The astonishing development of the private capital markets for fast-growing companies in the past five years is easy to record but it is only when put against public markets does the transformation in liquidity become apparent.
In 2018 GCV Analytics tracked 2,775 deals worth an estimated $180.17bn of total capital raised (see more in our annual review, the World of Corporate Venturing 2019 to be published at the GCVI Summit for 700+ attendees at the end of the month). While the deal count registered a notable increase on a year-on-year basis (14%) versus the 2,427 transactions reported in 2017, the total value of corporate-backed VC rounds grew by 55%, reaching another new all-time high.
The number of deals has increased by 60% since 2014’s 1,732, while the dollar figures have almost quadrupled. A simple reason: the number of corporate venturers per given year has more than doubled from 702 in 2014 up to 1,591 in 2018 but the experienced, such as Softbank, Tencent and Naspers, are doing even more.
This means the overall share of corporate venturing activity out of all VC activity by volume has increased significantly from 8% in 2014 to 18% in 2018, using data provider Pitchbook’s numbers for the overall venture capital market.
The percentage of money coming from corporates is harder to measure given the opaque nature of private markets. Given, however, the entire VC market was $255bn of deals in 2018 – of which corporations where involved in $180bn – then it is likely a higher proportion of the capital is coming from CVCs given their deeper pockets (either directly or indirectly as limited partners in VC funds in which corporations are the second-highest funder in Europe).
One deal in the past week sums up the change. Singapore-based on-demand ride service Grab has increased the potential size of a series H round already backed by several corporate investors to $5bn.
The company has been raising money for the series H round since June 2018 when it received $1bn from Toyota, adding $1bn in August from investors including Ping An Capital. The Mirae Asset – Naver Asia Growth Fund also backed the second close, after Booking Holdings invested $200m in Grab in October before Hyundai and Kia Motors provided $250m weeks later as Grab revealed the round included Microsoft, Citi Ventures unit and Goldman Sachs Investment Partners.
The company raised a further $50m from Kasikornbank the same week and secured a $150m commitment from Yamaha Motor last month to take the round to $2.85bn. Grab said it had planned to close the round at $3bn before the end of the year but SoftBank’s Vision Fund is apparently interested in investing up to $1.5bn in the round, encouraging Grab to increase its size. It had previously raised a total of $3.7bn in funding.
For context, a $5bn round, let alone the estimated $8.7bn total it would then have, would put Grab just outside the top 10 (11th) for the largest initial public offerings (IPOs) on US stock exchanges, the world’s deepest and most liquid markets, according to Kiplinger.
A total of 191 companies went public in the US last year, raising $46.8bn. That was up from 2017’s 160 IPOs and $35.5bn of proceeds but just a fraction of the private market’s appetite.
Add in a similar amount estimated raised on Europe’s stock markets (it was $29.4bn in the first nine months) and China’s exchanges – the most active by IPO volumes, with about $58.4bn raised last year on Hong Kong, Shanghai Stock Exchange and the Shenzhen Stock Exchange, and the global public markets was still about two-thirds of the CVC-backed total and half of the overall venture market.
The flow of capital to private markets might be fickle but there is an underlying reason – strategic investing brings added value to portfolio companies that can help them perform better.
Better governance and leverage over listed peers a long-held rationale behind private equity-backed portfolio companies’ growth and performance but less clearly-observed in syndicate investing of growth companies.
But with greater focus on an entrepreneur’s five primary needs of capital, customers, product development, hiring and an exit and if an investor can bring more than capital they help a portfolio company. With passive investors dominating public markets and even ‘active’ managers broadly limited to deciding which companies to buy and sell rather than any further engagement beyond the margins and some activist hedge funds focused on financial structures and break-ups and mergers then actually helping with a company’s core business can deliver lucrative growth and a commensurate rise in shareholder value.
Interestingly, we are now seeing some successful corporate investors in the private markets trying to bring the model into the public ones.
In a thoughtful post at the end of October, Kasim Kutay, CEO of Novo Holdings, a $50bn Denmark-based investor in public and private life sciences companies, described its Principal Investments activities, and, in particular, its “lighthouse” strategy.
He said: “The Principal Investments team of Novo Holdings focuses on investing in larger or well-established life science companies. An investment typically exceeds USD 300 million, and we aim to take positions of at least 10% in a company along with board representation….
“For the lighthouses in our portfolio, such as Chr. Hansen and ConvaTec, and indeed for all our public holdings, we practice engaged ownership to optimally generate attractive long-term returns. The underlying philosophy is that, as highly active life science investors, we deliver added-value input to our portfolio companies, regardless of how well run they are.
“The engaged ownership approach rests on two key tenants. First, is representation on the board and, second, is our life science value-add. We bring ideas and suggestions to a board and management team. We can also raise an agenda through the board. We leverage knowledge in ever-widening circles to deliver as much value as we can.”
Or take China-based media and internet company Tencent, which has seen portfolio companies raise billions of dollars in IPO proceeds in the past few years but held on to the equity even as the value of its own holdings have climbed into the tens of billions of dollars.
This follows a similar strategy used by its own corporate venturing backer, Naspers, as its reflects the added value long-term partners can bring.
The question for the rest of the investment market is will they catch up or do they risk oblivion?