Venture Capital funding streams slow but steady, cyber security and AI strong

19 September 2016 Consultancy.uk

Venture capital investment remains cautious across the globe, with political and economic uncertainties – including Brexit and possible rate rises – as well as valuation concerns, continuing to affecting investor confidence. New research finds that while deal volume has hit lows last seen in 2013, deal value remains relatively robust due to large hauls from unicorns. Two major areas of concern to many businesses, cyber security and AI, continue to draw funding support.

KPMG's latest study on the Venture Capital (VC) investment market, conducted in association with CB Insights, provides insight into key market trends and main developments at VC firms and the VC arms of corporates.

Quarterly Global Financing Trends

VC backing out

Q2 2016 reports a mixed bag result on the previous quarter. Deal volume is down, from 2,008 deals to 1,886 deals, while deal value has increased from $26.5 billion to $27.4 billion. Both results remain far below that of Q2 2015, when deal activity reached its most recent peak at 2,319, while deal value stood at $34.7 billion.

According to the firm’s analysis, the increase in deal value is largely due to a number of $1 billion+ funding rounds by ‘deca-unicorns’, those valued at more than $10 billion. Deal volume has been impacted, according to the firm’s analysis, by a range of factors – from Brexit, the impending US Presidential elections and macroeconomic conditions, to continued concerns about valuation.

The firm suggests uncertainty, particularly around valuation, is seeing VC players take up a ‘wait-and-see’ holding position, whereby they continue to raise capital as well as evaluate their current stock. Investors have also become more cautious about late stage funding, following a number of lacklustre IPOs that failed to meet their private valuations. Caution has also seen a reduction in the number of newly minted unicorns, just seven in Q2 2016, with considerable concern that the tough market conditions may see the magic wear off, resulting in a number of ‘unicorn corpses’.

Quarterly Global Deal Share

The research does find that VC investors have increased their backing of startups, whose deal share returned to levels last seen in the frenzied Q3 2015. Series A saw a slight loss of funding share, down 3% from the previous quarter but in line with activity in Q3 2015. The ‘other’ category remains at a relative high, coming in at 17% of total backing. 

According to the firm’s analysis, those companies that are attracting VC backing tend to be well organised, with strong profitability profiles and cost controls in place. In North America and Asia, mainly proven companies were able to garner VC attention, while in Europe – in which strong organisation has been the norm for some time – it was predominantly seed funding being handed out.

Deal and investment

In terms of VC deals by continent, North America is still well out ahead. The US and Canada saw a total of 1,117 deals, down slightly on 1215 deals the previous quarter. In Europe the number of deals were up slightly on the previous quarter, increasing from 365 to 385, while Asian deal volumes saw a slight decrease, falling from 389 to 343. Deal value was up particularly sharply in the US, from $15.5 billion to $17.1 billion – mainly on the back of large funding rounds by unicorns. Deal value in Asia remained stable, while deal value in Europe dropped by around $700 million to $2.8 billion.

Focus areas

The research also considers the VC backed deals in a number of ‘hot’ areas of investment. One such area is cyber security. Globally the ‘informal’ cyber criminal economy stands at around $400 billion per year according to McAfee, while up to 500,000 cyber criminal events per day are said to occur. Increased digitalisation, increasing value for personal information and the ever increasing number of interfaces through which to penetrate systems – from staff to IoT – means that few systems are secure. Securing systems, if this is possible, has become a large industry, which is continuing to draw demand for expertise and innovative solutions.

VC backing for the industry has, even in the face of the increasing threat, stayed relatively stable. In Q2 2016 there were 68 investments, worth around $811 million. These numbers are down slightly in terms of volume relative to Q2 2015 when there were 70 deals, while in terms of value the latest quarter was up ever so slightly. The US was by far the most active region with a total of almost $700 million in deals.

Artificial Intelligence

Another area garnering significant attention from investors is the Artificial Intelligence technology segment. The technology promises to create a range of automation solutions for companies in a range of sectors, many of which are no longer confined to simple processes but also factor in a range of possible contingencies that require some form of understanding of the sometimes irrational actions of other entities within an environment. Particularly in areas such as business process outsourcing, technologies are proving themselves as a way of reducing headcount while boosting key business performance metrics.

The segment has shown relatively strong resilience over the recent period of funding instability. Deal volumes stood at 73 in the previous quarter, from heights of 81 in Q3 2015, deal value however has decreased somewhat, falling from $858 million to $624 million. The analysts suggest that the promise of the technology will continue to garner increased investor interest in at least the short-term. Mid-term risks are likely to include government regulatory attention.

Cliff Justice, Principal of Innovation & Enterprise Solutions at KPMG, says, "From automating simple tasks to augmenting complex decisions, there are very few areas of business that Al and cognitive computing will not impact. KPMG is currently piloting cognitive technology to help augment our services which underscores our commitment to reinforcing confidence in the capital markets."

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Private equity firms ramp up sustainability focus

19 April 2019 Consultancy.uk

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.