13 April 2021
As communities, governments and businesses look to deploy technology to rebuild in the wake of a global pandemic, unprecedented levels of private capital are standing by ready to help.
The growth of diversified sources of private capital has driven a proliferation of non-public market opportunities, and the acceleration of its investment in technology-enabled innovation is transforming industries and business models, and will lead to convergence between sectors at a global scale.
Private capital has been the driving force behind a lot of the digitisation and innovation we have seen in all aspects of our lives. As the global community looks at building back better once the COVID-19 pandemic is brought under control, it offers an as-yet-untapped opportunity for businesses and economies to reverse some of the economic damage they have suffered.”
Head of Innovative Equity Ventures, Macquarie Capital
The value of private capital assets under management (AUM) has grown significantly in the last decade; McKinsey estimates a near-threefold increase since 2010, with the total now standing at over $US6.5 trillion.1 Much of this is in traditional areas such as private equity, infrastructure and real estate funds, private credit, and venture and growth capital.
Despite the widespread business disruption caused by the pandemic, private equity fundraising is expected to surpass $US330 billion in 2021, setting an all-time high.2 High net worth individuals and family offices have established themselves as ambitious investment vehicles. Ernst & Young estimates that there are at least 10,000 family offices now collectively managing over $US5.9 trillion in capital finances and investments globally3, with the largest proportion (42 per cent) based in North America.4
In the past year, we’ve seen more and more family offices looking to go direct to gain more control and drive positive impact on the business, as well as increasingly investing sustainably and responsibly.”
Managing Director, Family Offices, Macquarie Capital
Larger players such as major fund managers, pension and superannuation schemes, and even sovereign wealth funds (SWFs), are progressively investing away from public markets through private equity to access broader opportunities, secure higher yields and build greater flexibility into the portfolio construct. In 2019, SWFs participated in 142 venture capital (VC) deals worth around $US13.4 billion - 20 times the amount they had invested in VCs just a decade before.5
Private market AuM has grown nearly threefold since 2010
Expected amount of private equity fundraising in 2021
in capital finances and investments globally managed by family offices
Debt financing plays a key role in enabling private equity investors to achieve their target rates of return, and the financing landscape for private equity-backed businesses has shifted in recent years, with direct lenders playing an increasingly meaningful role in financing middle market businesses. As private equity firms have come to value the flexibility afforded by these private credit structures, direct lenders in turn have raised increasing amounts of capital - sitting on a record of $US272 billion of dry powder, according to Preqin.6
The technology sector is a standout area benefiting from the influence of private capital, especially in North America and Asia – the US and China account for 70 per cent of all unicorn startups globally.7
The explosion of these billion-dollar private companies is being driven by new technological advancements and the breadth of opportunities available in today’s digital-first world. One where fintech, internet software and services, e-commerce and A.I. make up the largest unicorn population.”
Managing Director, Principal Finance, Macquarie Capital
A common theme for technology companies that attain unicorn status is that they are now staying private longer than they used to. “If you go back to the 1990s and 2000s, you’ll see the companies that really changed the world - the Googles, Amazons and Netflixes - tended to fund their growth by going to IPO early to raise capital, but that’s not what is happening today,” says Jeffrey Shiu, Head of Innovative Equity Ventures, Macquarie Capital.
“Many of the top-performing companies are holding off from listing and instead are leveraging private capital to fund their early-stage growth. When, and if, they list, they tend to be at a different stage of their growth journey - often already boasting substantial revenue and a large workforce, with valuations to reflect that profile.”
Airbnb is one high profile example of this trend. When the online accommodation platform was listed on the NASDAQ in late 2020, it already had more listings than the top five hotel chains combined.9 It had also raised $US6.5 billion over a 12-year period from private investors including Sequoia Capital, Founders Fund and DST Global.
“It was private capital and not public listing that allowed them to refine their product, gain market share and experiment - all of which would have been more difficult if they had to focus on the regulatory processes that come with being publicly listed.”
California-based Bloomreach provides leading-edge software to businesses globally so they can create unique digital experiences for their customers. Founded in 2009, it operates at the intersection of artificial intelligence (AI), marketing and commerce.
Bloomreach already powers more than $US200 billion in digital commerce and has a large international customer base that includes many high-profile retailers, B2C and B2B companies.
Macquarie leveraged its balance sheet, cross-border footprint and expertise in private capital raising to help Bloomreach raise $US150 million in Series E investment from Sixth Street Growth. This included tapping into senior relationships to access investors and using our deep sector knowledge to achieve a premium valuation for the business.
Technology-enabled innovation occurs in mature companies in addition to new, innovative startups. Leading businesses are adopting new ways of bringing their value propositions to customers and to adapt to a dynamic world that’s transforming the way people work, travel, play, learn and even access healthcare. And many long-established organisations that have previously invested extensive research and development time and money to develop solutions – particularly those in the software space – are driving impressive growth.
As private equity firms have been drawn to these growing technology-enabled businesses, so too have the private credit providers looking to support that innovation.
Nearly half of our direct lending deals done over the past year were loans to software or tech-enabled businesses, which is more than double from five years ago. This is attributable to the underlying high-quality credit characteristics of these businesses.”
Head of Principal Finance, Americas, Macquarie Capital
Investors need to remain selective, though. For every Airbnb that successfully changes the world, there is, of course, a long list of companies in the market that did not make the cut – despite there being more demand among investors than there are opportunities in which to invest.
“There are many lessons we have learned – or should have learned – from the dot.com boom of 1999,” Shiu explains. “You need to make sure that the company, product or idea that you’re investing in has a good degree of uniqueness and that there are sufficiently high barriers to entry for the market it is in. Where you get to the stage of multiple competitors with similar products, it’s far more difficult to tell who will end up on top.”
“But even when you find what you think is the right investment, the other challenge is actually getting access to it,” Shiu says. “That’s not always something that’s easy to do. It often means knowing the right people.”
At Macquarie Capital, our team are empowered to accelerate the growth of technology-enabled innovations around the world and making positive changes. We are uniquely placed at the intersection of the increasingly diversified and growing sources of capital which helps us to connect opportunities for corporates, entrepreneurs and investors.