Private equity deals up, but valuations hit

Market is growing but financial turmoil impacting private share prices

All equity markets are hurting these days, even fast-growing and exclusive ones that involve only high net-worth individuals and professional money managers.

The market for private equity transactions, where startup companies, their executives and their investors sell shares through private placements, is expected to grow 50% this year to about $3 billion, according to several firms that broker transactions and buy and sell shares for themselves.

As the IPO market remains shut and M&A activity falls off, deals sizes are also growing. And that trend isn't likely to reverse itself anytime soon. 

"Most people we talk to don't see the IPO market coming back until next year at the earliest," says Hans Swildens of Industry Ventures, echoing what investor banker Thomas Dietz told us a few weeks back. 

That's driving more big deals into the private market.

Transaction amounts typically have ranged from $500,000, typical when an individual founder is looking to sell, to as much as $20 million or $30 million when hedge funds or investment firms buy stakes of larger companies.

"We're starting to see more of those $20 million to $30 million-sized deals," says Swildens, whose firm manages $400 million in private equity. 

Yet despite the growth, valuations in some sectors are coming down as the public stock markets plunge.

"Private market valuations do mirror the public-market," says Ken Sawyer, founder of Saints Capital, a private equity and venture capital firm in San Francisco.

A lot of buyers are coming to market because they're worried their shares will continue to decline.

As we reported before, private valuations tend to lag those of public stocks by six months or more.

But the downward pressure on valuations isn't universal, says Sawyer. Sellers of shares in clean tech companies, for example, have seen valuations increase. And hot startups like Slide and LinkedIn, which have raised money at rich valuations, are seeing more investors selling shares in private transactions.

"If you're in an industry that's suffering, valuations are going down. If there's still solid growth, they're holding up," Sawyer says.

Saints Capital holds stakes in 170 companies and manages over $1 billion worth of assets in multiple venture funds. In some cases, it buys entire portfolios from other investors. The company has at least two more deals to come this year and expects this year's total transaction value to reach half a billion, Sawyer says.

"Venture guys are finally waking up to the fact that there are other exits" besides IPOs and M&As.
Other VCs have been savvy to this for years, he says.