Large Cash In-Flows and Market Uncertainty Favor Private Equity Investors in 2018, Says CVP’s David Brophy

By Claudia Capos, Guest Editor

Recent changes to the U.S. legal, regulatory and tax framework are creating a lot of uncertainty in the investment markets, according to David Brophy, professor of finance and director of the Center for Venture Capital and Private Equity Finance.

“No one knows how this will work out, and the ripple effect into the venture capital and private equity businesses is by no means trivial,” he explains. “People are now thinking of restructuring the general-partnership agreements, and it’s not clear what will come out of that. Anything that increases uncertainty around this process is a mixed blessing.”

Private equity investors generally thrive during periods of uncertainty, because more-orthodox investors back off and opportunities arise for more-aggressive investors.

“There is still a ton of investment money coming into the private equity business ─ but less so into the venture capital business,” Brophy observes. “It appears this will be a belt-tightening moment for venture capital, but not for private equity.”

One phenomenon that will continue to gain traction is the increase in “growth equity,” an investment in which a private equity fund takes a minority stake in a relatively mature company that is seeking capital to expand or restructure, enter new markets or finance an acquisition without relinquishing its ownership control.

“Private equity funds are coming down the proverbial stair step toward where venture capital folks usually live and beginning to do deals for fast-growing companies using less debt and more equity,” Brophy explains.

Another trend he sees is the shrinking pool of capital available to early stage startups. “The venture capital business still seems less interested in early startup deals,” Brophy notes. “It is difficult for young companies to get that kind of funding.”

On a micro-level, Brophy reports that two companies which participated in his fall 2017 Financing Technology Commercialization course recently announced they had completed Series B round financing. “I’m heartened by the quality of the 15 companies that went through the program,” he says. “In our marketplace, the degree of professionalism is certainly increasing. People in the businesses are accumulating years of professional experience, getting to know the markets on both coasts and becoming better able to deal with financiers.”

Michigan Ross also is supporting the rise of so-called “cashless sponsorship.” MBA students in David Hiemstra’s Entrepreneurship through Acquisition course are learning to source potential deals and find private equity investors who can pull those deals together.

The hottest sector play for investors in 2018 will continue to be health care. “Anything connected with the information-technology aspects of health care is going to be very important, because marshalling information is still a critical need in that field,” Brophy comments.

Michigan’s automotive and manufacturing sectors, which are finally being recognized for their talent and capability, are now garnering national attention. “What I see as a hopeful trend is that technology companies on the West and East coasts are moving to Michigan,” he says. “They are beginning to realize that technology should come to the place where the products are being made.”

The bottom line is that deal flows in Michigan look promising in 2018. “Our market is maturing and improving,” Brophy says. “I’d look for this year to be a pretty good one for Michigan deals.”

He expects the 2018 Michigan Growth Capital Symposium to be robust and expansive. “I think we’ll have a much stronger cohort of investment firms from which to choose, and we’ll expand our catchment area,” Brophy predicts. “We’ll try to attract firms from outstate and around the Midwest.” He still sees the need, however, to retain more dollars from Michigan institutional investors and to convince them to put their money to work in homegrown technologies and companies.

“Overall, I think we’re making a great deal of progress,” Brophy concludes. “Things are definitely looking up.”