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Results of 6th Annual Semaphore PE Industry Confidence Survey

 

Confidence at All Time High

Results of 6th Annual Semaphore PE Industry Confidence Survey

 

By Mark S. DiSalvo

Is irrational exuberance on the horizon?  Will the Merry-Go-Round ever stop? Can the Masters of the Universe continue to rule? Notwithstanding the recent February Dow swoon the 2014 Semaphore Confidence Survey suggests No, No and Yes.
Extraordinarily, 91% of our over 500 respondents were confident in their own businesses, fully 50% higher than a year ago. 94% were confident in themselves, an all-time high, growing from78% last year.  In contrast only 31% of respondents expressed confidence in the President with 49% stating a lack of confidence in him, significantly above last year’s 37% number. As miserable as that may be it is decidedly better than the leader of the other branch of government, Speaker John Boehner, who has an 11% favorable v 66% unfavorable rating. As dreadful a rating for sure but it is far better than Congress as an institution with 87% expressing no or little confidence in our elected officials and only 1% offering an expression of confidence in the House or Senate.
In contrast some 80%, nearly double last year’s 43%, remain confident in the PE/VC Industry, while 6% express confidence in the US economy and less than half at 22% enjoying confidence in the International economy. This is expressed in the near wild enthusiasm around expected deal number and size.  96% reported completing between 1 and 4 deals and a similar number expecting to do the same.  More surprisingly is that over a quarter of us completed more than six transactions and fully a third anticipate exceeding that plateau in 2014.  And the deal sizes are growing.  Across venture and PE the average initial investment size is expected to be 50% larger in 2014 than last year. 
So what will all this prospective deal effort be in? Health Care investing shot to top in expected activity, up from fourth. Enterprise Software got bumped to #2 and Energy oriented investing rocketed to third place and last year was not even in the top ten.  With Business Services ranked fourth in prospective deal making with Digital Media and Financial Services tied for 5th place. Agriculture investment broke the top ten for the first time and came in a close 6th.  Gaming was not only out of the money but also failed to make the top twenty. Social/Community Technology, On-line Consumer Retail and Food rounded out our top ten deal hopes.  
And where does all this enthusiasm and confident take us. 77% expect to earn more than they did in 2013 with only 6% expecting to earn less. This on top of the fact that 65% earned more last year than they did in 2012 and 23% reported earning less.
For the second year in a row my industry colleagues continue to see the prospect of more income, more deal flow and high confidence in themselves, their peers, and industry. This clear read comparing the raw highlight data from the 6th annual Semaphore Confidence Survey with last year’s results suggests that our industry remains on the rise.  Too much more enthusiasm and consequent riches and our seemingly hated colleagues in Congress might find it more politically palatable to eliminate capital gain rates on carry.
The distribution of respondents in the US remained nearly the same from past years - the top five were 29% California, 16% Massachusetts, 11% New York, 6% Connecticut and 5% Texas with only New Jersey dropping out of the mix (guess the GW Bridge traffic might have been too heavy to get our usual Garden State respondents to reply). DC 4% and Illinois came in at 3% and no other state represented more than 1%. Our US respondents had reasonable confidence in their state governments with 26% expressing confidence - at least in comparison to the US Congress.    
International responses were quite different.  We had our widest ever distribution of respondents with only the UK remaining on top with 37% of all international survey-takers with (10 points higher than last year) followed by  9% Canada, 7% China and 3% France rounding-out the top four just as they did the prior years. We received multiple respondents from Germany, the Philippines, Brazil, Russia, Japan, Ukraine, Viet Nam and single responses from14 other nations including our first ever from Bora Bora (must have been a PE partner on vacation!). International respondents had depressingly poor opinions of their governments with 5% expressing confidence in their countries leaders, down from 7% in 2013.   
The 563 of us who did reply this year, up from 470 last year, was over weighted by third party professional participants compared to past years.  The mix this year compared to the last year was VC (24% v 39% ), Buy-out pros (25% v 24%), Limited Partners (6% v 13%) operating executives (7% v 6%) and third party professional (38% v 18%). Hmmm…charting this back to the income responses, perhaps the continued increase in income levels is attributable to the transaction fees and expenses associated with our explosion of deal numbers and values.
Comments this year were more muted in tone than past years and can be viewed on the survey highlights link below. Perhaps the tight bandwidth contributed to the lack of wit expressed.   Here is one none-too-pleased respondent commenting on the survey itself:
            “Well done, like an overly charred steak forgotten on a summer BBQ grill. Terrible survey.”
I hate when that happens as I like my steak very rare.
Hope everyone’s expectations are indeed met in 2014.  See you next year.
To see the highlights of the results of the 2014 Semaphore Confidence Survey please click here.  If you want to do your own comparison, the 2013 Semaphore Confidence Survey results are here.
Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of troubled Private Equity and Venture Capital funds under management. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds, is a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York, London and Dallas.

Topics: market diligence, troubled funds, Venture Capital, equity, investment, venture funds, technology, private equity funds, Semaphore, Venture Capital, funds under management, general partners, limited partners, turnaround, LP, private equity

Beach Blanket Bingo?

Semaphore Has a New Markets Tax Credits Summer Project

Spring has finally made an appearance to New England after a long winter.  Hot summer days spent languishing at the beach; margaritas by the pool or skimming on the lake in a new boat are moving their way to the front of everyone’s minds.  No one thinks of stifling days surrounded by paperwork with the sun shining through the office window…you know, the one with the broken air conditioner. While summer is a time for relaxing and rejuvenating, the Semaphore staff is going to be reviewing projects, diligently negotiating contracts, finalizing deals and closing multi-party agreements in order to fulfill our latest allocation of New Markets Tax Credits funding.  

Semaphore has been operating Pacesetter CDE since 2010 and last year entered into an agreement with its majority shareholders, Wells Fargo and Bank of America, to acquire 100% of the stock of the firm.  We are pleased to announce that a $30 Million New Markets Tax Credit Allocation has been awarded to us in the latest round from the U.S. Treasury Department's Community Development Financial Institution (CDFI) Fund.  Semaphore is one of just 85 Community Development Entities (CDEs) throughout the nation that has received an award this year.

The New Markets Tax Credit allocations have assisted hundreds of low-income communities with the help of private investment capital.  We are excited that our good fortune allows us to actively continue to participate in revitalizing communities and creating jobs to improve distressed areas around the nation. So…while you are enjoying your sun filled activities, keep us in mind if your beach towel discussions turn to equity investments in low income communities; we would love to hear about any projects in which you think we can assist. 

Have a safe and profitable summer!

Louise Martineau is the Director of Operations at Semaphore. Semaphore (www.sema4usa.com ) is a leading global professional services provider of Private Equity and Venture Capital funds-under-management and diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds, is a New Markets Tax Credit provider and advises General and Limited Partners as well as corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York, London and Dallas.

Topics: investment, private equity funds, Semaphore, new markets tax credits, Announcements

Results of Annual Semaphore PE Industry Confidence Survey

 Self-Confident PE v Congressional Follies

By Mark S. DiSalvo

 

The Semaphore Confidence Survey respondents are truly prescient.  If America had only listened to our results last year it would have saved the American people over a Billion dollars in advertisements and political machinations in the just concluded presidential campaign.  Exactly twelve months ago some 47% of our respondents had confidence in Mitt Romney (funny, that number).  Game over.  Then again, only 39% were confident in President Obama.   Let’s see what Nate Silver can do with this year’s results!

While Romney is off the political grid and despite the big re-election, only 33% of respondents expressed confidence in the President with 37% stating a lack of confidence in him. That is decidedly better than his principal newest political foe, Speaker John Boehner, who “enjoys” a 3% favorable v 64% unfavorable rating. Those abysmal ratings are only superseded by Congress as a whole with nearly 80% expressing no or little confidence in our elected officials laboring under the Capitol Dome with not a single expression of confidence by any respondent.

In contrast some 78% of our respondents are confident in themselves and 43% remain confident in the PE/VC Industry with only 18% expressing some lack of confidence in how they earn a living. Personal confidence slipped a bit from last year’s results of 81%. Confidence in the US economy has slipped from last year, 37% to 46% and degraded even more with the International economy as the preponderance of those with little or no confidence grew from 47% last year to 57% today.  This seems a bit counterintuitive in that the number and size of expected deals appear significantly up by those self-reporting their expected investment objectives.  Further proofed by the fact that 65% earned more income last year than in 2011 and fully 57% expect to earn yet again more income than in 2012 - they’re going to need it to pay higher taxes.

Continuing the reversal of a trend prior to last year, my industry colleagues continue to see the prospect of more income, more deal flow and high confidence in themselves, their peers, and industry. This clear read comparing the raw highlight data from the 5th annual Semaphore Confidence Survey with last year’s results affords some fascinating insight across business and politics.

And in what is the group investing?  Enterprise Software replaced Social/Community Technology for the top spot with the latter moving down to third and Financial Services moving from eighth to 2nd this year.  Health Care Services moved from third to 4th with Digital Media rounding out the top five.  For the second year in a row, Sustainable Energy/Cleantech (for the first three years of our survey in the top five) failed to make the top ten.  On-line Consumer Retail and Gaming went from 4th and 5th to 9th and 10th.

The distribution of respondents in the US stayed remarkably the same from past years - the top six were CA, MA, NJ, NY, CT, TX, with only NY and NJ swapping places. Our US respondents had reasonable confidence in their state governments with 28% expressing confidence - that must look like heaven to the US Congress even though it is down from 37% last year.   

International responses were quite different.  We had our widest ever distribution of respondents with only the UK remaining on top with 27% of all international survey-takers with  Canada, China and France rounding-out the top four.  Russia, Japan, Switzerland and Germany were knocked out of last year’s top five. International respondents had crushingly poor opinions of their governments with the same 74% having no or little confidence in their countries leaders, up 3% from the 2011 survey and more than double the 31% of three years ago. 

The over 470 who did reply this year, up slightly from last year, were weighted a bit differently than  prior years’ mix of VC (39%  this year v 28% last year), Buy-out pros (24% v 33%), Limited Partners (13% v 11%) operating executives (6% v 19%) and third party professional 18% v 12%).

Comments this year were generally policy oriented and in a serious vein.  Some can be viewed on the raw data highlight link below.  There was one comment I’ll share in full from either a jokester or savant – or both:

“I met a fairy who said she would grant me one wish.  Immediately I said, "I want to live forever." "Sorry," said the fairy, "I'm not allowed to grant eternal life." "OK," I said, "Then, I want to die after Congress gets its head out of its ass!" The fairy replied, "You crafty bastard."  12/26/2012 2:14 PM

Maybe this individual should run for Congress.

See you next year.

To see the highlights of the results of the 2013 Semaphore Confidence Survey please click here.  If you want to do your own comparison, the 2012 Semaphore Confidence Survey results are here.

_________________________________________________________________________________

Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity and Venture Capital funds under management and diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds, is a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York, London and Dallas.

Topics: entrepreneurs, equity, investment, Business Operations, private equity funds, Semaphore, funds under management, general partners, limited partners, VC

An Office Lunch Table Thanksgiving Tale

 Leftovers and gratitude - a new Semaphore tradition.

By Mark S. DiSalvo

At my Thanksgiving Day table we go around the room and ask each family member (31 this year) to relate just what it is for which they are most grateful.  Responses are variously funny (“my big nose so I can better enjoy the smell of that wonderful pecan and pumpkin pie” or “I’m especially pleased to be taller than my runt older cousin who always tortured me when I was a kid”); poignant (“that Mother’s dementia has allowed her to forget the pain of the past year and simply enjoy our family get together”) and variously serious (getting into a favorite university, the blessing of a new child, etc.).  I’m sure it’s a tradition or experience that many other families enjoy.

On the Monday after the holiday, with my colleagues at our office lunch table, it was noted how I had not written a biz blog post for a couple of months. We agreed I should highlight the recent transaction where we acquired a New Markets Tax Credit platform and trumpet the recent investments. Somehow we got off on the tangent of family Thanksgiving expressions of gratitude.  It struck us that we don’t do the same at work as we do in our homes.  When the gang started discussing that very fact, we went from voicing gratitude for our good fortune to have interesting careers to bemoaning those, some of our relatives and friends that are up against it and pressed economically, in unproductive careers or who don’t have the privilege of a job at all. We discovered, in conversation, that our successes, in and of themselves are unimportant but that true satisfaction came in helping others get the same emotional fulfillment that we enjoy when we turnaround a fund or help a portfolio company earn a new customer. We were amazed to discover we’ve supported the creation of a few thousand jobs over the past decade and resolved, collectively, to see how we can ensure that the dignity of work is afforded to even more people as we continue to invest and nurture our current and future portfolio.  The discussion turned to taxes and universally, albeit some of  my colleagues begrudgingly,  we understood that the moaning about an increase in marginal tax rates and an expected upping of capital gain was a tiny price for the benefit of our  Semaphore Team working together and doing so in this engagingly challenging industry in a great country. Experiencing the ancillary profits of hard work as satisfaction, in and of itself, as well as the emotional stimulation of assisting entrepreneurs and stakeholders alike, we realized, was the true reason we labor. Sure, we like the monetary success but the sense of accomplishment when a business liquidates on its own terms and seeing the unadulterated joy of an entrepreneur actually accomplishing a dream is our most sustaining payoff.

Bottom line, we are privileged indeed.  I think we’ll start a new tradition.  Lunch table Thanksgiving. Nothing goes better with left-over turkey and stuffing sandwiches (with cranberry sauce, of course).  Try it – establishing the tradition of asking your colleagues about what makes them grateful at work.  You might find a new motivation and a reason to believe in yourself. The sandwich isn’t too bad either – lighter on the mayo next year.

Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity and Venture Capital funds under management and diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds, is a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York, London and Dallas.

Topics: investment, new markets tax credits, portfolio company, turnaround

No Sand Between Our Toes 2012

No Sand Between Our Toes (2012)

But our LPs are very happy that we don't have summer tans.

This is the fifth edition of our summer blast. OK, it should be titled "Some Sand Between Our Toes". We've actually had the fortune of enjoying both a busy period and a highly efficient back office, operations and professional mitigation staff that is running like a well-oiled and glowingly-tanned sunbather. After 11 years of taking over troubled fund assets and doing diligence on funds and deals, we have comfortably created an effective process that makes our clients more liquid and we, at Semaphore, smiling at both our good fortunes. In fact we've just spent this past month officially closing down a Venture Fund after intervening some five years ago.

It may not be a breezy beach read but here is the story. The North Shore Fund (name changed to protect the guilty) was a moderate sized venture fund with two General Partners investing from a syndicate that included many of America's most well-known banks and several larger state pension funds, each with approximately $40 million in committed capital. It was a second fund run by well-educated but under skilled managers. You'll have to wait for the movie but suffice it to say, returns were less than generous. More accurately, they were outright awful. While few get fired for poor performance alone, you will get fired for willful destruction of value, cutting governance corners along the way and playing just on the edge of fraud. The LPs had spent the better part of two years fighting with the GPs about their misbehavior while paying 2 full points in management fees. Litigation had been filed and discovery was ongoing. There was not a no-fault divorce clause in the Limited Partner Agreement and some several hundred thousand had already been spent on litigation. An LP who had previously worked with Semaphore introduced us to the syndicate. We promised three things: 1.) Get the GP out the door without litigation. 2.) Take control of the fund and let the partnership know what had gone wrong. 3.) Tell the truth about whether we could fix it.

We were not very welcome when we walked in the GPs door to introduce ourselves as the folks who were going to replace the very individuals who greeted us. Governance was a mess, portfolio companies had been wholly ignored during the protracted fight and fund values were, well, lower than the clams buried deep in the sand we hoped to be trodding this summer. In fact we ended up taking over Fund I as well, whose value had wholly eroded. We mercifully buried the fund and secured complete liability protection for the LPs.

Back to Fund II: Bottom line is, we fixed it. Semaphore walked the GPs out the door without further litigation; straightened out governance; righted portfolio businesses; sought and received third party reparation; and replaced a third of portfolio company management teams. Ultimately, Semaphore returned 3.1X of value – all without drawing down another nickel of the then available unfunded capital commitment when we intervened.

Oh yeah, we got paid a piece of the action – real carry from a fund destined to be written down to zero. This, of course, meant that our LPs received significant newly-found liquidity. For the rest of the story give us a ring. I will promise to call you back from the beach. Then again, the phone just rang and it's a client with a recalcitrant GP who is acting badly. Maybe next summer...

Hope summer is affording you some respite. If you have any fund worries keeping you from enjoying the surf, lake, forest cabin, poolside, living room or wherever it is you should be happily vacationing - then kick the problem to us.

Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for seven six Private Equity and Venture Capital funds, a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore’s corporate offices are inBoston with principal offices inNew York andLondon.

Topics: troubled funds, operations, Venture Capital, investment, venture funds, private equity funds, Venture Capital, general partners, limited partners

Cash Trumps Politics

Cash Trumps Politics

Results of Annual Semaphore PE Industry Confidence Survey

 

By Mark S. DiSalvo

It’s all about the cash.  Reversing a trend, my industry colleagues seem to have the wind at their backs when it comes to their personal income and business expectations - this despite a decided lack of confidence in government, most especially Congress. This clear read comparing the raw data from the 4th annual Semaphore Confidence Survey with last year’s results affords some fascinating insight across business and politics.

Let’s start with pay.  At the start of last year 74% of the over 400 respondents to the 2010 Confidence Survey believed they would earn more money than the prior year. Fully 61% did. And this is over 5 times as many who earned more income in the then prior year. 18% earned the same as the prior year and only 21% earned less, halving the number whose compensation was less the prior year.   Not only are the respondents richer but they also expect to get more so.  57% believe they will earn yet more money than last year, 31% the same amount and only 12% less. We don’t know the sources of this increased comp but for the 61% of our respondents who were PE or VC professionals it’s a fair bet that, like Mitt Romney, they had a much smaller tax rate than our other respondents who presumably paid ordinary income tax rather than the 15% carried interest tax rate.  Perhaps we should ask that specific question next year.

Speaking of Mitt: 47% express they are somewhat confident or confident in Romney against the 11% who express somewhat confidence in Gingrich while, significantly, 0% are confident in Newt. Romney even beats the President by 8% in a head to head match on confidence.

On the negative side, in this particularly contentious Presidential election year,

72% are not confident or not very confident in Gingrich while the numbers are 27% for Romney. Romney again laps the President with 49% expressing a lack of confidence.

Clearly Romney is the favorite in this crowd as one might expect him to best Obama here.  Nonetheless, the small gap in confidence between them suggests that Obama may be in better shape than one could generally predict although he is significantly weighted down by the large non-confidence opinion expressed.  Surely, Gingrich would be the preferred opponent for the current resident of 1600 Pennsylvania Avenue. Surprising still is that Obama does not receive more credit for the growth in actual income and trend of continued growth expressed by respondents.  

There is no wondering or skillful analysis needed when you talk about Congress. Last years lowest ever number of 7% confidence was more than halved to 3%!  Even state legislatures grew in confidence from 27% to 32% (you should know that the top states replying were CA, MA, NY, NJ, CT, TX, WA, NC and then IL).   This does not bode well for any member of Congress running for reelection.  Their jobs may be more at risk than a GP who has made negative returns for, say, two straight funds (in and of itself an all too common experience).

International respondents had crushingly poor opinions of their governments with fully 74% having no or little confidence in their countries leaders, up 4% from last year and still more than double the 31% of two years ago.  The preponderance of our international respondents were from the UK with most replies coming, in order, from France, Switzerland, Japan, German and China. 

Our peers expect to be busy this year. In the beginning of 2011, fully 100% thought they would make up to six investments – and they did. 81% completed up to three deals and almost the same numbers intend to complete up to three deals. Further, those deals were as large as expected with 63% self reporting that their deals were in excess of $25 Million in each discrete investment. 

And in what is the group investing?  The industry stayed rather consistent. Social/Community Technology took the top spot for the first time, moving up from second, swapping places with Enterprise Technology and Health Care remaining third. Sustainable Energy/Cleantech dropped out of the top five (it dropped out of the top ten!) with On-line consumer retail claiming 4th and Gaming staying in 5th.

The over 400 who did reply this year, down slightly from last year, were similar to last year’s mix of VC, Buy-out pros, operating executives and third party professionals. One thing for sure is that this year’s mix of survey takers continued to be very high on themselves believing that 71% (78% last year) were confident in their business and 81% (84% last year) confident in themselves.  Confidence in their bosses dropped to 63%, from 75% expressing that view last year, but still – that is 13 points higher than two years ago and nearly triple the year before.

As always, there was insight and entertainment offered by our contributors.  Channeling Lady Macbeth, one offered “Out out damned Newt” balanced by “Obama's wealth redistribution agenda is destroying the economy of this country”.  An optimist suggested, “Even 9% unemployment still means 91% employment”. Another bemoaned that “I should have gone to law school” - hope that was not one of our attorney respondents.  

We had an infamous commentator from our inaugural survey who said “PE is dead and I wish my boss were too.”   I can’t tell you how many people still ask me about that guy. All have waited for him to resurface.  I can’t say definitively it was the same person but someone this year noted, “PE is not dead. Still wish my boss was.”  That, at least, was a confession that he was wrong a few years ago about the industry, and a comfort that he did not murder his boss.  Whew.

See you next year.

To see the highlights of the results of the 2012 Semaphore Confidence Survey please click here.  If you want to do your own comparison, the 2011 Semaphore Confidence Survey results are here.

 

Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity funds-under-management and diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds, is a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.

Topics: Venture Capital, investment, venture funds, Semaphore, Venture Capital, general partners, limited partners, VC

Semaphore's Annual PE Industry Confidence Survey results

Posted by Mark DiSalvo on Tuesday, January 25, 2011 @ 12:30PM

Is 2011 a Wasteland or Playground?

By Mark S. DiSalvo

It seems my industry colleagues have continued to be wrongly optimistic about their personal income against a backdrop of continued and decided lack of confidence in the economy and their national governments.  That appears to be the clear read comparing the raw data from the 3rd annual Semaphore Confidence Survey with last year’s results. 

Let’s start with pay.  At the start of last year 78% of the over 500 respondents to the 2010 Confidence Survey believed they would earn more money than the prior year.  The truth was that only 36% of this year’s respondents reported they did in fact earn more than the prior year.  Importantly though is that only 11% of respondents earned more money two years ago against that prior year baseline, clearly signaling at least a change in how some shops are valuing their talent. This must be counterweighted by the realization that 45% earned less than last year – carry not being what it used to be.  Nonetheless, not unlike last year, my colleagues firmly believe that the next year will provide the big score as nearly 75% of this year’s respondents believe they will earn more money than last year.  If they are right, then next year the national deficit will be on the decline despite no increase in upper tier taxes or capital gains and the real estate market will be certain to see significant rebound.

Our peers demonstrated their personal income optimism with their LPs pocketbooks too. In the beginning of 2010, fully 98% thought they would make up to six investments.  The year did not go as strong as hoped with only 11% doing six deals or more, but 76% closed 1-3 deals. Further, those deals were as large as expected with 73% self reporting their deals were in excess of $25 Million in each discrete investment when they anticipated 76% of their deals would be above $25 Million in size at the time of last year’s survey. 

And in what are we investing?  Unlike the year before when our respondents chose three new investment areas in the top three, the industry stayed rather consistent. Enterprise Technology and Health Care were 1 and 3 and Social/Community Technology took the second spot in that list, breaking the top 5 for the first time.  Sustainable Energy/Cleantech and Gaming (not even top ten last year) were 4th and 5th.  Last year the survey indicated investors were apparently smelling money and opportunity in Obama-care. As one person noted, “…when you mess with 16% of the economy something’s got to break our way.” We’ve yet to see if that comment is correct or merely hopeful but investors intend to remain active, according to our survey, in that space.

The just over 500 who did reply this year were similar to last year’s mix of VC and Buy-out pros, with a slightly higher representation of operating executives responding.  One thing for sure is that this year’s mix of survey takers were very high on themselves believing that 78% (63% last year) were confident in their business and  84% (77% last year) confident in the person who sits down in front of their computer each morning. They even had increasing confidence in their bosses with 75% expressing that view - a full 25 points higher than last year and triple the year before.

This personal and professional confidence does not extend itself to America’s political leaders.  While respondents were hard on President Obama and his economic team with only 36% expressing confidence in the President; it was more that triple the 11% expressed last year.  His economic team did not fare as well with 49% (55% a year ago) dissing Larry Summers et al.  

A 7X return is spectacular in a year but when it comes to Congress it is de minimis as its favorability improved over last year’s 0% reply of confidence in Congress to 7% with 77% (65%) stating no confidence in the folks under the Capitol Dome.  Apparently it does not matter which party is in control of the Congress. State governments and state legislatures earned a doubling of confidence to 27% (you should know that the top states replying were MA, CA, NY, NJ, NC and IL).  While confidence has skyrocketed for the President and crept upward, however marginally, for other pols in America, international respondents had crushingly poor opinions of their governments with fully 71% having no or little confidence in their countries leaders, more than double the 31% of a year ago.  The preponderance of our international respondents were from the UK with most  replies coming, in order, from Germany, Switzerland, Japan, France and China. 

To see the highlights of the results of the 2011 Semaphore Confidence Survey please click here.  If you want to do your own comparison, the 2010 Semaphore Confidence Survey results are here.

As usual there was a bit of entertainment offered by our none-too-shy contributors. One offered that “This was a terribly written survey,”…alas.  There was the usual partisanship with strong comments about “not believing the positions the Republicans are taking” counterbalanced by charging that Obama “is a socialist with desire to make US a 3rd world country”.  While there is little danger of we becoming Sweden in a hurry there were many serious comments reflecting state budget shortfalls, pension liabilities, and a belief in significant New Year investment opportunity with many industry recommendations.  One notable recommendation offered was “I have never felt as strongly about the investment opportunity presented by vertical farming,” who knew? 

A cottage industry has grown about the infamous response in our inaugural survey “PE is dead and I wish my boss were too.”   Many wondered where “he” was and hoped he would surface. He didn’t.  One survey taker suggested that “he must be serving time without access to internet.”  Many have tried their hand at PE Killer’s NY Post style headline writing skills (maybe he got laid off from Wall Street in ‘08 and is now working for Murdoch?).  One offered that “VC is a wasteland. PE is a playground (unless your name is Guy Hands.)”  Ouch! We’ll check back next year to see what side of the seesaw we will actually experience in 2011.  

Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for seven Private Equity and Venture Capital funds, is a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.

Topics: VC, Venture Capital, Semaphore, general partners, diligence, technology, troubled funds, Venture Capital, equity, investment, venture funds, business advisory

Board Knowledge and Perspective

Posted by Cris Miller on Thursday, September 23, 2010 @ 10:45PM 

I field calls from GPs and CEOs all the time.  Invariably they are doing a deal, whether investment or acquisition, and need either verification that the technology and/or markets targeted are real or a product exists and someone wishes to buy it in the future.  Less often we get calls from Board of Directors.  Those calls are less exact as to what the caller requires.  A lot of it is because the Board member making the call carefully ensures that they have not lost confidence in the CEO (even if that is not the case) and are fulfilling independent diligence on the company itself, the markets or an acquisition opportunity.  

A while ago we had a call for help from the Board of Directors of a growth stage technology company.   After discussion, it was evident there was agreement that the firm needed to conduct both technology and market due diligence for their company.  Initially the request was for a technology review to determine the viability of commercializing the core platform technology upon which two successful products had been built. 

The CEO was a technology wizard while the Board was comprised of non-technologists and retired business people.  After Semaphore’s chief technologist had reviewed the platform product’s architecture, patent and documentation, we had a review session with the CEO.  The discussion immediately dropped into techno-jargon only the brightest geeks could comprehend and appreciate.  The conclusion was that the product was adequate for internal use but was deficient in form and substance for outside consumption.

The CEO reviewed the findings with the Board who had market/business questions about the size of the market for such a product, the competition for such a product and the value of the product.  Our market research/strategy group took the baton and came back with some interesting results that were presented directly to the Board.  It was intuitively obvious to the casual observer that:

  1. The product in its current condition was a non-starter
  2. The market for the product if it were “cleaned up” would have 5 world class competitors and 10 mid-market competitors
  3. The product in its new state would be woefully deficient in features, so much so  that its value would be difficult to sell at any price
  4. The effort should be scuttled

The lesson learned here was in order to get the correct answers, the Board needed to be educated to the best of its understanding.  To accomplish that education, independent technical and market due diligence was necessary.  The readily available technical answer alone was not sufficient since the product could have been improved.  It took the market diligence, in concert with an agreed technology product plan, to make the business case not to proceed with the questioned direction. 

Crispin Miller is the head of the Diligence Practice at Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Technology and Marketing diligence, and Private Equity funds-under-management services.  Semaphore currently holds fiduciary obligations as General Partner for seven Private Equity and Venture Capital funds, a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.

Topics: Semaphore, diligence, technology, technology diligence, market diligence, Technology Assessment, due diligence, investment

Good Fortune, Dan

Posted by Mark DiSalvo on Tuesday, September 14, 2010 @ 1:45PM 

I think I was subscriber number 293 – certainly somewhere under one thousand.  That got me the privilege of sharing a Dim Sum meal in Boston’s Chinatown with the curly haired, lightening talking, quick-fire questioning editor of what was then known as PE Week Wire.  In those days Dan Primack would meet with anyone.  Witness his suffering me gnawing on Fung  Zao (chicken feet steamed in black bean sauce—don’t knock it till you try it) and learning that the young scribe was a former political activist, community newspaper reporter and editor as well as failed federal level campaign manager.  I kept thinking to myself “he’s just like me (politically) except with hair and actually is able to write – and he really does speak intelligently about the fund business”.   It was odd that we both started our careers in politics for it was abundantly clear, in my case anyway and I’ll bet Dan’s, that early in our community oriented activism that neither of us could spell PE. 

Dan has not since shared a meal with me (showing excellent judgment) but has offered countless insights on our business sector spiced with an open and undeniably irreverent style.  It seems his corporate overlords, as he respectfully touted his employer, could look past bald political opinion, an undeserved mistrust in the initial coaching abilities of Doc Rivers, a penchant to encourage nationwide betting on college basketball and a desire to increase his own subscribers’ income taxes.  He also shared, in a disarmingly intimate manner, absolute love for his wife Jen along with the tests of that affection including a grueling trek up Machu Picchu, frequent trips away from home in the “trusty” (read “death trap”) old Pontiac – and now the blessings of soon-to-be fatherhood. 

I learned to appreciate the aggregation of content, saw the business blogosphere grow up in front of me, witnessed the creation and explosion of the peHUB brand, the wisdom of contrarian thought, and most particularly appreciated the daily news that would occasionally set up an insight or future knowledge base that would occasionally get me a gig.  The day just plain required that 10am Primack fix.

Dan’s announcement begs the many questions of an ever curious investor. What prompts a founder’s departure?  Was there a fatal flaw in whatever the relationship/agreement was with Thompson Reuters?  Was he pushed because of cost cutting?  Did he jump for better security and/or more cash?  Is this next gig an entrepreneurial adventure (and did I miss the opportunity to participate!)? What can I learn from his experience to cement my own portfolio relationships?  I suspect we will yet learn the answers to those queries as Dan himself will be as revelatory as one could expect and present his own valedictory.

This fund manager and advisor will continue to be a reader of peHUB and hopes its next editor will bring the same irreverence and a unique perspective to the marketplace.  The entire Semaphore team and I wish Dan Primack all good fortune(.com). 

               

Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for seven Private Equity and Venture Capital funds, a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.

Topics: VC, Venture Capital, private equity funds, Venture Capital, equity, investment

WHAT CAN MASS DO?

Posted by Richard Gabriel on Thursday, July 29, 2010 @ 12:00PM 

By Richard Gabriel

I live in Massachusetts and let’s face it; we live in what is perceived to be a high tax state. Whether this belief is true or not we share that belief of high taxes with California, New York, New Jersey and Michigan. On the other hand Florida, Texas and North Carolina, among others share a different belief and it is reflected in each states approach to funding of Life Science companies. And each of those states would kill for the concentration of Life Science, technology and educational institution that we enjoy with California and the other so called high tax states.

Sure, taxes in Massachusetts and the overall business environment for start up companies are less than ideal. There is frankly, no comparison between the incentives being offered in Florida and Texas for start up companies to move to those states and start their businesses. Some entrepreneurs have moved to these states and have taken advantage of the help, financing and favorable state environments. Each time a technology leaves Massachusetts heading for more fertile pastures, we lose jobs, tax revenues and population, which in turn decreases our real estate values, creates more stress on our commonwealth to raise taxes even more, it’s a vicious cycle and yet we sit on one of the greatest natural intellectual resources in the world and have yet to figure out how to fully mine its fountain of bubbling opportunities.

However, in my last blog, we talked about a new funding model for biotech and the life sciences industry and we received hefty responses from VC’s that were interested in exploring a new way of funding. Some ideas that we kicked around included a new ‘fund’ that would have a longer time horizon, attract a more patient and less capricious group of investment partners that weren’t demanding a 5 year exit with double digit returns per annum, but rather a combination of long term debt, mixed with long term equity investment.

How would such a fund work? Well a possible appropriate debt to equity ratio should be 1 to 4. Every dollar in long term debt at a reasonable interest rate is backed by 4 dollars in equity. This ratio, provides the limited debt partner with the interest only coverage for the life of the debt, which in Life Sciences, should be no less than 10 years. Additionally, expecting a short term double digit return on a Life Science equity investment is, frankly, ridiculous. Not only does it place an unfair burden on the entity that is being formed and its management, it is an unfair hurdle and it’s artificial to the practical operations of starting and running this type of business.

Well then, what about the risk? How is a venture fund ever to make any money? All these choices have their pluses and minuses and are self evident. For the entrepreneur, think, Steven Jobs, Michael Dell, Bill Gates and not a veteran of multiple start up companies, all of whom have, by now, failed, been swallowed or otherwise disappeared and, if alive, are headquartered in another part of the country. Perhaps the alternative though of invest big, hold, pay dividends and interest or buy back the shares at an appreciated rate that reflects the true value of the business that was built has some merit today? Take a look at the valuation gaps between a pre-clinical candidate and the sums of money paid by Pharma for Phase 2 & 3 compounds, the gap is astronomical and it is that gap that tells us or should tell us that the current model is wrong

We should be looking more carefully at the broken institution of funding our start ups in our state and instead of letting Texas, Florida, North Carolina and California pirate our technologies and people away, find a way to fund them and keep them here. Build businesses and jobs and people will start coming back to Massachusetts or perhaps they won’t even leave after they graduate! Got any ideas? Write us. We’d love to hear from you.

        _______________________________________________

Richard Gabriel is head of the Life Science practice at Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners as well as Corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.

Topics: Venture Capital, Semaphore, technology, Life Sciences, entrepreneurs, Biotech, equity, investment, venture funds

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