what happens in 1Q. As public market valuations soften, private comparables will correct in turn, potentially paving the way for a resurgence in activity far down the road. But as investment declines gently for now, fundraising will likely follow suit or plateau, as investors seek to put dry powder to work at a slower pace, and consequently take longer to fundraise as well. More first-time fund managers have been competing for capital U.S. VC first-time fundraising 58 $ $3.9 $ $ $2.2 Fund managers have been able to close at an accelerated clip Average & median U.S. VC fund time to close Capital raised ($B) Median (months) # of funds closed Nearly 86% of all VC funds that closed last year hit their target U.S. VC funds (#) that hit target $ $ $ $ Average (months) $ % 80% 60% 40% 20% 0% Hit target Missed target 12

13 Return to the middle VC fundraising by fund size 21% of all venture funds that closed last year ranged between $100 million and $250 million in size. Not only was that the largest proportion of overall VC fundraising for the size bucket since 2009, but the total number of funds closed 51 was the highest of the decade. We ve discussed the apparent bifurcation in venture fundraising before, wherein both ends of the fund size spectrum have seen increased activity over the past few years; 34 funds of $500 million or more in size closed in 2014 and 2015, while the same timeframe saw no fewer than 269 sub-$50 million vehicles. But as previously stated, those twin surges at different ends of the market did not preclude steady fundraising in the middle, and, in fact, given the proportion of midsized funds raised last year, a return to the middle appears to be already underway. The most significant drivers of that return have been the increasingly broad definition of what constitutes early-stage financings and the entrance of emerging fund managers on the scene. Not only has competition as well as hefty financings pressured early-stage firms to raise funds of sufficient size to pull off follow-on financings when opportunity arises, but it has also encouraged VCs to narrow fund focuses to particular sectors and geographies. Despite current uncertainty swirling around late-stage venture financings in particular, this surge in midsized fundraising implies that VC firms are anticipating the need for significant sums to invest in order to stay competitive, even at early stages, in the future. With the decline in earlystage investment, however, it s easy to see early-stage round sizes and Midsized funds resurged last year to a decade high in count U.S. VC fundraising (#) by fund size Under $50M $50M-$100M $100M-$250M $250M-$500M $500M-$1B $1B+ Close to $21B has been collected by funds $1B or larger in size since 2014 U.S. VC fundraising ($) by fund size $40 $35 $30 $25 $20 $15 $10 $5 $0 Under $50M $100M-$250M $500M-$1B $50M-$100M $250M-$500M $1B+ valuations deflating somewhat in the coming quarters, due primarily to increased investor scrutiny whittling down the pool of eligible targets. Once that deflation has occurred, investors should have more leeway to remain active, although sheer caution sparked by general macroeconomic concerns, as well as extended vetting of prospects, will remain a counterbalancing factor for the interim. 13

14 Large VC funds will likely slow their pace of investment, and consequently, as LPs wait to see their money come back, fundraising at the larger end of the spectrum will slow. The decline in median fund sizes is attributable to micro fundraising Average & median U.S. VC fund size ($M) $215 $211 $100 $130 $195 $86 $111 Median ($M) $140 $198 $50 $47 $50 $140 $25 Average ($M) $109 $41 $137 Only 2007 outstripped last year in terms of median fund step-up Median U.S. VC fund step-up $26 $ % 79.0% 64.1% 57.6% % of funds > predecessor Median fund step-up 67.2% 68.2% 48.1% 63.6% 63.2% $ % When it comes to the larger end of the fundraising market, it s somewhat of a different story. Close to $21 billion has been amassed by funds at or exceeding $1 billion in size in the past two years. In this fund size arena, portfolio economics will likely compel firms to maintain a fairly active clip of large financings. Of course, it s precisely such large financings and late-stage valuations that have sparked the most concern as of late, particularly with regard to liquidity prospects as the public markets remain in turmoil and, accordingly, formerly active acquirers may dial back the pace of M&A somewhat. In this environment, a winner-take-all trend will only accelerate, as the most robust of proven, mature startups are the most logical candidates and consequently will continue to garner substantial interest from large VC fund managers. Since there isn t an abundant supply of such companies to fund, large VC funds will likely slow their pace of investment, and consequently, as LPs will wait to see their money come back to them before reupping, fundraising activity at the larger end of the spectrum will slow. It will take some time for uncertainty surrounding the investment climate to materially affect median VC fund step-ups, but a natural sag in numbers wouldn t be unexpected, simply given the sheer leap that metric took last year. VCs opportunistically gathered and re-upped ample commitments while the good times lasted now, given the onset of caution on the dealmaking side, even if fundraisers are able to remain fairly successful in terms of fund counts, step-ups will likely return to the levels observed prior to 2015, similar to the trend observed from 2007 to % 38% 25% 10% 0% 9% 16% 19% 14% 36% 14

15 Micro VC funds The boom in sub-$50 million venture fundraising is, in many ways, testament to maturation of the industry, as well as contemporary investment trends. Multiple factors derived from both have combined to produce this recent surge, chief among which include: the increased breadth of the seed-stage financing landscape; the proliferation of angel syndicates and other such alternative investment entities; the increase in the number of LPs willing to back fledgling funds typically as long as the proof-of-concept is robust and the managers have decent track records; and advances in tech and business practices enabling significant reduction of key startup costs. VC firms have seen experienced managing partners spin off new vehicles designed for syndicate seed investing, drawing on a pool of high-net-worth individuals and family offices for commitments. Angel networks have also looked toward raising small pools of capital geared toward the pre-seed stage. The fact that the seed stage has broadened and diversified into what can be several tranches has helped establish a fertile playing field for such micro funds, enabling them to sign on to initial financings and even invest in follow-ons given suitable size ranges before fund economics become a limiting factor. The likely deflation in seed financing sizes and valuations will create a more welcoming environment for investors, but the level of competition will remain elevated, probably resulting in consolidation. Niche and/or full-stack focuses accordingly will evolve even further than they are currently present among VCs, as investors seek to not only hone strategies in the current, uncertain investment landscape but also ensure a stable pipeline of deal flow. In the past two years, 269 micro funds have closed on $2.9 billion U.S. micro (sub-$50m) VC fundraising $1.1 $ $ $ $1.2 The evolution of seed-stage investing has driven fund sizes downward Average & median U.S. micro VC fund size $19.0 Capital raised ($B) # of funds closed $18.0 $18.4 $15.0 $15.0 $14.7 Median ($M) Average ($M) 62 $1.0 $16.4 $16.4 $15.9 $ $ $1.5 $11.0 $10.0 $10.0 $ $1.7 $14.1 $14.8 $ $1.2 $8.0 $9.4 $ was historically strong, if a considerable decline after 2014 totals First-time U.S. micro VC fundraising 24 $443 Capital raised ($M) 20 $ $486 $ $501 # of funds closed 28 $ $ $ $ $512 15

16 Recent vintages predominate U.S. venture capital overhang Despite the considerable rate of investment over the past two years, venture capital overhang remains substantial and heavily concentrated in recent vintages. 37% of the current $79.8 billion in VC dry powder is locked up in 2015 vintages, with 28% in those of 2014; no less than $52 billion of VC has yet to be deployed from funds of the vintage years. It should also be noted that a considerable $17.1 billion from 2012 and earlier vintages also remains on hand. In short, the recent increase in overhang has left venture GPs with more-than-ample stores of capital to put to work. Given the current challenges facing VC investors, it s fortunate that most of the overhang is centered in recent vintages, as that allows for some leeway with regard to investment timelines. VC firms have already pulled back from financing at the same furious clip seen prior to the final quarter of 2015, opting to decelerate in the face of uncertainty. They will continue to do so, although the decline is unlikely to be precipitous. There simply is too much money to put to work, as well as positive factors such as modest gains in U.S. economic growth and employment assuaging general concerns around the viability of a portion of startups. Although LPs and GPs will be looking to put dry powder to work this year whenever possible, VC s recent returns and distributions have been strong, which should merit some patience on the part of LPs. Accordingly, the extent to which investment activity will diminish, may well lead to a slight decrease in overall VC overhang, while a likely, gradual decline in fundraising, while 65% of the current VC overhang is in 2014 and 2015 vintages U.S. venture capital overhang ($B) by year overall funds raised remains healthy, should prove a counterbalancing factor of sorts. U.S. venture capital overhang by vintage year 3% 2% 2% 7% 37% 28% 8% 13% Note: The LP reporting cycle is two quarters behind the most recent quarter ended. PitchBook s most recent fund returns data is through 2Q 2015, with 2H 2015 numbers from vehicles that have begun reporting yet have not fully closed. $ $100 $80 $60 $90 $96 $92 $86 $76 $77 $69 $64 $71 $ $40 CUMULATIVE OVERHANG OVERHANG BY VINTAGE 2010 $ $0 * 2008 *As of 6/30/15 16

17 Select open U.S. funds Buyout Investor Fund name Fund target ($M) TPG TPG Partners VII $10,000 BDT Capital Partners BDT Capital Partners Fund II $5,206 Madison Dearborn Partners Madison Dearborn Capital Partners VII $4,000 Oak Hill Capital Partners Oak Hill Capital Partners IV $3,000 Kelso & Co. Kelso Investment Associates IX $2,750 Harvest Partners Harvest Partners Fund VII $2,200 HGGC HGGC Fund III $1,500 JLL Partners JLL Partners Fund VII $1,100 Blue Road Capital Blue Road Capital $750 Waud Capital Partners Waud Capital Partners IV $750 Growth Investor Fund name Fund target ($M) BBH Capital Partners BBH Capital Partners V $600 Catterton L Catterton Growth Partners III $500 Revolution Revolution Growth Fund III $450 Northern Pacific Group Northern Pacific Group Investment Partners $250 Spring Lake Equity Partners Spring Lake Equity Partners $250 Venture capital Investor Fund name Fund target ($M) Technology Crossover Ventures TCV IX $2,250 Khosla Ventures Khosla Ventures V $1,000 Summit Partners Summit Partners Venture Capital Fund IV $600 New Leaf Venture Partners New Leaf Ventures III $375 Walden International Walden Riverwood Ventures II $325 Edison Partners Edison Partners VIII $250 Sanderling Ventures Sanderling Ventures VII $250 Updata Partners Updata Partners V $225 Ribbit Capital Ribbit Capital III $220 PTV Healthcare Capital PTV IV $200 17

18 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. Note: for U.S. PE and VC contributions versus capital raised, the contributions are the sums called down in the U.S. from limited partners by general partners, compared to overall capital raised, in a given timeframe. 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. 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. 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, 2015 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. 18

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