Lecture #1 Kristjan Kalda: Introduction and fundamentals of the PE/VC industry

The opening lecture of the Private Equity and Venture Capital syllabus kicked off 2 February 2022 at Taltech university with Kristjan Kalda, the board member of EstVCA and partner at BaltCap taking us on a journey in the history and key fundamentals of the industry.

Kalda explained that currently we are witnessing the start of a new era for the industry as a whole - the rise of ESG and impact investing, influencing every single activity from top to bottom. The discussion with the students also led to the acknowledgment that throughout history, the high cycles of venture capital are related to fundamental technological breakthroughs and the following related implementation phases.




1) PE common ATTRIBUTES:

Investments are done professionally, meaning:

• shareholder rights are legally protected 
  
• investing according to a pre-defined strategy 
  
• investment managers have knowledge in managing the respective assets and are financially literate 
  
• the investment portfolio is composed according to pre-agreed risk profile, portfolio risk is actively managed 
  

2) HISTORY with some fun facts:

• The roots of the industry are in the US.
  
• Whaling expeditions 18th – late 19th Century: distribution of returns in whaling and VC correlate quite a bit.
  
• Followed by the industrial revolution and names like James C. Couzens, Laurance Rockefeller, Whitney & Co, American Research and Development Corporation (ARDC), Arthur Rock / Fairchild Semiconductor & „traitorous eight“, Davis & Rock, Kleiner & Perkins and many more have substantially impacted what we call PE/VC industry today.
  

3) Fund RETURNS:
IRR can span from 0,1% to 30+%, depending on macroeconomic environment, fund strategy, market, and a variety of other key details.

4) PE ASSET CLASSES:

• Buy-out (sector agnostic or sector-specific: healthcare, software, IT platforms, etc) 
  
• Growth 
  
• Venture (from seed to late stages; deep tech, biotech, space tech etc ) 
  
• Infrastructure 
  
• Real estate 
  
• Assets (art, wine, whiskey, aircraft, ships, intellectual property rights, etc) 
  
• Mezzanine 
  
• Debt 
  
• Distressed 
  
• Secondaries 
  

5) GOVERNMENT ROLE across the globe in industry development: 
Some possible roles: tax breaks, grants, loans, guarantees, direct investments, indirect investments through private fund managers

6) ESTONIAN PE industry history and rapid development:
From 18 August 1995 establishment of the Baltic Investment Fund LP, orchestrated by Matts Andersson and participation from EBRD and SITRA to today with 20+ professional fund managers and 2,4bn AUM.

7) Worlds‘ and Europe’s LARGEST PE players today:
Blackstone, Apollo, Carlyle, KKR, Partners Group, EQT, CVC Capital Partners, Bain Capital, Apax Partners to name a few...

8) GLOBAL numbers today (source Preqin):

• 2,389 private equity funds as of October 2021 
  
• 5,954 deals from October 2020 -2021, total private equity deal value $603bn 
  
• Median annualized net IRR for private equity funds in the five years to March 2021 18.8% 
  
• $5tn AUM, $1.3tn dry powder 
  
• VC fund AUM as of March 2021 $1.7tn, dry powder $355bn 
  
• The rise of megafunds: latest single funds Blackstone $26bn, Apollo $25bn, KKR $17bn 
  

9) Some ABBREVIATIONS to remember:

• GP – general partner
  
• LP – limited partner
  
• LBO - leveraged buyout
  
• SPAC - special purpose acquisition company
  
• AUM – assets under management
  

10) A selection of BOOK RECOMMENDATIONS from Kristjan’s long list:

• Cohen, Ronald; “Impact: Reshaping Capitalism to Drive Real Change”
  
• Carey, D.; Morris, John E. „King of Capital“, Blackstone & Steve Schwarzman
  
• Meyer, Thomas; Mathonet, Pierre-Yves. „Beyond the J curve. Managing a Portfolio of VC and PE Funds“