Is Micro VC The New Macro Trend? Preqin Private Equity Spotlight – ValueWalk Premium
Micro VC

Is Micro VC The New Macro Trend? Preqin Private Equity Spotlight

Is Micro VC The New Macro Trend? by Preqin

Is Micro VC the New Macro Trend?

Justin Hall and Doug Paolillo take a closer look at the micro venture capital industry, including fundraising, funds in market, investors and more.

With the boom in fundraising activity and investor appetite for micro VC, several fund managers which could choose to raise larger funds are opting to keep their fund sizes in this sub-$100mn range. In this month’s feature article, we focus on the micro VC market, its position within the overall industry, investor sentiment and future outlook.

As of 6 June 2016, there are 501 micro VC funds* in market globally looking to raise upwards of $23bn in aggregate capital. These funds account for 69% of the total number of venture capital funds in market (Fig. 1) and a quarter of aggregate target capital.

Micro VC

Over the past decade, micro VC funds have consistently accounted for over half of all venture capital funds closed in a given year (Fig. 2). The proportion of micro VC funds in market reached its highest point in 2009, when 74% of venture capital funds closed on $100mn or less. While the total number of micro VC funds closed per year has continued on a general upward trend, the proportion that micro VC has accounted for in overall venture capital fundraising has fl uctuated. In 2015, 61% of total funds closed were micro VC funds – a decrease of 13 percentage points from the high of 2009. As shown in Fig. 3, the total aggregate capital raised by micro VC funds has risen steadily year-onyear, reaching $8.5bn in 2015 – a 31% increase on 2009 ($6.5bn).

Notably, 2009 also saw the decade’s largest proportion of micro VC funds closing below target size, with 54% of micro VC funds closing shy of their goals (Fig. 4). Since 2006, the largest proportion of micro VC funds closing on or above their target size was observed in 2015. Sixty-two percent of funds reached a fi nal close equal to or greater than their target size last year.

Micro VC

Sixty-eight percent of micro VC funds in market are targeting $50mn or less, with the remaining 32% seeking $50-100mn. North America has historically been home to the majority of micro VC activity (Fig. 5 & 6), and remains the primary geographic focus for the majority (58%) of funds currently seeking capital, followed by Asia (19%) and Europe (11%) as shown in Fig. 7. The remaining 11% is comprised of funds targeting Middle East & Israel, Africa, Australasia, Latin America, and those pursuing diversifi ed multi-regional opportunities (Fig. 4).

For half of venture capital funds in market targeting more than $100mn, North America remains the primary focus, too. Asia and Europe are targeted slightly more frequently by larger funds, with 19% and 22% of funds targeting these regions respectively. Just 9% of non-micro VC funds in market will target investments in Rest of World.

Micro VC

The 10 smallest venture capital funds in market (Fig. 8) are each targeting $1-$3mn, of which nine are focused on investment in North America. The two smallest funds are both managed by Angel Capital Group, a fully syndicated ‘angel’ capital private equity network operating across nine US states. Both funds, Phoenix Fund and Kansas City Fund, will focus on local science and technology start-up investments in their respective cities. On the other side of the micro VC spectrum, 74 funds are each looking to raise $100mn, collectively accounting for 32% of aggregate targeted capital by micro VC funds. Sixty-three percent of funds targeting $100mn are focused on North America, and all but three of these funds are managed in the US.

When looking specifically at the US, the vast majority (88%) of funds in market seek investment throughout the country, with no specific regional preference. Four percent of US-focused funds have a primary geographic focus on the North East or Midwest respectively, and 3% will each target the Southeast and Western states. The US is home to 279 of the 292 fund managers currently raising a North America-focused micro VC fund, and half of these fund managers are located in the San Francisco Bay Area (Fig. 9). San Francisco leads the way with 14% of fund managers, followed by Palo Alto (6%), Menlo Park (4%), San Mateo (2%), Oakland (1%) and Mountain View (1%).

Thirty-one first-time venture capital fund managers based in the Bay Area are currently raising capital, seeking an aggregate $2.6bn. The majority (65%) of these funds are focused on the technology sector; however, this is a significantly smaller proportion than the average (82%) for experienced fund managers in the area. First-time fund managers in the Bay Area are more receptive to investment opportunities outside the technology sector than their more established peers. Several micro VC fund managers also plan to utilize a diversified opportunistic approach to investing in the US, typically giving greater notice to sectors such as healthcare, retail, media and marketing.

The northeast corridor of Boston, New York and Washington, D.C. is also home to a high concentration of micro VC fund managers: 16% of fund managers with funds currently in market are located in this region. Sixty-seven percent of fund managers in this region are based in New York City, while 22% are in Boston, followed by 11% in the Washington, D.C. area. There are currently 26 first-time funds being raised in the northeast corridor, targeting an aggregate $1.4bn.

Chicago-based fund managers are seeking the majority of capital within the Midwest. There are currently 11 micro VC fund managers located in Chicago with at least one fund in market (as of 6 June 2016), seeking an aggregate $500mn. Illinois Ventures, a Chicago-based seed and early stage venture capital firm focused on innovative technologies – particularly those derived from research conducted at Midwest universities and federal laboratories – is currently raising Illinois Emerging Technologies Fund III.

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Despite the smaller average investment size associated with micro VC funds, a wide range of investor types are seeking exposure to the segment. Similar to how venture capital fund managers often invest in companies that are located in close proximity to their headquarters, investors also look to commit to funds managed locally. In March 2016, Contour Venture Partners reached a final close on two of its funds, Contour Venture Partners III (CVP III) ($56mn) and Contour Opportunity Fund ($25mn). CVP III focuses primarily on early stage financial services, digital media and internet start-ups based in New York. Two local investors made commitments to the fund: New York Life Insurance Company along with New York State Common Retirement Fund, which committed $15mn. New York State Common Retirement Fund also committed an additional $15mn to Contour Opportunity Fund, which makes expansion and late stage investments in the same sectors as CVP III.

Micro VC

The trend of committing to funds in close proximity applies to investors based outside North America as well. Verso Spin-off Fund II invests in underperforming European companies with a primary focus on Finland and reached a final close on $54.9mn in April 2016. The primary investors in the fund include Ilmarinen Mutual Pension Insurance Company and private equity fund of funds managers Finnish Industry Investment and Luxembourg-based European Investment Fund – all investors based in Europe, with two located in Finland. Southeast Asia-focused Monk’s Hill Ventures Fund I reached a final close in March 2016 on $80mn and has already invested in several technology start-ups domestically in Singapore, as well as in Thailand, Indonesia and the Philippines. Investors in the fund include Japan-based YJ Capital and ITOCHU Corporation, Singapore-based National Research Foundation, sovereign wealth fund Temasek Holdings and one known US-based investor, Cisco Systems.

In South America, Brazilian National Development Bank, has committed to a total of eight known micro VC funds, including most recently Fundo Performa-Key de Inovação e Meio Ambiente, which focuses on minority investments in early and growth stage innovative sustainability and cleantech companies in Brazil.


Micro VC funds by nature are well-suited to fulfill investor requirements for social and environmental impact investing.

Micro VC

Micro VC

As a function of necessity, these funds operate much closer to ground level, which enables them to identify and approach smaller opportunities, especially in developing regions of the world. For this reason, among others, micro VC funds have the chance to be an important part of alternatives portfolios moving forward, both for performance potential and satisfaction of increasingly prevalent goal-based investing across social, economic and educational fields.

With both robust investor appetite and fundraising targets in the pipeline, the micro VC industry seems set to continue carving a niche within the early stage investment community. A confirmed 2,253 institutional investors (55% of investors active in venture capital) have active mandates suited to micro VC investment based on commitment size range, strategy and other criteria which are listed on Private Equity Online. This also includes 1,665 that are known to have at least one past investment in a micro VC fund (Fig. 10). These smaller funds will play important roles in funding growth in global communities by offering a greater degree of attention than larger funds, as result of being highly specialized.

Micro VC

Despite strong investor appetite, fund managers targeting micro VC funds are still likely to face competitive fundraising environments in the years to come. As the preference of fund managers to raise micro VC funds is likely to continue, more established fund managers will be raising these funds, whereas they had previously been a function of necessity for first-time and less established fund managers. Fund managers will need to provide solid track records, favorable terms, and positive social impact investment opportunities to attract distinguished cornerstone investors that can clear the path to a broader range of investor capital.

Sovereign Wealth Funds Investing in Private Equity

Alastair Hannah and Selina Sy provide an insight into this secretive and exclusive subset of the investor community, based on data from Preqin’s recently launched 2016 Preqin Sovereign Wealth Fund Review.

Sovereign wealth funds continue to capture attention as a result of their ever growing assets under management (AUM) and corresponding influence on global financial markets. Despite the decline in commodity & oil prices and the global volatility seen over the past year, which has reduced the capital available to some sovereign wealth funds, AUM of these investors reached $6.51tn in March 2016 (Fig. 1). This is over double the AUM held in 2008 ($3.07tn), the year Preqin launched its first Sovereign Wealth Fund Review.

Micro VC

Relative to other institutional investors, sovereign wealth funds typically have a greater tolerance for the illiquidity inherent in private equity investments, allowing many sovereign wealth funds to build private equity allocations that may not be feasible for other investor types. This is due to sovereign wealth funds’ preference for returns, in order to increase capital reserves for future generations. These unique investors have been steadily increasing their share of capital invested in private equity and remain an important source of capital for the asset class. Fig. 2 shows that private equity has seen greater participation from sovereign wealth funds over the past year, illustrative of the increasing sophistication of these institutions in constructing their investment portfolios and the attraction of the asset class to deliver their investment objectives.

Micro VC

As shown in Fig. 3, over half (55%) of sovereign wealth funds are known to invest in private equity, representing an eight percentage point increase from the proportion seen last year. Thirty-eight percent of sovereign wealth funds exclude private equity from their investment strategy, often due to liquidity prioritization or anticipation of a period of economic stress. Chile-based Economic and Social Stabilization Fund, for example, does not invest in the asset class as it does not provide the liquidity needed to meet the requirements of its mandates.

Assets under Management

Larger sovereign wealth funds are more likely allocate to the asset class than their smaller counterparts (Fig. 4). While only 20% of the smallest sovereign wealth funds (with total assets under $1bn) invest in private equity, rates of participation in the asset class increase steadily alongside AUM, reaching 100% for sovereign wealth funds with total assets of $100-249bn.

However, this rate declines to 89% for those with total assets of $250bn or more. Norway-based Government Pension Fund Global, for example, is the largest sovereign wealth fund in the world and does not invest in private equity due to restrictions imposed by the Government of Norway. Instead, its portfolio is allocated to investments in public markets and real estate.

Micro VC


Fig. 5 shows that sovereign wealth funds investing in private equity are based across the globe. Middle East- and Asia-based sovereign wealth funds continue to constitute the largest proportions of investors in private equity within this pool, accounting for 33% and 29% of funds respectively. While this is primarily due to the large numbers of sovereign wealth funds based in these regions, this also illustrates the large appetite such investors have for the asset class and the vast amounts of capital allocated to private equity by these investors. Sovereign wealth funds based in North America, Europe and Africa also invest in private equity, representing 14%, 10% and 10% respectively of all sovereign wealth funds investing in the asset class. Currently, no sovereign wealth funds located in Latin America & Caribbean invest in private equity; however, Fondo de Ahorro de Panamá has reported that it will consider investing in the asset class once its total assets exceed 4% of Panama’s GDP.

Strategy Preferences

Buyout funds remain the most preferred private equity strategy among sovereign wealth funds, with 72% of sovereign wealth funds investing in such funds (Fig. 6). The larger size of buyout funds makes them attractive to sovereign wealth funds, as it allows them to put large amounts of capital to work, while venture capital funds (which draw capital from 65% of sovereign wealth funds) allow for the nurture of domestic enterprise and support the economic development initiatives of the fund. Commitments to venture capital funds are a significant component of BpiFrance’s investment strategy, with known commitments to Europe-focused venture capital vehicles, Fonds Europeen des Materiaux and CapAgro Innovation.

Co-Investments and Separate Accounts

Due to their size, many sovereign wealth funds look to alternative routes to the traditional commingled fund model to gain access to the asset class in a bid for lower fees and greater transparency. Nearly half (47%) of sovereign wealth funds investing in private equity are inclined to invest alongside fund managers in co-investment arrangements. Attractive benefits for co-investors include portfolio diversification, exposure to quality private equity assets, the ability to evaluate the risk/ return profile of an investment (that is not necessarily available in traditional fund investments), better transparency and mitigation of the J-curve effect as capital is deployed faster.

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Separate accounts provide sovereign wealth funds with a number of advantages, offering enhanced transparency in being the sole investor of a fund, having greater control over terms and conditions and the ability to gain exposure to a bespoke product to achieve investment objectives. Alaska Permanent Fund Corporation (APFC) is one such fund that prefers private equity investment through separate account structures; APFC will also co-invest alongside fund managers and invest in fund of funds vehicles.

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Regional Preferences

Europe is the most attractive region for sovereign wealth funds gaining exposure to private equity, with 79% investing in the region (Fig. 7). Appetite for Europe-focused private equity opportunities remains ahead of that for North America-focused investment (for which 65% of sovereign wealth funds have indicated a preference). Both Europe and North America accommodate some of the world’s largest and most established private equity fund managers and are the most mature private equity markets globally, thus offering a wide range of attractive strategies and opportunities for investors.

Despite containing some of the largest sovereign wealth funds, just over half of sovereign wealth funds target private equity in the MENA region, trailing emerging markets (for which 60% of sovereign wealth funds have a preference). However, it is worth noting that some sovereign wealth funds in the MENA region pursue direct private equity investment to support domestic, social and economic initiatives.

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Private equity investment offers diversification within overall investment portfolios, potentially generating substantial returns over the long term without the short-term volatility seen in public markets. Sovereign wealth funds are contributing a growing proportion of total institutional investor capital to private equity, increasing from 9% in January 2013 to 17% in January 2016, suggesting an expanding influence within the asset class. From the perspective of fund managers, securing capital from sovereign wealth funds is an increasingly competitive endeavour, with such investors looking for the best opportunities to deploy capital, showing a healthy appetite for the asset class to achieve their investment objectives.

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Private Equity Industry News

Despite failing to match the peak fundraising levels of 2014, growth private equity continues to attract substantial amounts of capital from significant players in the investor community. Alastair Hannah takes a look at fundraising activity in the growth private equity market.

Recently Closed Growth Funds

Silicon Valley-based Accel Partners held a final close in March on $1.5bn for its latest fund, Accel Growth Fund IV. The largest growth fund to close in 2016 so far, Accel Growth Fund IV will focus on IT, software, internet and digital media investment opportunities in the US.

HIG Brazil & Latin America Partners held a final close in April on $740mn. Managed by Miami-based H.I.G. Capital, the fund targets small- and mid-sized companies with attractive growth potential in Brazil. Investors in the fund include Maine Public Employees’ Retirement System and Pennsylvania State Employees’ Retirement System, which committed $60mn and $50mn respectively.

Growth Funds in Market

As of 27 May 2016, there were 294 growth funds in market seeking an aggregate $13bn in institutional capital. The largest growth fund currently raising capital is Sino-Singapore (Chongqing) Connectivity Private Equity Fund, a joint venture between UOB Venture Management, Chongqing Yufu Asset Management Group, Ping An Insurance and Tus-Holdings. The fund is targeting CNY 100bn and will seek growth opportunities in the Chongqing region.

Asia remains a substantial region for growth fund activity; growth funds based in Asia that are currently on the road represent almost a third (31%) of aggregate capital sought by all private equity funds based in the region. Ninety-three Asia-based growth funds in market are seeking $41bn in institutional capital; this exceeds North America-based fundraising, where 86 growth funds are currently seeking a total $20bn in commitments.

Boston-based Summit Partners Growth Equity Fund IX is currently seeking $3bn in institutional capital. The fund, which is the second largest growth fund on the road, is Summit Partners’ ninth flagship vehicle and will primarily target companies located in North America and Europe.

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In 2015, growth capital fundraising failed to match the levels seen in 2014. The aggregate capital secured in 2015 ($34bn) represented a 17% decrease from the previous year, while the number of funds closed (96) was a 32% decrease from 2014 (141), the lowest number since 2009. The $9bn in institutional capital raised from January to May 2016 represents 26% of the total amount raised in 2015 and 29% of the average aggregate capital secured each year from 2008 to 2015. The reduction in the number of growth funds closed annually from 2013 to 2015, combined with an increase in aggregate capital raised, has led to an increase in average fund size during this period. The average size of growth funds closed in 2015 is $419mn, compared with $190mn in 2013.

Private Equity in Spain

We examine the private equity & venture capital market in Spain, looking at the latest fundraising data from Spain-based fund managers and investors, as well as the latest buyout and venture capital deal activity.

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Performance Update

Darren Fernandes provides the latest private equity performance data to Q3 2015, comparing the returns of different investment strategies as well as exploring the growth in industry assets under management.

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Secondaries Update

Olivia Perry takes a look at the largest fund managers and investors in the European private equity secondary market.

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