Industry Description
The venture capital & principal trading industry in the U.S. comprises principals in financial contract transactions, specifically buying and selling for their own portfolios (NAICS 52391). The industry excludes securities dealers, investment bankers, and commodity contracts dealers who trade as principals.
The following are some basic characteristics of the venture capital & principal trading industry:
- Venture capital & principal trading industry has a combined revenue of $33.1 billion, with a growth rate of 3.0% in 2019-2024
- There are approximately 147,300 businesses as of 2024
- The venture capital & principal trading industry employs approximately 359,600 people
Industry Trends
The venture capital & principal trading industry is highly fragmented and has low levels of market share concentration, with no operators having a significant amount of industry revenue in 2019. The largest players employ teams of financial professionals, executives and industry experts account, while small players are typically independently owned and employ specialized individuals or are a small team. Some key external factors that influence this industry are (i) S&P 500, (ii) investor confidence, and (iii) regulations. Each of these is described in further detail below.
The S&P 500 reflects overall market performance and has grown its index value from 2,600 in the beginning of 2018 to 5,700 in the end of the third quarter of 2024. This growth means that the market has performed positively, so the industry can sell securities at a higher price than they were bought for. This trend enables higher market volatility allowing for short-term gains which combined with the trading volume of the S&P 500 enriches opportunities for high-frequency trading. The performance of the S&P 500 shows minimal risks and influences the aggressiveness of strategies embraced.
Investor confidence is a key to the industry because the extent of confidence in the market influences their potential degree of investment. This means that investors tend to invest heavily in riskier and higher-return equity investments when they are confident with market performance, but when confidence is low, they focus on lower risk. Investor confidence was optimistic at the end of 2024, so it should be expected funding will increase in 2025. As a result, the industry should expect benefits from this increase in market liquidity.
Regulations determine the cost of participation and must deal with laws and institutions such as Investment Company Institute (ICI), which reported 16,038 investment companies at the end of 2023. This number has been on a decline due to changes in taxation and compliance requirements that have hindered trading activities and venture investments. Investor protection measures such as regulations on reports and disclosure of investments have helped with transparency. Though these measures have also increased operational costs because these new compliance measures must be met.
The venture capital & principal trading industry in the U.S. has been influenced by external factors such as the S&P 500, investor confidence, and regulations. The performance of the S&P 500 combined with strong investor confidence has increased market liquidity and has created favorable conditions. Maintaining compliance with these conditions to meet regulatory requirements is needed, and while costly, this maximizes performance in a favorable environment.
Key Performance Metrics
In evaluating the venture capital & principal trading industry, the following metrics can provide useful information in comparing a subject company to guideline companies and transactions.
- Distributed to paid-in capital (DPI)
- Exit success rate
- Internal rate of return (IRR)
- Maximum drawdown
- Multiple on invested capital (MOIR)
- Win rate
Industry Organizations & Publications
The following organizations publish useful information:
- American Investment Council (AIC)
- Investment Company Institute (ICI)
- National Venture Capital Association (NVCA)
- Securities Industry and Financial Markets Association (SIFMA)
Guideline Information: Private Purchase Transactions
Most venture capital & principal trading companies are privately owned. While there are publicly traded companies, data regarding the sale of 100% of closely held venture capital & principal trading companies is generally the best source of information to appraise a subject company.
The following are typical appraisal multiples from sale of venture capital & principal trading companies:
- Revenue multiples between 3.6 and 14.9 times
- Gross Profit multiples between 3.5 and 7.6 times
- EBITDA multiples between 3.3 and 33.2 times
In selecting guideline transactions, it is of critical importance to select transactions that are similar to the subject company. Unique factors for any subject company must be considered to yield credible results. Additionally, industry economic conditions also vary over time, which must also be considered.
Guideline Information: Publicly Traded Companies
Most venture capital & principal trading companies are privately owned; however, there are a few that are publicly traded, meaning it is possible to compare a subject company based on industry metrics and appraise using industry multiples. However, as with the guideline transactions described above, it is of critical importance to select publicly traded companies that are similar to the subject company. Also be aware that multiples of certain publicly traded companies may not accurately reflect a subject company.
The four largest publicly traded U.S. venture capital & principal trading companies ranked by market capitalization are:
- Blackstone Inc. (BX) – $224.8 billion market capitalization
- KKR & Co. Inc. (KKR) – $147.7 billion market capitalization
- Apollo Global Management, Inc. (APO) – $96.8 billion market capitalization
- Ares Management Corporation (ARES) – $60.6 billion market capitalization
The Price-to-Earnings (P/E) ratios of these four companies range between 18.0 times and 51.5 times.
Appraisal Rules of Thumb
Please note you should never use a Rule of Thumb in place of a professional appraisal. You will never see a competent professional appraiser do their work using a Rule of Thumb. The professional standards that govern professional appraisal practice, which all professional appraisers should follow, specifically prohibit the use of Rules of Thumb.
Venture capital & principal trading companies are businesses sold based on sound economics. These economic considerations can be measured using the key performance indicators described above, but such economics cannot be accurately summarized in these simple formulae.