A frothy cup of private equity

Fundraisers can now head down to Starbucks for a $100m fund commitment, but what does this tell us about the market cycle?

Starbucks made its first private equity fund commitment last week, providing a $100 million anchor investment for Valor Siren Ventures I. The fund is expected to raise an additional $300 million from third parties to invest in companies that develop technology and products relating to food or retail.

The coffee giant joins the likes of US multinational Kellogg’s, which launched food industry VC fund manager Eighteen94 Capital in 2016, and its compatriot General Mills, which set up emerging food brands investor 301 Inc in 2015.

US corporations have vast sums of cash to put to work following the US Tax Cuts and Jobs Act, which slashed corporate tax to 21 percent from 35 percent and introduced a one-time charge on profit gathered overseas, meaning businesses will be able to repatriate cash without paying additional taxes.

Why not allocate some of it to private equity? Especially sector-focused funds, which, as highlighted by a Bain & Co report, have a greater likelihood of outperforming generalist funds. And conveniently, there are plenty of them about to choose from. Apax Partners, CVC Capital Partners and KKR have each raised tech-focused vehicles, for example, since 2016. Around $70 billion was raised last year for sector-focused funds, according to PEI data.

But obviously this is about much more than returns; the coffee giant will also explore direct commercial arrangements with the underlying start-ups as part of its commitment. “The rationale is that they’re able to identify either new trends or technologies; it’s about getting a window into what the future might look like,” David Fann, chief executive of LP advisory firm TorreyCove Capital Partners, told Private Equity International. Sector-specialist funds also offer corporations access to dozens of potential targets at a time.

But it’s not all roses: corporations taking riskier bets with their cash might suggest we are close – if not already at – a peak in the cycle. Corporate venture activity becomes more pronounced in a bull market and when the market turns  it tends to  shut down, as tech businesses experienced in the late 1990s with the dotcom crash.

When the next recession will hit is up for debate. In the meantime, expect to see more household names cropping up in the asset class.

Write to the author: alex.l@peimedia.com