Read what's new and noteworthy in Private Equity this week.

1. DIGEST 162
November 14, 2014
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Surprisingly Innovative & Frugal: Family Businesses
Outperformance Confirmed – Sector Specific PE Funds
Eternal Truths and Other Investment Advice from Sand Hill Road
Real Estate and PE Preferred Path to Preserving Wealth
PE Vintage 2007: Where Are They Now?
Quote of the Week: Hyping China’s Silicon Valleys

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SURPRISINGLY INNOVATIVE & FRUGAL: FAMILY BUSINESSES
A study of U.S. family-owned businesses by academic researchers reveals that contrary to conventional wisdom, family ownership actually promotes innovation, as measured by patenting volumes and related quantitative analysis. Because family owned companies have fewer financial constraints, a greater commitment to long- term value, and tight corporate governance, they outperformed comparable companies. The study measured activity over a ten year period. Family firms were associated with 11 percent more patents filed and 12 percent more citations of filed patents received. They scored 14 percent higher in originality (innovation output which considers the creativity of the firm’s patents) and 30
Cambridge Associates crunched the numbers over a ten year time period and found that sector- focused private investment funds do indeed outperform more generalist or opportunistic PE funds. Investments executed by sector specialists in four sectors returned an aggregate 2.2 times multiples of invested capital (MOIC), with a 23.2% gross IRR, outperforming generalist investments that returned
OUTPERFORMANCE CONFIRMED –
SECTOR SPECIFIC PE FUNDS
percent higher in generality (which considers the patents’ versatility). “Surprisingly, family firms spent less on research and development (we observed a negative relationship between family ownership and R&D input) but were significantly more efficient with what they did invest in this area, when measuring R&D spending against patent output,” said the authors of the report.

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ETERNAL TRUTHS & OTHER INVESTMENT ADVICE FROM SAND HILL ROAD
Ever wonder what smart money has learned from investing in technology ventures? Sequoia Capital gives us a clue, based on its 42 years of lessons learned in Silicon Valley, calling them “eternal truths”. One thing that is not on the list that Sequoia published on its website, but is evident in its track record, is that a good number of its big wins came as a result of investing anti-cyclically, not necessarily investing when markets, spirits and macroeconomics forecasts are positive.
Sequoia’s Wisdom
• Few people are courageous enough to have conviction
• Technology is the best amplifier of a business
• Outperformance comes from doing a few things better than others
• Believe actions, not words, listening beats talking
• High margins cushion mistakes, capital intensity usually produces nightmares
• Massive success comes from patience. We own shares we bought two decades ago
• Never sell shares before IPOs, at IPOs, or immediately after IPOs
• Teams, and gradual improvement of teams, are the secret to long-term success
• Nothing Lasts Forever
REAL ESTATE AND PE PREFERRED PATH TO PRESERVING WEALTH
Increasing allocations to Cash and Private Equity is the plan for the fourth quarter, and longer term, private equity is still hot but real estate is added to the mix, according to the results of a North American survey of 250 high net worth individuals, collectively managing USD 25 billion. Almost 45% of respondents plan to increase allocation to private equity, and cash. Public equities and fixed income are slightly less attractive than they have been, with 24% and 23% of respondents planning to decrease allocations, as the graphic shows. “These
an aggregate 1.9 times MOIC and a 17.5% gross IRR. Sector specialists’ two key advantages, according to Cambridge Associates: 1) the ability to better source deals, and 2) able to add significant value post- buyout, and during exit phase. (Image source Cambridge Associates)
investors typically prefer wealth preservation over the aggressive risk taking that wealth creation often entails,” said Michael W. Sonnenfeldt, Founder and Chairman of TIGER 21, which conducted the survey. Find more details in the TIGER 21 Looking Forward Survey here.

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PE VINTAGE ‘07: WHERE ARE THEY NOW?
The performance of the ten largest pre-crisis European PE funds was studied by FN last month and the results indicate that so far Doughty Hanson, Cinven, and Carlyle European Partners can claim fine vintages. Here’s their list of the top 3 and the bottom 2.
• Doughty Hanson 2007 Value: 1.5-times cost. €3 billion
• Cinven 2006 Value: 1.4-times cost. EUR6.5 billion
• Carlyle Europe Partners 2007: Value: 1.4-times cost. E5.3 billion
• Charterhouse Capital 2006: Value: At cost. €4 billion
• Terra Firma Capital Partners 2007: Value: 0.65-times cost €5.4
billion
FN warned that the numbers come from different sources (which means the data may be irregular) and that some funds may still have assets in their portfolio to sell, so their performance might change.
QUOTE OF THE WEEK: HYPING CHINA’S SILICON VALLEYS
“In one generation many segments of China’s technology industry have achieved what took a century in Silicon Valley. Western xenophobes will protest that this is due to the Chinese theft of intellectual property and pro tective regulation… [But] The best Chinese entrepreneurs – Jack Ma, Pony Ma, Hongyi Zhou, Robin Li, Richard Liu, Lei Jun, Eric Shen and Charles Cao (to name but a handful) demonstrate the same flair for combining innova tion, opportunism and intuition as the bold names of the Western technology universe.”
Who said it: Michael Moritz, Chairman Sequoia Capital
In context: This is just the latest note on Chinese tech entrepreneurship from Silicon Valley legend Michael Moritz whose VC firm has reaped the rewards of investing in a few tech boom and busts (the desktop PC, the Internet, Web 2.0 and digital media). Now he’s big on China, making commentary in the press and social media. His strong voice about Chinese tech does not necessarily mean that Sequoia is giving up on Silicon Valley, rather it indicates that Sequoia is raising a new China fund, its fifth, according to Dow Jones Venturewire. General Partners at Sequoia, which was founded in 1972, have worked with many tech stars, including Steve Jobs, Larry Ellison, and Cisco founders, Len Bosack and Sandy Lerner, not to mention Yahoo founders, David Filo and Jerry Yang, PayPal, YouTube, and LinkedIn. (Image source: Techcrunch Disrupt youtube)
Where we found it: LinkedIn

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The Dealmarket Digest empowers members of Dealmarket by providing up-to-date and high-quality content. Each week our in-house editor sifts through scores of industry and academic sources to find the most noteworthy news items, scoping trends and currents events in the global private equity sector. The links to the sources are provided, as well as an editorialized abstract that discusses the significance of the articles selected. It is a free service that embodies the values of the Dealmarket platform delivers: Professional, Accessible, Transparent, Simple, Efficient, Effective, and Global.
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Editor: Valerie Thompson, Zurich
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