Expansion/late stage financing is typically capital provided to companies that have a product or service in production or commercially available. These companies have demonstrated significant revenue growth but may or may not be showing a profit, which is why this stage of financing is so vital. The capital may be used to increase production capacity, product development and marketing, as well as to fund additional working capital. Preqin’s Fund Manager Profiles module on Private Equity Online currently tracks 5,592 active fund managers that consider investing in expansion/late stage companies.
Preqin’s Funds in Market database tracks 195 funds targeting solely expansion/late stage investments that have closed from 2010 to present. Despite the plethora of firms considering investing in expansion/late stage companies, the number of funds raised pales in comparison to the 864 early stage funds closed in the same time period. As seen in the above chart, 2015 expansion/late stage fundraising is on pace to match the level of capital raised in 2014; perhaps giving rise to a period of more consistent fundraising.
Approximately 52% of expansion/late stage funds closed between 2010 and the present day target investments in North America-based companies. Another 32%, 11%, and 5% are focused on investing in Asia, Europe and Rest of World, respectively. The appeal of the North American market looks set to continue, with 30 of the 65 expansion/late stage funds currently raising capital focusing on the region, the traditional home of venture capital investments.
In contrast to the variable fundraising efforts for expansion/late stage funds, the amount of capital early stage funds have raised has been steadily increasing since 2010. Early stage funds closed in 2015 have so far raised an aggregate $14.9bn, which is slightly more than the $14.4bn raised in 2014. The resurgence of early stage fundraising can be partially attributed to the increasing valuations of early stage businesses. The presence of “unicorns”, or private companies valued at $1bn and above, has increased dramatically over recent years. As a result, many fund managers are raising funds to invest in early stage companies with the hope of finding the next “unicorn”. Nevertheless, expansion/late stage fundraising has found some stability, as managers understand that early stage companies typically require a longer holding period and can be riskier than a late stage company with an established product, strong cash flow and a growing market share.