Investment banking fees fall 8 percent in weakest first quarter since 2012

(GNN) - Global investment banking fees fell 8 percent to $20 billion in the first quarter, the poorest start to the year since 2012, hurt by weak deal activity in Europe, Asia Pacific and Japan.

Fees for deals done fell 28 percent in Japan, 14 percent in Europe and 18 percent in Asia Pacific, according to data compiled by Thomson Reuters and Freeman Consulting.

The North American investment banking market remained stable, with fees little changed at $11.5 billion.

JPMorgan Chase & Co topped the global investment banking league table in the quarter with $1.49 billion in fees. Goldman Sachs Group Inc was second with $1.48 billion.

Morgan Stanley and Citigroup Inc were the biggest gainers among the top 10 banks in fees earned, while Credit Suisse Group AG's fees dropped 23 percent.

Investment banking activity in the financial, healthcare, and energy and power sectors generated 54 percent of the global fee pool during the quarter.

Fees from deal making in the healthcare sector jumped 24 percent, with Goldman commanding 14 percent of all fees booked in the sector.

Equity capital markets underwriting fees fell 2 percent to $5.3 billion, dragged down by a 36 percent drop in fees from initial public offerings.

Fees from debt capital markets underwriting rose 4 percent to $6.3 billion, while mergers and acquisition advisory fees fell slightly to $5.5 billion.

Investment banking fees generated by financial sponsors and their portfolio companies dropped 30 percent to $2.5 billion. Blackstone Group LP's investment banking fees rose 79 percent to $168 million.

(Reuters)(Reporting by Amrutha Gayathri in Bengaluru; Editing by Saumyadeb Chakrabarty)

EU nears deal on $338 billion plan to tackle drop in investment

(GNN) - EU finance ministers agreed the details of a 315 billion euro ($338 billion) investment plan on Tuesday to help revive the European economy without piling up more debt, and now aim to get the first projects going by the end of the year.

EU lawmakers must now approve the fund.

"The plan is the answer we need to confront the main handicap of the European economy: the lack of

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investment," said Pierre Moscovici, the EU economics commissioner, adding that investment had fallen by 15 to 20 percent since 2008.

The four-year plan fleshes out a call by European Commission President Jean-Claude Juncker to back riskier projects from airports to railways and to confront the fall in investment since the financial crisis.

Setting up the European Fund for Strategic Investments (EFSI) has been sensitive, with EU governments fearful of not having their projects chosen from a list of almost 2,000 projects worth 1.3 trillion euros that countries put forward.

Some EU lawmakers are wary of favoritism toward western European countries over poorer, eastern European members.

Another problem has been that the Commission wanted countries to stump up money for the fund, insisting that it would not be included in debt and deficit calculations.

That idea flopped because countries had no guarantee that their projects would be chosen. Instead, countries such as France, Spain and Germany said they would help fund projects in their country via national development banks, and Italy on Tuesday promised to contribute 8 billion euros to the Italian projects chosen, via its national promotional bank.

There are also doubts whether the plan will attract enough private money, however. Juncker's goal is to have 315 billion euros of largely private new investment by providing 21 billion euros in capital and first-loss guarantees from the EU budget and the European Investment Bank.

Under the plan agreed by ministers, the plan will run for four years but will be reviewed after three years to see if it is working.

A steering board made up by the European Commission and the European Investment Bank will oversee the fund, while an eight-member investment committee will choose the projects.

The list submitted in December, which officials stress is not definitive, includes plans for housing regeneration in the Netherlands, a new port in Ireland and a 4.5 billion euro fast rail connection between Estonia, Latvia, Lithuania and Poland.

Other ideas involve refueling stations for hydrogen fuel cell vehicles in Germany, expanding broadband networks in Spain and making public buildings in France more energy-efficient.

(Reuters) (Additional reporting by Francesco Guarascio; Editing by Hugh Lawson)

Startups, Late-Stage Valuations, And Bull

(GNN) - Bill Gurley, a general partner at Benchmark, makes news mostly because he says what other venture capitalists will tell you while drunk, but does so while on the record. It’s refreshing in a way.

Most recently, Gurley made the point that the tech and investment industries are shoving nine and ten-figure sums of cash into startups while not enjoying a full dig into their financials. In the age of the mega-round, the issue isn’t a small one: Gurley thinks that some people are investing from the hip and not from the spreadsheet.
Here’s the quote:

“Pay attention,” Gurley said. “These companies aren’t going through a proper audit process. … We’re drifting from high-margin businesses to ever-increasing low-margin businesses in terms of what we’re saying are unicorns. Be careful. I don’t think it’s sustainable if you extrapolate that way.”

Placing the low-margin bit aside, the point about vetting companies is disturbing. If huge sums of money are going into companies that are not properly audited, there is more risk in the market than was perhaps understood. And more risk, in this case, doesn’t mean more potential reward — it means more un-hedged downside.

I talked with Gurley on the phone for a minute on the auditing point and he noted that some companies are raising massive rounds off of a Power Point deck, and not an S-1. The implication is simple: When you go public, you undergo a financial root canal, exposing your strengths and weaknesses alike. Massaged decks aren’t like that. And as the market remains flush with bored capital, it seems perfectly happy to shovel it into the maws of companies that report less than you might want before valuing them north of a billion.

(Before I hand the floor to others, I have to ask: Do any of these companies know how to GAAP their top line? I hear endless talk of run rates, and 18-month-away cash flow breakeven, but desperately little when it comes to material profitability.)

Is Gurley Full Of Shit?

Not really, it seems. I reached out to a number of venture capitalists that I think are not stupid, asking for response to Gurley’s point on a lack of auditing of firms receiving late-stage capital in large doses. Here’s what they had to say:

Matt Murphy of Kleiner Perkins told me that there are “definitely some rounds that go on where the entrepreneur doesn’t want to provide detailed data,” but that sort of behavior is a “red flag.” Murphy went on to note that if a company wants to work with a firm, “they will ultimately provide” the information. “Firms who invest without it,” Murphy concluded, “are playing a dangerous game.”

Jason Lemkin of Storm Ventures had some hot words for the current market:

I know many very successful VCs that didn’t do a single new investment last year because of valuations. Many. But, those that simply chase returns are doing very little diligence these days. They will get burned. And it’s not just VCs. Who does diligence on AngelList? No one. No one.”

Josh Felser of Freestyle Capital made a different point, noting that “FOMO has been elevated to a higher status than it used to be and that can’t be good long term.” FOMO, or the ‘fear of missing out’ is a general term for being terrified in the face of an opportunity passing you by — what if all the cool kids do it? And if you think that the cool kids are doing it, why aren’t you? And all of a sudden, $35 million in at a $1 billion pre-money valuation suddenly seems like a deal.

Ron Heinz of Signal Peak Ventures was blunt:

The ‘Unicorn Effect’ has permeated Silicon Valley and created lofty valuations that are likely unsustainable over the long-term. While we fully expect sophisticated investors to complete thorough due diligence, enthusiasm for exceptional upside is clearly driving valuations higher in some instances.

Shade.
Aziz Gilani of the Mercury Fund feels similarly:

I generally agree with Bill’s warning on valuations. This scenario reminds me of the old maxim: ‘You pick the valuation and I’ll pick the terms’. Right now, some funds are giving in to founder desires for ‘unicorn’ raises and valuations in exchange for relatively onerous terms.

I presume that that is a subtweet of Box’s last round of private capital.
Continuing, here is Jacob Mullins, formerly of Shasta Ventures, and currently of Exit Round, a company that helps unwind failed startups:

Today, with stagnancy in the public markets, we’re seeing a large inflow of institutional investors, hedge funds and large private equity with far less experience in VC who are piling money into late stage venture rounds in order to find Alpha. This is increasing the availability of capital and thus increasing valuations and size of fundraises. But these firms often don’t understand the true risks in venture, nor do they necessarily care because of their risk tolerance with respect to the capital they are putting at work. They invest on the backs of other big VC names assuming that its a safe bet; but in venture, companies rarely are.

It’s a vicious capitalistic cycle, because venture investors love having this deluge of easy capital and skyrocketing valuations because it increases the overall holding value of their portfolios.

Chris Calder of Epic Ventures noted that return is concentrated, and expensive:

I think the quality of diligence is there, but because private equity is illiquid, returns are concentrated in a few companies, and there are only so many opportunities to invest (I.e. illiquidity), people are willing to pay up to get exposure. [And] So validation growth becomes lumpy.

Summing the above, it seems, and I know this will shock some of you, that we are currently sunning in the glow of a general asset bubble inside of technology, the result of which is that many funds are willing to buy not just next year’s growth at today’s prices, but profits that are a decade hence. When money is that generous, why not take it?

Just keep in mind that the business cycle is just that: A cycle. And according to that one dead physicist, whatever goes up tends to come down a bit. It’s like the inverse of rent in San Francisco.

#Enterprise Investments Surge To Over $5.4 Billion

#GNN - After years of backing headline-grabbing consumer internet deals, it seems that venture capitalists are paying more attention (and more money) to the seemingly staid and stodgy enterprise technology companies (the businesses that sell technology to make businesses work better).

Their mission: to explore new ways of organizing data, to seek out new models for efficiency and security for business customers of all shapes and sizes, and to develop new technologies for marketing and selling on devices that no one has done before.

Investments into enterprise software companies of all stripes are soaring. The amount of capital invested in these startups has already surged to over $5.4 billion in the first half of 2014. That’s roughly the same amount that enterprise-facing companies raised in the entire year for 2013, according to data from CrunchBase.

Much of that capital was invested in the monster financing for new database technology, Cloudera, but it points to a belief among investors that there’s a huge change coming in the way that technology effects business. And these venture capitalists are hoping to cash in.

The surge in investment dollars is actually accompanied by a slowdown in commitments to new technology companies, indicating that investors’ confidence in the sector’s strength is matched by a belief that this current crop of business technology companies is maturing. In the second quarter of 2013, investors backed 328 startups in the enterprise software category, by the second quarter of 2014 that number had declined to 205.

While the numbers indicate a slowdown in the commitments going to business-focused technologies, some investors insist this is only the beginning. The idea of selling software as a hosted online service has been around for nearly a decade, beginning with the Salesforce.com customer relationship management revolution, but the technologies that are moving to the cloud were never part of core business operations, they argue. Now, these hosted software businesses are everywhere, and taking over core functions that used to be the purview of internal information technology departments.

Data storage is now a service, and even enterprise resource planning software can be bought as a service (and if there’s anything more important to a business than where it keeps its information and how it manages and organizes the use of its resources I’m not sure what it would be). Furthermore, new companies are taking advantage of the extremely powerful new infrastructure technologies that are available to rethink how customer service and other business processes can be automated to a degree that wasn’t possible before.

That’s why Salesforce.com is snapping up young cloud computing companies as if it were Oracle a decade ago, Microsoft has its head in the cloud, and why IBM and Apple have partnered to deliver software to mobile business users.

One need only look at the fact that Salesforce and Red Hat now trade above Oracle to see how momentum has shifted away from the traditional software vendors (although at 179.67 billion Oracle’s market capitalization is still over five times that of Salesforce.com’s $33.7 billion market cap). Not to mention the big bets that venture capitalists, corporate investors, and hedge funds and money managers are placing on technology like Hadoop and NoSQL.

“This is that next future data platform that in 30 years from now the vast majority that structured and semi-structured data would be stored in,” said Joseph Ansanelli, a partner at Cloudera backer Greylock Partners, in an April interview. “Oracle? Their core database is basically under attack from Hadoop.”

If Hadoop and NoSQL are eating at the core of the infrastructure businesses use to operate, then a slew of software as a service offerings, and technology solutions are attacking big enterprise companies on their periphery with services that better apply the new architecture of hardware, software, and cloud-sourced services with open interfaces for application integration.

“One of the themes we’ve invested heavily behind is this intersection between big data and traditional enterprise application software,” says Ajay Agarwal of Bain Capital Ventures. Indeed, Bain’s newest partner, Enrique Salem, the former chief executive of Symantec, sees business technologies on the cusp of a still-greater transformation.

“Historically some of these cycles have been a five-to-ten year change, but we are just at the beginning of this transformation,” says Salem. “Historically, $120 billion was spent on hardware implemented inside data centers. Now consumers will start running and picking their own applications and that $120 billion spend that was inside the four walls of the data center? A majority of the spend will not be in the data center, but in companies that are delivering services.”

Photo via Flickr user Scott Maxwell

(IMAGE HAS BEEN MODIFIED)

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Zynstra Raises Further $8.4M Funding To Bring ‘Hybrid Cloud’ To SMEs

Zynstra, which offers ‘hybrid cloud’ solutions for small and medium sized enterprises, has raised a further $8.4 million of funding in a Series B round. This brings the total amount raised to just over $14.4 million.

The UK startup plans to use the additional capital to further develop its range of “hybrid cloud” products, which are designed for SMEs as opposed to much larger enterprises, and expand its channel reach in the UK, and then launch in the U.S. towards the end of this year.

Zynstra is also positioning itself, rather shrewdly, to benefit from Microsoft ending support for Windows Server 2003 next July. “This affects a lot of businesses,” Nick East, CEO of Zynstra, tells TechCrunch. “We are seeing an increasing pull from the market for our solution as a natural choice for infrastructure refresh. This is one of the reasons we are expanding.”

The company operates in the “hybrid IT” space, whereby East says companies use a mixture of on-site IT services -– usually a ‘private cloud’ — integrated with one or more remote cloud services. However, this hybrid approach, while increasingly favoured by most large enterprises, usually requires significant “up front capital investment in hardware and software, and IT integration skills,” putting it out of reach for smaller enterprises. Zynstra wants to change that.

“We have customers that use our smallest on-premise appliance; you could think of it as a ‘cloud gateway’ device. It runs local IT services like networking and user administration, printing and backup, but also integrates the office simply and securely with remote cloud services like Office 365, cloud backup and disaster recovery,” explains East.

“For larger IT needs, our product runs a resilient private cloud, with a series of applications or workloads that must run locally –- usually for reasons of network performance, security or control required by the customer.”

As an example of the latter, he cites customers who run collaboration apps on Zynstra’s appliances so that sensitive business data stays behind their firewall. These are then integrated with public cloud collaboration tools to share less sensitive information with customers and partners. Hence the “hybrid” termonology.

Zynstra’s new funding round was led by previous backers Octopus Investments, with participation from other previous investors including: Richard Brennan, former EVP Global Marketing at Orange Group, Tom Vari, former CIO of Cable at Rogers Communications Inc., and Jon Craton, Zynstra’s Chairman and former founder and CEO of Cramer.

Agriculture loan: World Bank approves $76m for Sindh project

(GNN) - ISLAMABAD: The board of executive directors of the World Bank (WB) has approved $76.4 million concessionary lending for the Sindh Agricultural Growth Project.

The project is aimed at improving productivity and market access for small and medium producers in important commodity value chains. It will benefit approximately 112,000 farmers covering over 66,000 hectares of land, according to a handout issued by the country office of the Washington-based lending agency. Total cost of the project is $88.7 million.

The project intends to achieve its objectives by investing in knowledge and technology for producers and sub-sectors of crops and livestock, and strengthening public sector institutions to enhance the environment for sustained sector growth, according to the WB.

The credit is financed from the International Development Association (IDA), the World Bank Group’s grant and low-interest arm. It will be on standard IDA terms, with a maturity of 25 years, including a grace period of five years.

It is the last planned concessionary lending by the WB as part of its outgoing country partnership strategy. The bank has already approved a new four-year strategy for Pakistan that offers both expensive and cheap credit but is subject to many prior measures.

“The project is envisaged to be a significant investment towards inclusive growth by prioritising support to small and medium-sized producers who are trying to compete in horticulture markets,” said WB Country Director for Pakistan Rachid Benmessaoud.

The plan focuses on small farmers as there is a significant involvement of women in production and processing.

Sindh enjoys greater competitive advantage in these pro-poor production value chains. Capacity building, technical assistance and strategic planning for sector growth will also be provided through this project, said the WB.

The project will focus on horticulture, particularly chillies as 92% of national production is produced in Sindh, onions – one-third of total production comes from Sindh – and dates as the province contributes about half of national production.

Horticulture is largely unregulated, includes more private sector actors than major crops and has received little donor attention in the past, according to the WB documents.

The introduction of good agricultural practices and modest investments in relatively simple technology could substantially increase the quality of production and the potential for increased trade and higher incomes. For instance, chili exports from Pakistan are banned by the European Union due to unacceptable levels of Aflatoxin.

For dates, only 20-30% of the production is in high-value table while 10% of those are Grade-A and 60% are Grade-C dates. A majority of this fruit is dried dates and is mainly exported to India to be used in religious ceremonies, where they are thrown into the Ganges, according to the documents.

Improved tissue culture, orchard management and harvesting practices could increase the production of Grade-A dates, thus increasing income, said the WB.

The project will also promote private sector participation in agricultural development and sector growth through public-private models for agribusiness development and support services. The federal and provincial governments have highlighted commercial agriculture and market linkages as priority investments for the sector, said the WB.

Published in GNN - AIP - Tribune, July 9th, 2014.