Unicorns are taking over private equity

Unicorns are called unicorns because they’re supposed to be rare. But in recent years, the quantity of companies collecting billion-dollar valuations has ballooned. Fifty-three startups earned unicorn valuations last year, and another 23 have joined the club so far in 2018.

For the venture capital firms that typically back these companies, that means the prospect of major returns. There are now hundreds of unicorns out in the world. Some will surely flame out. But perhaps one or two will become the next Apple or Facebook, companies that grow to such a gargantuan size that movies are made about their creation. Getting in early enough with one of those businesses could make an investor’s career.

And at a growing rate, private equity firms are taking notice, backing companies at earlier stages than normal in pursuit of a windfall. The past five years have brought an explosion of PE investment in unicorns, per PitchBook data, with deal count quadrupling and the value of those deals expanding at an even more extraordinary rate:

Several of the biggest names in private equity are among the firms leading the charge. Warburg Pincus has made 12 investments in unicorns since the start of 2007, according to PitchBook data, more than any other buyout investor. KKR has backed 10 companies with billion-dollar valuations in the past dozen years, while Silver Lake has completed nine such deals.

All three of those firms have been investing in unicorns using software to transform transportation. KKR is a backer of both Go-Jek and Lyft, Warburg Pincus is an investor in Go-Jek and Mobike, and Silver Lake has supplied financing to Didi Chuxing.

Here’s a selection of some of the other past and present unicorns these firms have backed since the start of 2007:

It’s no coincidence that all three of those firms are active investors in software. That sector has been the dominant arena for PE investment in unicorns in recent years: Of the 190 deals involving private equity firms and billion-dollar companies between 2014 and 2017, 91 were in the software sector. Ranking second place in frequency is the consumer goods space, with 22 deals.

Here’s a full sector-by-sector breakdown of what sorts of unicorns PE firms backed between 2014 and 2017:

The majority of the unicorns in private equity portfolios are based in North America, although Asia isn’t far behind. Out of 246 investments by PE in billion-dollar companies since the start of 2007, more than 90% have occurred on one of those two continents. Deals in Europe are notably sparse, with firms making just 15 investments in the region’s unicorns over that time period.

North America has a slight edge over Asia in terms of the quantity of unicorn deals—though that gap has been dwindling in recent years. In terms of the size of rounds that are drawing private equity interest, though, Asia already has a clear lead, as you can see in this chart breaking down the percentage of overall PE capital invested in unicorns by region:

That trend is also reflected in a ranking of the most valuable PE-backed unicorns. Five of the top 10 are located in Asia, including Chinese juggernauts like Xiaomi and Toutiao. Combined, those five businesses have a current valuation of more than $100 billion.

Another trend among the priciest unicorns in private equity portfolios is a previously mentioned presence in the ridesharing sector. Uber is the most valuable private company in the world; it’s also the most valuable unicorn in the world with PE backing. Lyft and Grab are two PE-backed rivals with lofty valuations of their own.

In some ways, the growing trend of PE firms investing in unicorns reflects the continued blurring of the lines between traditional buyout shops and VCs. Private equity is investing more than ever in tech, led by firms like Silver Lake and Vista Equity Partners that proved specializing in software is a viable strategy. And large-scale investors such as KKR and TPG are leading an industry-wide push into investments at earlier stages, as firms once focused on LBOs devote more of their resources to tracking startups.

Is it PE? VC? Something in between? No matter the answer, the reason is clear. For investors of every stripe, hunting for unicorns often pays off.