Pension plan pressure on hedge funds was entirely predictable

News Report: Netherlands’ health and social sector Pension Plan to “eradicate” Hedge Funds from portfolio

First it was the California Public Employees’ Retirement System, and the trend has now extended to the Netherlands. Hedge fund allocations are under review, and there are plenty of reasons to assume this will continue as equity markets remain volatile…whipsawing every hedge fund that wasn’t truly market neutral. Pension plans need external managers, of this there is no doubt.

But which model? The questions are always the same: what are we paying for, why is there no “clawback” (see prior post “No one is surprised, but whose to blame?” Sept. 21-06), and where do you fit into my asset allocation strategy? The traditional Hedge Fund structure is not geared for the pension plan world, as I pointed out almost 8 years ago in the wake of Amaranth’s demise:

If you read the fine print, you get a sense of why it is inconceivable that pension funds can continue to support the idea that hedge fund managers:

– have a zero cost of capital
– pay out all of the “promote” based upon a single year’s performance rather than the performance of the team over the life of a fund
– do not ask the team to sign guarantees should the fund explode, and the promote that was paid earlier in the life of the fund is no longer “earned” based upon the fund’s overall performance

I was a bit ahead of my time, but the issues haven’t changed despite the passage of time.

That’s not to say that Trustees shouldn’t allocate capital to the Hedge Fund asset class. I’ve done it myself, in fact, via one or more plans where I had to vote in favour or against a specific manager allocation. As an industry, assets continue to flow to the sector despite the recent bad press. According to Preqin, $355 billion was raised last quarter and assets under management surpassed $3 trillion.

It was interesting to see that CPP Investment Board started 2015 as though it’s still 1985. When asked by the Globe for its allocation to hedge funds, CPPIB spokeperson reported that “we do not break out that number”, unlike Ontario Teachers Pension Plan and the Caisse de Depot, which gladly shared the very same information with the media. The CPPIB’s refusal to provide basic data on a subject of interest will come as no surprise to any of you (see prior representative post “12 questions CPP Investment Board won’t be answering on BNN today“).

With $3 trillion in AUM, and a plethora of rock star PMs commanding the spotlight on CNBC each and every day, the hedge fund asset class is here to stay. Change may be in the offering, however, so that higher profile institutional investors don’t rush for the exits, vacating the sector and its “heads I win, tails you lose” structure. Mega buyout funds have had to make their limited partnerships more investor friendly over the past 24 months, demonstrating the power of the Limited Partner universe when it gets an idea in its head.

MRM

 
 Share on Facebook Share on Twitter Share on Reddit Share on LinkedIn
No Comments  comments 

Wellington Financial leads new growth capital financing for Atlanta-based NanoLumens

News of our final transaction for 2014 was just released. This time, it was a growth capital round for Atlanta-based NanoLumens. Whether you live in Boston, Hawaii, New York, Sao Paulo, Toronto or Thackerville, Oklahoma, you can get a glimpse of the different ways that the world’s leader for visualization solutions is helping institutions and companies market their wares and engage with the public.

Our US$5 million round was joined by another US$8.3 million in new equity raised from Canadian institutional investors and NanoLumens’ existing shareholders. Euro Pacific Canada Inc. served as the exclusive agent.

We were impressed with what NanoLumens CEO Rick Cope and his team had accomplished to date (year-over-year sales growth is astounding), and the new round of funding will be used to accelerate the company’s strategic business and technology development programs. The technology that forms the backbone of Rick’s various products was originally developed at McMaster University, here in Ontario.

NanoLumens’ current clients include a broad range of marketers covering the fields of broadcast, casinos, control rooms, convention centers, DOOH, higher education, hospitality, retail, stadiums, and transportation including AIG, Bally’s, CBS Outdoor, CCTV, CNN, Charles Schwab, Coca Cola, Delta Airlines, Estee Lauder, ESPN, GTE Financial, Holt-Renfrew, Invesco, Macy’s, Nike, Terra, Turner, Universal Studios Florida, Uniqlo, and the new World Trade Center Freedom Tower, among many others.

MRM

 
 Share on Facebook Share on Twitter Share on Reddit Share on LinkedIn
No Comments  comments 

2014: Year in Review

Published on January 2, 2015 by in General

2014 was a busy year for our firm.

It all starts with “The Funnel”, and the team hit new highs in two of the important categories: Opportunities and Financial Reviews. We didn’t break any records on the Term Sheet front, which I took to speak to the middling North American economy.

We closed 11 transactions all told, committing $95.2 million of our $200 million in recirculating equity capital to growth companies in the USA and Canada. That $95 million figure tops our previous $78 million high in 2007. If you include capital on transactions that we led and syndicated to other players, the figure grows to more than $105 million for 2014 (versus $90M in 2007).

By geography, nine of those transactions were for U.S.-based firms in places such as California, Georgia and New York, while the remaining two were for VC-backed firms in British Columbia and Quebec. (If you’re wondering about the US weighting, blame it on the competitive practices of the Business Development Bank of Canada and its cheap government funding.)

As years go, it was also the most active on the exit front as buyers of high quality tech firms continued to add talent, customers and IP via M&A transactions. In the end, we saw ten complete exits in seven different States/Provinces during 2014…and those that didn’t result in an M&A deal wound up in the portfolios of a few asset-hungry commercial banks (see prior representative post “Bloomberg: Regulators stand by while U.S. bank lenders get footloose” May 14-14). Our Limited Partners recognize that an exit is an exit, since each speaks to the credit quality of our loan portfolio.

The portfolio still grew, despite the huge surge in exits versus 2013, and with two new Partners in our San Jose office, everyone is excited about what 2015 will bring.

Speaking of LPs, our institutional investors saw warrant gains hit our P/L in five different months last year. In aggregate, when you add up every dollar between our Funds III and IV, it was our best year in more than 10 on that front. With an ever-larger portfolio, warrant gains are something that one would expect; but seeing them hit the tape certainly speaks to the diligence that our team performs at the front end of the process.

On the performance front, Preqin recently branded the firm one of the most consistent performing funds in the world in its 2014 Private Equity Report (see prior post “Wellington Financial named to Preqin’s list of ‘Consistent Performing Fund Managers‘” Feb 24-14). However, as you might have heard me say before: It’s all about tomorrow.

Best wishes to all for a healthy and fulfilling 2015.

MRM

 
 Share on Facebook Share on Twitter Share on Reddit Share on LinkedIn
1 Comment  comments 

SurveyMonkey deal demonstrates power of late stage private markets

News Report: SurveyMonkey Valued at US$2 billion as Some Investors Sell Shares

Once upon a time, the only way a tech company could raise $250 million was via an Initial Public Offering. Then along came Facebook, and the mold was broken. Over the course of a few years, Facebook did a series of financing transactions, both direct and via secondary platforms such as SecondMarket. Several institutions and Family Offices bought shares privately, and made out handsomely once the IPO froth had settled. Twitter followed in the same path, and large “late stage” fundings are now commonplace for the high quality pre-IPO cohort — whether they be debt or equity or a combination of each.

From the company standpoint, these brokered stock deals served a purpose. Early (primarily former) employees and Series A venture capital funds got the chance to take some money off the table. And, if the need was there, CFOs had a third party valuation should they want to tap into this demand to raise some private capital for the company’s own balance sheet, too. Underwriters benefitted as well, as these “fur coat” transactions removed some of the pressure to include a large secondary component in any eventual IPO. Retail investors would also benefit by the reduced overhang on the stock following the IPO.

The success of these large private offerings, often without any of the hooks that usually come with traditional VC rounds (such as Board rights or vetoes on material events), served every master. Although each generation of VCs has but one or two Facebooks, the success of these pre-IPO transactions appears to have opened the window for far smaller names with substantially less buzz.

The most recent examples of large private rounds are Survey Monkey and Vancouver’s BuildDirect. This from The Wall Street Journal:

A group of large money-management firms are valuing SurveyMonkey at close to $2 billion in a new round of funding that will help fuel the online questionnaire service’s expansion into corporate software, said a person familiar with the matter.

The Palo Alto, Calif., startup raised $250 million from new investors including T. Rowe Price , Morgan Stanley Investment Management, Fidelity Investments and Baillie Gifford, the person said. A portion of the funds will be used to buy back stock from employees and previous investors, including Bain Capital Ventures, Spectrum Equity and TPG Growth.

SurveyMonkey could use the new funding to expand its tools for corporate customers. First offered a year ago, SurveyMonkey’s enterprise product gives businesses more analytics around survey results, lets them allocate billing to departments and works with other software like Salesforce.com Inc.

The company could also use its cash to ramp up mergers. SurveyMonkey made its first acquisition in more than two years in August, when it bought smaller Canadian rival Fluidware for more than $20 million.

Previous investors, including Google Capital, Iconiq Capital, Tiger Global Management and The Social+Capital Partnership, all participated in the new round of funding, according to the person with knowledge of the deal.

SurveyMonkey was last valued at about $1.3 billion in a round of funding in January. The startup has raised more than $1.2 billion in debt and equity as it puts off an initial public offering.

The cynics will say that an early stage company that has issued more than US$1.2 billion of debt and equity securities, and is “only” valued at US$2 billion, doesn’t hold a candle to Facebook or Google. The larger point is that the money management world is so awash with cash that a company that had US$113 million of revenue in 2012, which is small by global standards, can pull this off. As asset allocation decisions go, can you blame them, given the recent rout in the commodities markets? Private tech looks like a far safer place to be right now than oil and gas.

Last week’s BuildDirect financing may well have been another example, as BMO Asset Management was cited as a new investor in that company’s recent $50 million offering, along with existing VC firms Mohr Davidow Ventures and OMERS Ventures. Although it hasn’t been reported on, the use of BMO Asset Management in the press release, rather than BMO Capital Partners, leads one to believe that the BuildDirect shares went into the hands of high net worth clients, rather than the bank itself (as was the case with the 2013 financing of Real Matters, for example).

Some have called this trend a “democratization” of the markets, although I think that’s misplaced. When firms such as Fidelity and T. Rowe Price acquire the shares of private companies, they are definitely giving private company entrepreneurs more staying power, just as our own Growth Capital financings do at Wellington Financial. The recent track record suggests this cohort of investments will play out better than the local 2000-2001 vintage did, when many private companies raised large rounds (such as Eletrofuel and Metrophotonics), only to fritter the capital away.

MRM

 
 Share on Facebook Share on Twitter Share on Reddit Share on LinkedIn
No Comments  comments 

A flurry of deals to end the year

The press release won’t be out for another 30 minutes, but our loyal blog followers deserve to get the early scoop.

Our latest financing, this time for Montreal-based iPerceptions, represents our fifth Growth Capital transaction announcement in the course of the past six weeks.

iPerceptions is a leading digital customer research company specializing in voice of the customer analytics. Many top Fortune 500 companies, such as Dell, InterContinental Hotels, Logitech, and Ford trust iPerceptions to improve the customer experience across their digital platforms. As you may recall, our first of three financings for Vision Critical was in October 2006, so we have a wealth of experience in the customer intelligence sector. iPerceptions is backed by Telesystem and XPND Capital.

We hope to close one more financing before the end of 2014, and if that comes to pass, our team will have closed more than $90 million of commitments over the course of the year.

That surpasses our previous deployment record of $77.5 million ($87 million including syndicated portions), back in 2007. Thanks to all of our new portfolio company entrepreneurial partners and their VC backers.

MRM

 
 Share on Facebook Share on Twitter Share on Reddit Share on LinkedIn
No Comments  comments