Insights from North America

Ahead of SuperReturn US West, Svetlana Fathers, Editor-in-Chief shares her event research which forms this year's agenda.

When looking at North American private equity landscape, there is a clear division between East and West. It does not necessarily mean the two regions are totally different or are at varying levels of development. Both are tied by similar trends and characteristics, external and internal processes, market players and strategy preferences.

Yes, when you talk about the West coast, you see venture and tech, whereas East coast is largely considered to be a hub of the buyout activity. Still, some of the venture capital investments originating in the East are making it big across the entire country, proving a real spirit of entrepreneurship and innovation. Similarly, with Silicon Valley at the heart of venture capital, the West Coast of the U.S. is also home to an ever-rising amount of private equity activity.

For the purpose of this article we would like to analyze some of the key developments related, in particular, to the U.S. West coast.

As expected, the top concern for the industry at the moment is the outcome of the U.S. presidential elections. For many it is crucial to be able to navigate the post-election environment and manage the impact of the new administration and policies on the U.S. equity market.

High interest rates, deteriorating infrastructure, wage stagnation, rising income inequality, elevated pension and medical costs, as well as large current account and government budget deficits are undeniably raising red flags for private equity practitioners.

There is a general observation that private equity and venture capital asset class is becoming more globalized. Many U.S.-based funds now possess the capability to make investments outside the United

States and are actively searching for new investment opportunities abroad. In this respect, emerging markets seem to come through as one of the favorite investment destinations. Amongst the most popular markets for foreign investment Asia, Middle East, Africa and Latin America appear to be in the spotlight.

The performance of emerging markets isn’t the only aspect to be considered when it comes to global investments. The recent developments in Europe have a significant impact on the global economy and macro universe. What will be the impact of the Eurozone? How will Brexit change the deal making landscape? How does AIFMD affect the private equity managers? These are the top questions addressed by the industry when it comes to assessing European investment allocation.

Portfolio company valuations are currently hovering at a sky-high level, and are perceived to be rarely accurate. This poses a major concern and calls for an ever-important transparency and consistency. Many are curious is some sort of a correction is inevitable.

A significant interest from investors in emerging managers operating in both private equity and venture capital is another interesting observation. There appears to be a strong case for investing in emerging or new mangers as they are perceived to generate high returns. Despite the great appeal of emerging funds, and in order to strike the right balance, investors still need to be cautious when analyzing the performance of new and emerging managers and identifying the key risks for both parties.

In the venture space, some people believe there is a risk of the tech bubble bursting, although many would disagree. On the one hand, there are fewer deals, fewer IPOs and some decrease in valuations. On the other hand, VC industry is deploying more capital than in the past few years, the late-stage deal making remains positively sustained and we can see some successful exits.

With ongoing assessments, it is still hard to say if there is a buddle indeed, and whether it is going to burst any time soon. Thus, the mystery remains, and it is down to an individual perception of the recent venture market developments as to which side to take.

The technology convergence across various sectors is now more important than ever before. The tech-enabled market segments are seen to disrupt traditional industries, attracting a large amount of capital. Investors are becoming more interested in the companies developing innovative and disruptive technologies. Largest deals included startups that use technologies in the financial services, education, retail and consumer industries. This trend is expected to continue throughout 2017 and beyond. Life Sciences and Healthcare, in particular Biotech, as well as Media and Entertainment industries have seen the most investment.

We have seen some notable unicorn and late-stage funding taking place, with non-traditional investors on the rise. However, the majority of the deals are still going to seed and early stage companies, with a significant number of companies raising venture capital for the first time.

Micro-VCs are also attracting lots of attention, and their future is certainly something the industry wants explore. Micro VCs are getting into some very good deals, generating attractive returns. However, most institutional investors, even the biggest endowments and pension funds, still can’t seem to figure out Micro VCs. A deeper analysis has to be made into Micro VC versus traditional fund performance, how they differentiate themselves from accelerators and angel networks and the keys to investing in Micro VC funds.

There is no doubt the U.S. West coast market is seeing a lot of investment activity and some positive growth. There are, as always, new challenges and perhaps, even more to come in light of the new political developments. Despite any uncertainty, the private equity and venture capital market is expected to continue to thrive in 2017 and beyond, contributing to the overall growth of North American financial sector.