New Markets Venture Partners Update, 1H 2020
- Apr 22, 2020
- 4 min read
New Markets Is Proud Of Our Portfolio Companies Helping Vulnerable Populations During This Difficult Time. Our History Shows That Mission-Driven, Double-Bottom Line Companies Can Be Even More Successful And Impactful During Market Downturns.
New Markets believes that during difficult times like these, impact investors and mission-driven entrepreneurs are more important than ever. The negative impact of this crisis will fall disproportionately on low-income, minority, and first-generation Americans who attend underfunded public schools or work in hourly jobs with minimal (or no) sick leave or healthcare.
These are the communities that New Markets and our portfolio companies are working hard to serve every day. During this current crisis, we are committed to fully supporting our existing portfolio companies and continuing to invest in new technology-enabled solutions that educate, train, and provide financial access for students and workers most in need to help assure that the least well-off amongst us are not left even further behind.
The New Markets team has been investing in high growth impact companies for 28 years and we have experienced two other major market downturns: 2000-2002 (internet bubble and September 11th) and 2008 (the housing/financial crisis). In both cases, public markets fell over 50% and we helped our portfolio companies successfully navigate through the crisis. The vast majority emerged in a much stronger competitive position. We also made some of our best investments during these prior liquidity crises, examples include: Questar Assessment (2008), Mediasolv (2009), Moodlerooms (2010), and Kroll Bond Ratings (2010). These four investments generated an average return greater than 4x invested capital.
We are confident that the companies in our current portfolio, with their highly efficacious solutions, are fundamentally sound, well capitalized, and relatively well positioned to withstand this crisis, emerge stronger than the competition, and poised for growth. Our portfolio companies have moved quickly to shore up their balance sheets and conserve cash over the past few months. Thankfully, many of our companies have recently completed funding rounds, and all of our companies are relatively well-capitalized.
However, in crises such as these, high growth companies that are not yet cash-flow positive often experience more financial turbulence than larger organizations. It is highly likely that there will be a severe near term liquidity crisis in the financial markets. Debt and equity funding may dry up at the same time that sales cycles stall or plummet. It is more important than ever for investors like New Markets to actively support, both financially and otherwise, our companies through short-term economic disruptions like this one.
Back in March, we sent our portfolio companies a letter predicting that the economic downturn was likely to be very severe, and including links to missives from blue-chip VCs like Sequoia and Bessemer. The overall message was conserve capital, be focused and keep supporting the students, workers and companies who count on our products and services. We also said that New Markets will be here for you and we will stretch to be as supportive as we possibly can during these turbulent times. We are here to help.
Exits and Impact
The fourth quarter of 2019, before the crisis struck, was one of the best quarters for New Markets in our history. With our three very successful recent exits, New Markets achieved top quartile performance across each of our last three funds based on distributed to paid-in capital (DPI) according to benchmarks from Cambridge Associates. Together, with distributions received from escrows from past exits, we returned over 50% of the capital called across our education funds to our limited partners at the beginning of 2020.
This exceptional performance comes as a result of our disciplined approach as value investors based on nearly 30 years of experience. What makes this accomplishment especially fulfilling is the commensurate impact that these portfolio companies have achieved as they have scaled and collectively improved outcomes for over 25 million students and 2 million employees, more than half of which come from at-risk populations. Graduation Alliance has served over 12,000 students through its dropout recovery and other programs. From 2016-2019, Graduation Alliance increased its number of students served by 35% annually. Graduation Alliance has graduated over 4,000 former dropouts across its programs and increased its number of graduates by 100% annually from 2016-2019. We will be releasing our 2020 impact report in the second quarter, which will include additional New Markets portfolio company impact highlights.
In light of our recent set of successful exits, we have taken the opportunity to analyze our 19 exits from our last three funds in order to distill lessons learned and fine-tune our investment approach. Our analysis showed that our most successful portfolio companies tended to serve a more diverse set of students and employees and provided products and services that clearly accelerated economic mobility as measured by certification and degree completion, employability, wage increases, and significantly higher lifetime earnings. Our analysis further reinforced our intuitive approach that value investing (i.e. adhering to traditional Graham and Dodd approach as we have traditionally bought companies at lower revenue multiples, as compared with the higher revenue multiples typical to growth equity) combined with capital efficient growth yields compelling risk-adjusted returns.
Future Initiatives
Our next fund, “New Markets Education Partners III: Investing in the Future of Work and Learning” represents a compelling opportunity to improve on both our financial and impact returns, as we focus on increasing both the supply of, and demand for, skilled human capital and more closely involve corporate employers in building pathways to prosperity to deliver an even stronger value proposition to students and workers. Most importantly, given the current state of affairs, impact focused equity capital will be the vital life blood of companies dedicated to serving increasingly at-risk populations for the next few years as we recover from this crisis with the resilience that American’s have always demonstrated.