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Term Sheet — Thursday, August 2

August 2, 2018, 1:40 PM UTC


Good morning, Term Sheet readers.

Antoine Dréan doesn’t think private equity is in a bubble. In fact, he doesn’t think it’s anywhere even close to one.

You may know Dréan as the founder of Triago, one of the first private equity fund placement agents. His latest venture is Palico, a digital marketplace that streamlines fundraising and secondary trading in the PE market. It allows limited partners to search for general partners and even bid on or list secondary stakes. General partners can offer information about their firm and fundraising and follow up on LP leads.

In other words, he plays matchmaker for those in the PE community. He founded Palico in 2011 in an effort to allow PE firms to take advantage of new technology. “People were still relying primarily on phone and email to conduct business,” Dréan told Term Sheet. “At the time when most industries were going digital, I felt like it was time for PE to take advantage of technology to become a bit more efficient.”

As someone who has spent the last 26 years immersed in the private equity market, Dréan offered some context about what’s happening today. Term Sheet caught up with Dréan and Palico spokesman David Lanchner to discuss industry trends, record fundraising, and funds’ ability to generate attractive returns.

TERM SHEET: I recently read an article titled, “Everything About Private Equity Reeks of Bubble.” It lays out the concerns of private equity’s record fundraising that’s pushed the industry’s dry powder to more than $1 trillion. Can you break down what this kind of trend mean for the industry at large?

DRÉAN: My sense there is that private equity is only at the beginning. You may hear people saying that this is a bubble, that there’s too much money, that there’s never been this much dry powder, but I’ve been hearing this same story for the last 15 years.

Of course, there’s much more money today than there was 15 years ago and many more players, so some of this is definitely true. It’s true that there are many more competitors now — for one good buyout opportunity, there are 100 GPs. Now, private capital is $5 trillion of assets under management. For global financial assets, that number is $300 trillion. So PE is only 1.5% of what’s out there. When you think about it, this is still small.

Even though this space is about talent and much more art than science, I think that the risk involved got lower over time. A long time ago, it was possible to get negative returns. Today, that’s less the case. So overall, the asset class is much better than 20 to 25 years ago. It’s returning more money, it’s getting a bit more liquid, and overall, it’s a good asset class. So there’s no reason why this 1.5% number couldn’t grow to 5% or even 10%. This is why I’m saying this is just the beginning, and of course, there’s a flip side to that. There will be more money. There will be more competition. There will be diminishing returns. There will be a strong need for innovation, and a strong need for diminishing costs, fees, etc.

Are you seeing limited partners express concern about PE funds’ ability to generate attractive returns?

DRÉAN: Oh yeah. Obviously, for those who have been in the asset class for 20+ years, there is now a huge difference in returns between then and now. It used to be 20%+ [internal rate of return], I’m talking gross numbers, It’s now between 10% to 15% IRR. It’s almost been divided by two. Now, the good news for PE is that in the same time horizon, the risk-free rate has gone from 10% to zero. If you adjust the PE return on a risk-adjusted basis, the PE number is about the same. Even though LPs are quite concerned about diminishing returns, it’s still much more than the other asset classes.

The question is what happens when, for instance, the risk-free rate goes back to 5%. I mean, who knows when this is going to happen but it will. That’s when the cost of running PE will definitely need to go down. Otherwise, if PE is still 10% IRR and the risk-free rate is 5%, then it makes it difficult for LPs to justify liquidity risk and other risks, and they may at some point, put less money in PE unless this asset class becomes a bit less expensive. To be less expensive, you need to be more efficient, you need to use technology, you need to have interesting ideas such as yield management.

A lot of the capital is flowing to the large funds, so what does it mean for small and mid-sized funds operating in this kind of environment?

DRÉAN: I wouldn’t be surprised if in five years from now, you have two sorts of PE organizations. One category would be large firms with many different strategies. That’s becoming the case already. You already have firms with half a dozen different strategies under one umbrella. The second category will most probably be niche GPs and smaller entities ran by people who are experts in a given field or area. In the middle, it may be a little tougher. If you’re a generalist, mid-market buyout fund in Europe or in North America, it’s going to be difficult to survive unless you have a great track record. Apart from that, it could be difficult. The same thing goes for fund-of-funds. You have already seen many fund-of-funds leave the scene because they had less value, wanted their share of the pie and they were costly on top of an already expensive asset class. Those guys who were not bringing that much value are now pretty much out of business.

This is also why you’re seeing much more consolidation with some more niche GPs trying to find a new home. Some of them are pretty good at managing money, but they’re pretty poor at raising money, and they’re looking for other people who know how to do that.

According to Palico’s latest investor survey, more than three out of five GPs say fundraising from sovereign wealth funds is a “fundraising priority.” Is this because of the large amounts of capital SWFs are willing to put to work?

DRÉAN: It depends on the type of GP. Obviously, if you’re raising $100 million, are you going to be appealing to SWFs? Probably not. But some of the larger GPs are all thinking that the sovereign wealth funds are great sources of capital because they’re able to write very large checks.

We, at Palico, believe there are about 15,000 active LPs on the market right now for private equity funds, including 3,000 who are very active. By “very active,” we mean that the groups that allocate almost every month to the asset class. I would guess SWFs are in that category, but you have about 30 of them. It’s a very tiny number.

Another point in the survey that stood out is that 75% of LPs are now willing to invest in first-time funds. This goes against the industry norm. What do you attribute this change in attitude to?

DRÉAN: That’s a really big shift. It was hell to raise a first-time fund 10 to 15 years ago. It’s actually now fairly easy. Well, “easy” may be an exaggeration, but there’s a chance today that if you’re a first time fund, you do raise money — especially if you’re a spin off. The reason why it’s easier now is because it’s linked to this appetite for private equity coming from pretty much every LP out there. It’s also linked to the fact that many LPs feel that some of the strategies are now less interesting as far as returns are concerned. Some funds got too big. Some funds have too many competitors. So some LPs are ready to look at new ideas, new faces, new industries, and new strategies to make sure that they keep their return objective where it should be.

LANCHNER: In the numbers we’ve seen at Palico, there is an interesting disconnect that’s occurring. We’ve seen surveys that say 70% of investors out there are or would like to be investing in first-time funds. The Catch-22 there is that in the survey, it shows that only about 5% of LPs have fixed allocation for first-time funds and approximately 58% invest opportunistically. While there is tremendous enthusiasm in investing in first-time funds, LPs don’t have as much time or resources in some instances to invest in these funds. About 40% of the funds on Palico are first-time funds.


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Wefox, a Germany-based insurance technology firms, is close to settling on a new “triple-digit million” euro funding round, with Softbank’s Vision Fund among the suitors, according to Reuters. Read more.

Yellowbrick Data, a Palo Alto, Calif. and Hong Kong-based provider of data warehousing, raised $44 million in Series A funding. Investors include DFJ, GV, Menlo Ventures, Samsung Ventures and Third Point Ventures.

RideOS, a developer of marketplace and mapping services that offers deploying on demand transportation services for self driving and human operated fleets, raised $25 million in Series B funding. Next47 led the round, and was joined by investors including Sequoia and ST Ventures.

Pico, a provider of virtual reality solutions, raised $24.7 million in Series A funding. GF Qianhe and GF Xinde Investment led the round.

inVia Robotics, a Westlake Village, Calif.-based provider of robotic warehouse automation solutions for commerce fulfillment centers, raised $20 million in Series B funding. Point72 Ventures led the round and was joined by existing investors including Upfront Ventures and Embark Ventures.

HealthMyne, a Madison, Wisc.-based provider of quantitative imaging decision support for radiology and oncology to U.S.-based multi-hospital system, raised $15 million in Series B funding. Ascension Ventures led the round, and was joined by investors including Venture Investors, 4490 Ventures and WARF., a San Francisco-based provider of automated mobile application testing solutions, raised $11 million in Series A funding. Gradient Ventures, Google‘s AI-focused venture fund, led the round, and was joined by investors including, Uncork Capital and Zetta Venture Partners.

HYAS, a provider of attribution intelligence tools for infosec and cybersecurity professionals, raised $6.2 million in Series A funding. M12, Microsoft’s Venture Fund led the round, and was joined by investors including Startup Capital Ventures, 205 Capital, Wesley Clover and luminary cybersecurity professional Tom Noonan.

WeeCare​, a Los Angeles-based company focused on early childcare access for families, raised $4.2 million in seed funding. Social Capital led the round, and was joined by investors including Fuel Ventures.

ZecOps Inc, a San Francisco-based stealth-mode cyber security startup, raised $3.5 million in seed funding. KPN Ventures led the round, and was joined by investors including Evolution Equity Partners, Plug and Play Silicon Valley, WISE Ventures and Array Ventures.

Willow, a direct-to-consumer disposable underwear brand, raised $2.5 million in seed funding. Investors include FirstMark Capital, Founders Fund, Two River, and Wildcat Venture Partners.

California Dreamin’, a San Francisco-based cannabis soda brand, raised $2.3 million in funding. Investors include Y Combinator and Paul Buchheit, creator of Gmail.

Peel Away Labs, a developer of multi-layered peel away disposable bed sheets, raised $1.3 million. Investors include New York Venture Partners and Alpine Meridian Ventures.

Holberg Financial a Chicago, IL based B2B employee financial education and benefits platform, raised $1 million in seed funding. West Loop Ventures led the round and was joined by investors including G2T3V Fund.


ReViral, a U.K.-based antiviral drug discovery and development company, raised $55 million in Series B funding. New Leaf Venture Partners and Novo Ventures co-led the round, and were joined by investors including Perceptive Advisors, Andera Partners, OrbiMed and Brace Pharma Capital.

Evidation Health, a San Mateo, Calif.-based health and measurement company, raised $30 million in Series C funding. SV Health Investors and B Capital Group led the round, and were joined by investors including GE Ventures and Sanofi Ventures.


San Francisco Equity Partners acquired a majority stake in Brazi Bites, a Portland, Ore.-based producer of naturally gluten-free Brazilian-style cheese bread. Financial terms weren't disclosed.

Genstar Capital acquired BBB Industries, LLC, a Daphne, Ala.-based company focused on the automotive aftermarket. Financial terms weren't disclosed.

Lombart Instrument, a portfolio company of Atlantic Street Capital, acquired Enhanced Medical Services, a Brentwood, Mo.-based distributor of pre-owned ophthalmic instruments in the U.S. Financial terms weren't disclosed.

Blue Sage Capital and Hanover Partners invested in Ligchine International Corporation, a Floyds Knobs, Ind.-based manufacturer and marketer of laser-guided boom operated concrete screeds. Financial terms weren't disclosed.

Community Fuel Investment Partners acquired a “significant” stake in EnergyWatch LLC, a New York City-based provider of utility data analytics and reporting for multiple real estate markets. Financial terms weren't disclosed.

Mediware Information Systems Inc, a company backed by TPG Capital, acquired BlueStra EHR, a St. Louis, Mo.-based cloud-based electronic health record for post-acute care providers. Financial terms weren't disclosed.

Netgain Technology LLC, which is backed by Bluff Point Associates, acquired Afinety Inc, a provider of cloud services and IT resources to law firms. Financial terms weren't disclosed.

Implus, a portfolio company of Berkshire Partners, acquired SKLZ, a Carlsbad, Calif.-based provider of multisport athletic performance and skill development training products. Financial terms weren't disclosed.

AXA received an “irrevocable offer” from Cinven to buy AXA Life Europe, a Dublin-based company that offers unit-linked insurance investments with guarantees. AXA said the sale could generate 1.165 billion euros ($1.4 billion), including a 240 million euro capital distribution. Read more.

Hidden Harbor Capital Partners acquired Masterwork Electronics, a San Francisco, Calif.-based maker of printed circuit board assemblies. Financial terms weren't disclosed.

Genstar Capital acquired Drilling Info Holdings, Inc, an Austin, Texas-based provider of business-critical insights over mobile, web, and desktop platforms to oil and gas industries worldwide. Insight Venture Partners will retain a significant minority stake.


HighQ acquired Legal Anywhere, a Lake Oswego, Ore.-based software and technology company. Financial terms weren't disclosed.

Nintex acquired Promapp, a New Zealand-based business process management software company. Financial terms weren't disclosed.

WebMD acquired Vitals Consumer Services Division, a provider of online tools that help consumers find the right healthcare providers, from MDx Medical, Inc. Financial terms weren't disclosed.


Cushman & Wakefield, the Chicago-based real estate firm, raised $765 million in an IPO of 45 million shares priced at $17, between its $16 to $18 range. The firm posted revenue of $6.9 billion in 2017. TPG (44.7% pre-offering) and PAG Asia (33.6%) back the firm. Morgan Stanley, J.P. Morgan, Goldman Sachs, and UBS are underwriters. It plans to list on the NYSE as “CWK.” Read more.

Sonos, a Santa Barbara, Calif.-based wireless speaker maker, raised $208 million in an IPO on 13.9 million shares priced at $15, below its $17 to $19 range. It posted loss of $14.2 million on revenue of $992.5 million in the year ending Sept. 2017. KKR (25.7% pre-offering), Index Ventures (13%), and former CEO/co-founder John Macfarlane (12.9%) back the firm. Morgan Stanley, Goldman Sachs, Allen & Company, RBC Capital Markets, Jefferies, and KKR are underwriters. It plans to list on the Nasdaq as “SONO.” Read more.


Cisco will buy Duo Security, an Ann Arbor, Mich-based security firm, for $2.35 billion in cash. Duo has raised approximately $121.5  million in venture funding from investors including Index Ventures, Workday, True Ventures, Lead Edge Capital, GV, and Benchmark.

Riverside Co sold Specialized Medical Services Inc, a Milwaukee, Wisc.-based provider of respiratory equipment, logistics solutions, and related medical products, to Lincare Holdings Inc, a unit of Linde AG. Financial terms weren't disclosed.


Lariat Partners promoted Josh Sartisky to vice president.

Bryce Miller and Cameron Weiner joined BelHealth Investment Partners as associates.

John Warner joined Gridiron Capital LLC as a managing director.


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Polina Marinova produces Term Sheet, and Lucinda Shen compiles the IPO news. Send deal announcements to Polina here and IPO news to Lucinda here.