Private market investing adapts to the current environment, insights from the SuperReturn US West 2019 Conference

Reposted from East Los Capital website:

In an effort to share knowledge, the following includes insights and my takeaways from the panels and presentations at the SuperReturn US West 2019 Conference last month.  It was an honor to present at the Fund Showcase, but it was more interesting to learn from the rest of the attendees.  Presentations which contributed to my notes and thoughts came from the following: LACERA, Coller Capital, Headlands Capital, Darc Matter, Muzinich & Co., Dr. Jerry Nickelsburg, The Port of LA, Probitas Partners, Alpha Venture Partners, Preqin, Upfront Ventures, amongst others.

The number one referral source traditional limited partners (LPs) rely on is other LPs.  Other sources include other GPs, fund formation attorneys, placement agents, and service providers.  Relationships are crucial to finding asset managers, and for asset managers, or general partnerships (GPs), relationships are crucial to be able to raise assets.  LPs do not rely much on databases like Prequin and Pitchbook as relationships matter more.  GPs must navigate the LP ecosystems to be known and consider developing their own ecosystem through thought leadership and relationships.

It’s okay for GPs to take seed capital as first-time funds are really difficult, but don’t be beholden to anyone.  Independent, or fundless, sponsors, should be open to taking seed capital.  Approximately 30% of GPs are open to anchor/seed deals.  Anchor investors, however, should probably not be involved in the investment process.  But not worry, GPs always remember their founding LPs.  GPs can also consider sharing the opportunity to seed with other LPs, not just the anchor. Some LPs prefer not to have anchor-type LPs who may be perceived as having outsized influence on the GP. Regardless of who you are and where you come from, first-time funds are difficult to raise.  GPs must prepare to fundraise for one to two years, if not a lot more, to raise a new fund.  If you’re a fundless sponsor, work on telling a legitimate story and bring a deal – an LOI on the first deal doesn’t hurt.  The good news for fundless sponsors is that 89% of investors who have more than $500M committed to private equity (PE) also have an active internal co-investment program or outsourced one, according to Probitas Partners.

New differentiated strategies in first-time funds are not as welcome in the industry as LPs prefer to see a track record in an existing strategy – oh and it doesn’t hurt for the GP to already be wealthy.  LPs generally like when wealthy partners at GPs backstop younger partners – younger partners are usually given the ability to earn out the wealthier partners’ backing.  LPs generally want 1) a cohesive team with a track record in the asset class, 2) a repeatable investment process, 3) the ability to source deals, 4) strong pedigree, 5) prior institutional investing experience, 6) portable track record, and 7) the ability to sustain themselves – essentially wealthy already.  LPs also like being asked about their own strategy – do not forget the personal side of the business.  In addition, GPs should ensure that every team member meeting with an LP has a specific role and unity is displayed.

PE fundraising continues at a strong clip, however, big buyout fundraising is slowing.  LPs realize mega funds will have a tough time with exits.  Final closes for non-buyout funds, however, continued to increase, especially for middle market and growth capital raises.  The lower middle market uses less leverage, which leads to lower loss and default rates.  In addition, there is way more private equity dry powder than private debt supply, which leads investors to believe more will be deployed to credit in the coming years.  LPs also seem more and more to like operationally-focused funds and funds focused on healthcare and technology.  LPs understand the market currently wants growth over profitability and sometimes the best PE performers are startup funds.

LPs care about returns, however, environmental, social, and governance (ESG) factors, including diversity, are starting to be recognized.  The Institutional Limited Partners Association (ILPA) is finally putting ESG at the top of mind.  Some institutional investors have begun treating ESG as part of their fiduciary duty since circa 2013 when studies began touting correlation between corporate sustainability and strong financial results.  LPs think of diversity more broadly than skin color and gender and consider factors such as what makes people think a certain way.  It is as if diversity finally came into vogue, but skin color and gender was too difficult to accomplish, so folks decide to broaden the definition.

Valuations are the number one concern for investors when considering PE return expectations.  Exits need to be planned at entry with the understanding that strategic buyers care about different things than financial buyers.  A strategic buyer looks for a product/service that it can sell to existing customers while financial buyers will buy based on financial health and opportunity for future returns.  Aside from exits, Partners Group considers the following value creation levers: accretive acquisitions, strong direction from board, cost savings, new customers and partners, end market expansion, new product launches, strategic planning, talent management.  Technology enablement was not a stand-alone value creation lever considered.  Given LP concerns and other market factors, the market is expected to see more 1) GP stakes by investors to enhance and diversify PE return streams, 2) secondaries investing in order to eliminate the beginning of the PE J-curve, and 3) take-privates potentially converging private and public equity returns. Concerns include GPs selling companies too early to show realizations for fundraising and frequent sponsor-to-sponsor deals resulting in transaction fees borne by LPs.  Despite all this, LPs believe PE-backed companies will perform better than non-PE-backed companies during the next economic downturn.  Lastly, LPs are not increasing focus on any one particular industry.

More LPs are now looking to buy and sell secondaries.  Secondaries are a three-party structure and can create win-win-win situations.  While previously viewed negatively for GPs, they are becoming more commonly accepted these days. Some VCs are still pretty secretive about their secondaries.  The current dynamic, though, is that GPs need to show exits, LPs desire liquidity, and of course secondary investors seek opportunities.  It’s a “3-ring circus” which you don’t want to get out of hand.  There is an argument for over-concentration into smaller amount of deals to be selective, but the fact is the market is growing for secondaries.  However, buyers know that well-run auctions will not allow for good pricing.  If everyone knows who is involved, buyers may not buy, so there is an interest in the seller to not allow a lot of people to know about their secondaries.  LPs are weary of single asset secondaries because of the concentrated risk.  There are $330 billion in “sunset funds,” which used to be referred to less politely as “zombie funds.”  While there may not be a lot of secondary funds raised, more and more investors say they do “GP restructuring.”  Capital is there despite the lack of dedicated secondary funds.  GP liquidity solutions tripled in the last four years according to Evercore, and now constitutes nearly a third of the secondary market.

Dispersion of VC fund IRRs is narrowing as lower quartile VCs are performing better than their historical performance and top quartile VCs continue performing on par with their historical performance according to Preqin.  This could potentially be that good deals are becoming more available outside of Silicon Valley or outside the top firms in Silicon Valley.  In addition, it is interesting to note that first-time VC funds are outperforming non-first time VC funds.  The hunger to ensure strong performance is found more in first-time funds.  Pre-seed (<$1M) deals have cooled off, decreasing year-over-year for the last 3 years, versus growing over 6x from 2006 to 2014.  Seed ($1-5M) deals similarly have cooled off as they’ve also decreased year-over-year during the last 3 years vs growing over 3x from 2006 to 2014.  Fewer micro funds are being raised over the last 3 years as “early stage” funds are bigger now.  Companies are staying in the seed phase longer as time to Series A has lengthened from less than 1yr in 2011 to 1.6yrs in 2018.  And yes, valuation creep is happening.  One reason is that VCs try to invest pro rata on their deals to keep the same ownership.  VCs have increasingly set up “companion funds” to defend their ownership.  VCs hope their late stage pro-rata investing will allow them to reap rewards, but the IPO window/liquidity has been pushed out 5yrs on average as dollars have shifted from public to private markets.  This shift leads to more mega rounds and less IPOs.  54 new unicorns were created in 2018 vs the previous high of 43 in 2015, according to Pitchbook.  While tech/internet use continues to broaden globally, VC returns are still on paper.  Larger sized exits are deceiving as the number of exits is actually dwindling to 2010 levels.

Technology needs to be understood by all investors.  While traditionally VCs are at the forefront of technology, investors expect more non-VCs to also understand technology investing and the use of technology in general.  Even real asset investors need to understand the technology used on the asset, whether land or other property, so as to understand the real value that can be created with the asset.  In addition, the most sophisticated investment firms, regardless of size, also have a tough time capturing and analyzing data across their portfolio companies.  This difficulty leaves tons of room for opportunity to improve.  And, do not expect much AI on data analytics or sourcing.  LPs are interested in GPs that have actual differentiated technology.

Talent management includes focusing on culture and ensuring that all employees feel accountable.  GPs should work on having an employee handbook.  Founders need to expound on vision, values, and goals of firm.  Do not ignore team building events and be ready for more questions on diversity.  Lastly, non-competes are difficult to enforce in California.

Vietnam is increasing its share of imports and exports according to LA Port data.  Vietnam is the fastest growing importer for furniture, toys, clothing, footwear, and leather, while Indonesia leads the growth for footwear and Thailand for plastics and auto parts.  Exports to China are decreasing while Vietnam is taking share.  The top imports are 1) furniture, 2) auto parts, 3) apparel, 4) electronics, 5) footwear.  The top exports are 1) wastepaper, 2) animal feeds, 3) scrap metal, 4) fabrics, 5) soybeans.

Capital is not enough

Reposted from East Los Capital website:

You, the CEO, have many choices when deciding to receive investment capital. Our firm aims to be your best choice. As we assembled our team, one thought stood out: capital is not enough. Private equity firms need to bring more than capital to the companies in which they invest. With hundreds of billions of dollars in private equity dry powder, private equity firms face increasing competition for deals. They must differentiate themselves. Whether venture, lower middle market, middle market, or large buyout, private equity firms must adapt. Unfortunately, industry pressures, norms, biases, do not provide much incentive to change.

We choose to be different from the beginning. We will always push ourselves to understand our industries better through strong research to make sure we help you become an industry leader. We will leverage our relationships and technology to scour the market to ensure we find the best paths to exit for you or find future acquisitions that will make you stronger. While most private equity firms tout some of the points above, we will truly distinguish ourselves in our roll-up-the-sleeves approach through technical operations.

We want to make sure you have access to 1) the best technology and 2) people who can build that technology. Technology is impacting every industry and we will do everything we can to provide the best tools available in order to lead your industry.

Aside from capital, we bring a hands-on team with individuals who have worked at and built best in class technology companies in Silicon Valley and beyond. Our team has:

  1. facilitated international growth of companies to over 40 countries,
  2. grown a company from zero to $70 million of annual consumer subscription revenue without venture funding,
  3. trained hundreds of software engineers,
  4. founded a data science platform used by 40 U.S. hospitals,
  5. acquired a cloud solutions business in one country and integrated it into another in a different country,
  6. built a consumer styling business into $20 million of annualized recurring revenue without institutional funding,
  7. pioneered the technology-enablement of a chemical manufacturer utilizing software best practices,
  8. scaled an edtech company to $12 million in revenue without external funding,
  9. built software products used by 1 million small to large enterprises.

Aside from technical operations inside of fast-growing technology startups and middle market companies, our team has learned from seeing the insides of companies such as Accenture, Amazon, Disney, Evercore, GoDaddy, Goldman Sachs, Google, IBM, Intel, KKR, McKinsey & Company, Microsoft, Sequoia Capital, Symantec, TCW, Vista Equity Partners, VMware, and the U.S. Treasury. We’ve also invested in dozens of companies in consumer, healthcare, internet, media, services, and software. Lastly, we’ve done deep industry research covering public companies such as Amgen, Comcast, Facebook, Home Depot, Johnson & Johnson, Netflix, Procter & Gamble, Expedia, LinkedIn, Marriott, Pepsico, Walmart, and Yahoo. We want you to have access to all this in your next leg of growth.

East Los Capital is not your typical lower middle market private equity firm. We’re here to join forces with you to maximize your potential.

Motivation repost: Full Circle of Leadership

This article serves as motivation to continue my work from my day job advancing in a tough industry to my nights and weekends volunteering my time to help others to spending time with my family and raising wonderful kids – second on the way :-)!

Thank you to Antonio Tijerino, the Hispanic Heritage Foundation (parent of LOFT) staff, my wife, Rebecca (now a tech startup founder herself), my mom (who raised my sister and me by herself throughout South Central and the Eastside of L.A.), and all those who have worked with me, trained me, and pushed me along the way.  Much more work to do.  Eternally optimistic despite the circumstances, let’s not stop creating a better world.

Full Circle of Leadership

by Antonio Tijerino

Full Circle Of Leadership: By Antonio Tijerino, HHF CEO

As Emanuel Pleitez navigated his way to the podium through the traffic of college students during the Hispanic Heritage Foundation’s (HHF) Coder Summit in Palo Alto, CA, I heard one of the students in our network murmuring to another, “he’s one of us.”

Indeed, he is.

From the moment Emanuel Pleitez received our Los Angeles Regional Youth Award and then the National Youth Award as a high school senior from el barrio, he has always been a part of our mission.  An embodiment of our mission actually – we strive to identify, prepare and position a Latino leader to impact hundreds or thousands of others in various “tracks” or fields through our award-winning LOFT (Latinos On Fast Track) program – Emanuel’s impact has been felt as a student, as a professional and now as the Chairman of HHF’s Board of Directors.  He’s always been focused on shining a light on various paths for young Latinos and even an old Latino like me.

As a college student at Stanford, Emanuel worked tirelessly to organize the Latino student body in various areas including community service, voter registration and leadership.  He also mentored, connected and mobilized thousands of fellow HHF Youth Awardees to create a support system for each other and younger Latinos.  Another area of focus was finance after getting an internship with Goldman Sachs through various support systems including LOFT’s Workforce Initiative.  By leveraging LOFT’s infrastructure, he developed Finance Boot Camps at Stanford and other universities in an effort to expose, connect and prepare Latinos to the financial services industry. Upon graduation from Stanford, he worked for Goldman Sachs in San Francisco and then joined US Department of the Treasury for the Obama administration in Washington, DC.  During this time, he exposed thousands of young Latinos to public policy careers in addition to financial services. Some of the efforts he created during this time continue today such as the Bay Area Latinos in Finance and the Latino Legacy Weekend which takes annually during Memorial Day weekend.

Emanuel then went on to work at McKinsey & Co. followed by stints at a couple of start-ups as Chief Strategy Officer and now he’s an investor at Sunstone Partners while serving as only the 4th Chair of the Hispanic Heritage Foundation and his shared vision with the team has moved us into interesting directions.  But always moving …

Whether he was a teenager, young professional or more seasoned influencer, he has always challenged me, our staff and the entire Latino community to be more innovative.  For instance, several years ago he called me randomly and said, “hey, we really need to think about getting our kids into coding, job opportunities are projected to be a million by 2020 and there’s a shortage.”  Pow!  Next moment there’s a brainstorming with HHF Advisor Eliana Murillo and Code as a Second Language (CSL) was born in East LA.  CSL is now in over 20 regions across the United States led by Emanuel’s protégé Alberto Avalos, also from East Los.  But it doesn’t stop there, when Emanuel was visiting my home, I asked him to watch my then 5-year-old son for a few minutes.  When I returned, Emanuel was teaching him how to code while my son thought he was playing a video game.  He doesn’t know how to stop.  And neither do I.

Which is why as HHF’s leadership, we have to deal with the concern/criticism that we “try to do too much.”  We do.  Yes it’s a problem in terms of communicating our brand.  But it’s also an interesting concept in a world of linear thinkers and doers.

We are scattered, but so it our impact.  When one is constantly creating, challenging, taking risks, impetuously executing, yes it’s maddening but our philosophy is that every issue should be approached with a simple concept, “this is possible.” The rest is a bundle of details.  But the concept has to be simple and focused on what’s possible.  That’s Emanuel.  That’s me.  That’s HHF.

That’s the philosophy that makes not only CSL go from idea to action but also LAtinas, Investor’s Forum, Charlas, LOFT Lab, Video Gaming Innovation Summit, Tech Entrepreneur exchange with Israel,  LOFT Network, and so many other initiatives that are influencing tens of thousands of young Latinos across the country.

As a hush settles over the hundreds of Latino programmers and developers attending the Coder Summit, the HHF Chair at his Alma Mater at Stanford, the energy in the room focused was on Emanuel Pleitez who was at the podium.

His words resonated with the audience in a way the other influential speakers that afternoon including Members of Congress, Fortune 100 leadership and entrepreneurs did not.  “I was where you are not too long ago and took my role as an innovative Latino leader very seriously.  We hope to not only give you a voice but the infrastructure for your ideas to become a reality.  The time is now to change how we think, how we do, how we want the world to look.  So let’s get to work.”

Yes, Emanuel, let’s get to work.

Article link:

Navigating the Politics of Contextual Inquiry

We all know that users often misreport when asked questions, not because they are looking to intentionally deceive us, but because they are humans with their specializations, constructed self-images, and fallible memories. One method for overcoming this problem is contextual inquiry, more commonly known as contextual interviews.

Source: Navigating the Politics of Contextual Inquiry

UX Battle of the Week: Zillow vs Redfin

We ran a quick UX benchmark study between Zillow and Redfin to see how their online experience compared. Here are the results.

Source: UX Battle of the Week: Zillow vs Redfin

How to Recruit for UX Research & Usability Testing – Webinar Q&A

We recently had a webinar with Leah Kaufman of Lenovo to discuss how to recruit participants for UX research and usability testing, and our attendees had a lot of questions for her. Here are her answers to some of the most common questions on recruitment for UX research and usability testing.

Source: How to Recruit for UX Research & Usability Testing – Webinar Q&A

Why You Should Always Test Your Prototypes

Releasing products without testing prototypes with your users is like buying a car without test driving it. Here’s 3 reasons why you should always test your prototypes.

Source: Why You Should Always Test Your Prototypes

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