Following the Money - 15 Years of SEC Filings Analyzed

What over a decade of private equity sales tells us about the past, present, and future of investing and startups

Photo Credit to Markus Winkler

All data sourcing and analysis source code is available at https://github.com/danthegoodman1/SECFormDAnalysis

The original data set can be found at https://www.sec.gov/dera/data/form-d

As the ago-old saying goes: “Just follow the money.”

In doing so I analyzed over 550,000 SEC Form D (and D/A) filings to discover the trends of private equity offerings since 2008, joining extensive disparate data all made publicly available by the SEC.

This analyzed data shows the history of investing, a curious future, the rise of technology, and potentially its successor.

Really Fast, What is a Form D?

A Form D is a notice that a private company files with the SEC to apply for a tax exemption when selling shares. Most companies will take any opportunity to exempt themselves from taxes, so it should be fair to assume that this is representative of the majority of private companies. A Form D/A is simply a Form D ammendment, for example if they extended the number of investors or the total amount sold after the initial filing.

A Quick Note:

Some graphs are interactive. You can hover to view data, click and drag to change time range, single click on series to hide/show a category, and double click on a series to isolate them!

Another fair warning is that the interactive graphs are up to 3.5MB in size!

A Naive Glance Shows Growth

Simply looking at the number of submissions per quarter shows that we have been on a steady trend for a decade. Come 2021, submissions take off like a rocket ship:

One would tend to make two immediate observations here:

Q1 is quite popular for filings, could there be tax implications?

2021 onward has seen significant growth from an otherwise mostly flat time series.

One might also assume that growth will continue, however not all dates are created equal when it comes to SEC filings: If we observe the offering date as opposed to the date that the form was filed, we see notably different results:

Observing Fig. B, while data is more granular, we see that the number of offerings for private security sales maintains a similar shape to that of the number of filings.

The notable difference is 2022, where the number of offerings sharply decline to similar levels as the start of the COVID-19 pandemic (which is also clearly visible in early 2020). Such levels has not been seen since 2009.

People are currently discussing “volatility in VC funding” and “VC hedging”, but this is behavior that is unprecedented.

Like the public markets, the number of private equity offerings is also impacted by economic health (2008 housing crisis recovery, COVID-19 recovery), and later we will discover even more symptoms as we dive deeper into the data.

Who Is Investing In Private Companies?

As we dive deeper into the SEC filings we can begin to look at the investors themselves, and what categories they belong to:

Hedge Funds have traditionally dominated the private equity investment scene, however starting in 2012 there is a steady decline in investment frequency.

Could this be due to the rise in High Frequency Trading (HFT) being a far more predictable, scalable, and immediately profitable business model? This seems likely.

Another trend that is immediately notable is the rise in activity from Venture Capital Funds (VCs) in the private equity space since mid-2018. The number of filings per month jumped nearly 10x within the span of a few years.

However with all investment fund categories, we see a similar dip in activity in early 2022, which will become a recurring theme.

Taking a deeper look at the share of total investments, the rise of VCs becomes even more apparent:

Fig. D illustrates with greater clarity the trimming in Hedge Fund activity, and the noteworthy increase in VC activity in the private equity space.

Immediately, the first question I asked was:

Are VCs becoming more active, or are there just more VCs?

We can use the same data to answer:

Between Fig. E and Fig. F, we can see that VCs are not notably increasing their activity over time, even with 2021 being an extremely popular year for VC investment, the typical number of recipients per round generally remains low.

Where the story unfolds is in the number of investors. More investors means more investments made. The growth of the number of active VCs show us the source of the growth in filings.

What Are They Investing In?

The first step is to look at the youth of the companies they are investing in: Are they investing in new companies or a proven track record?

Observed in Fig. G, most of these companies have only filed a Form D once. While this is not conclusive evidence that the majority of companies are new, it is indicative of such with further support from Fig. H:

Fig. H shows us that the number of first-time Form D filers are increasing as well, with a similar shape to the activity of VCs.

Somewhat naively we can assume that VCs invest mostly in first-time filers, which may very well be first-time fund raises or bootstrapped startup exits.

Another notable observation is that the number of companies that are filing subsequent rounds remains relatively flat, which is indicative of few potentials:

Companies only need one round of funding to become sustainable

Companies have recently exited (and thus do not appear again in Form D filings)

Companies have not sold more securities

Comapnies are not filing for more tax exemptions for private securities offerings

Companies don’t make it

Now, let’s dive in to which industries these investors trust with their wealth:

Fig. I - Interactive

Note: I removed the top item of ‘Pooled Investment Fund’, since that represented such an umbrella of categories like VC funds, Hedge Funds, etc. - Those funds are investors in the remaining categories.

A few observations immedaitely jump out to me:

Technology is not rising as fast as one might expect.

Being in the tech world it feels as if we are expanding like the universe, new startups announcing 8 and 9 figure funding rounds feels like a weekly occurance. However looking at the data, their filing frequency grows surprisingly slow.

Again, many could not be filing for exceptions and not need a Form D, but as a general trend I am surprised.

REITs, or Real-Estate Investment Trusts, have recently seen a notable increase in popularity. Could this be because of recently economic hardship caused by market forces like inflation, and they are seen as a safer investment?

This we’ll discuss later as further analysis and interviews shed more light on REITs.

The number of filings are only part of the story, if we look at the total amount of money invested we see anther picture entirely:

Fig. J - Interactive

Looking at the total dollar amount invested, we can actually see that Insurance takes the cake! Maybe this could be the wealthy creating life insurance policies to can borrow against as a tax protection strategy? We have seen many new millionaires and billionaires created within the last 5 years, and many of them are using life insurance tax strategies.

Coming in second place, REITs. The trends of recent months show that it is rising in value and frequency.

Maybe not so surprisingly, we see oil and gas spiking... thanks Russia?

Where does tech stand? 5th place, and it’s going down:

If we isolate tech, we can see a similar pattern of total investment decreasing as well, after peaking in early 2021. Many questions arise:

Did inflation and other economic stimulus cause too much artificial growth, and we are not correcting?

A golden age of tech investments end?

Where and when will this down trend end?

While I don’t have the answers to these questions (and I don’t think anyone could accurately), they provoke much deeper questions into the practice and nature of investing in technology.

How Much And How Often Are Investors Investing?

Diving more into the filings themselves, we can see that while investment frequency has generally been increasing (ignoring 2022), investment values have been declining over time:

The median of total equity sold in USD has been on a steady decline for a decade.

Diving into the percentiles, we find some interesting observations:

While the 99th percentile of filings have remained relatively flat for over a decade, even the 90th percentile has been on a decline since 2019. Looking at the median, we see a sharp drop in 2019, with a steady decline since.

Looking at some of the top investors, there are some interesting results that align with previous REIT observations:

Fig. M - Interactive, hover over the data!

Note: I left the gaps between data points to better show the patterns that emerge.

EquityZen is basically a private company stock market.

Scott Harrison is “Portfolio Manager at Verition Fund Management” (Hedge Fund)

Lori Mayfield, Patrick Whelchel, and Charles Harrison are all high level executives at “REIT Funding LLC”, more evidence of recent REIT investing popularity.

Real Estate on Fire - Why are REITS so popular recently?

Fig. M might be the most informative chart of all, as it illustrates a clear trend among the most frequent investors.

We observe a distinct correlation between Lori Mayfield and Scott Harrison (REIT and Hedge Fund). While they may not work at the same company, maybe their companies participate in many of the same investments? Very likely as their investment timings and frequency are nearly identical, with slight offsets. Maybe Charles and Scott are related as well?

According to some recent filings, it seems that Verition is investing in REITs, so it would not be so naive to suggest that they might be investing in the same assets.

Another of the largest investors of the last few months, Park Hill Group, has a specific real estate division. They are a publicly traded company (NYSE:PJT) that invests in private companies and real estate.

While Fig. I and J might just show recent quarters as “another spike” for REITs, Fig. M indicates otherwise: REIT investments are clearly rising significantly in frequency over time, following a far more predictable growth than the previous figures suggest. The growth seems to be exponential, which speaks volumes for predictions of the future... or as intervews show later, this growth might be deceptive.

Similarly to VCs, REIT investors are investing more and spending less per investment.

Could the surge in REITs be correlated so the increasing in real estate prices?

Since COVID, we have seen that the cost of housing has risen dramatically as inventory has crashed (generally speaking). This creates a “seller’s market”, where the sellers can get far more favorable deals.

To investigate more into commerical real estate, I spoke with an analyst at Avison Young (a commercial real estate firm) about any notable changes in investment within the commercial real estate world he might have observed.

According to the analyst, industries like industrial, life sciences, and other laboratories have recently been purchasing significantly more commercial real estate. What is especially interesting is that the companies buying the properties are investors that have nothing to do with the intended use case of the property, but rennovate the buildings for the intended use (life science, lab, etc.) to charge premium rent prices for pre-rennovated facilities.

These investors will also aim for “Trophy Tenants” that raise the value of the property directly.

These properties can go for extreme prices. For example, an old Amazon warehouse over 3M sqft recently sold for $397M. Land for datacenters can go for upwards of $1.5M/acre.

But why are investors purchasing more properties now than before?

Taxes.

According to other sources, there are 3 major items that could impact the populairty of REITS:

Increase corporate tax rates

Changes to tax codes for deferring paying taxes on real estate (like-kind exchanges)

Expansion of what is considered a REIT (e.g. adding electric vechicle charging infrastructure as a REIT)

Other Observations

As expected, most of these companies are incorporated in Delaware:

We also observe the trends of different company entity types filing over time:

The increase of corporations has remained surpisingly linear, while LLCs are growing slightly faster every year, with LLPs following suit the last few years.

So, What Did We Learn?

A lot!

Throughout this report we see how the impacts of the COVID pandemic, inflation, economic correction, and new tax codes play a role in private equity investments.

Over time investors in private equity are investing less in each offering, yet with the increase in total active investors the sum of investments has increased up to a surge in 2021, and a sigificant downturn in 2022.

Technology investments have taken a significant downturn since 2021 highs, and investments as a whole down to levels we have not seen since the start of the COVID pandemic, or prior, 2009.

Through this transition, VC firms are taking over the majority of investments in private equity in both frequency and in volume.

REITs and real estate are quickly rising as a popular private asset by both frequency and amount invested. This is due to many changes that make REITs a far more appealing investment than prior.

Insurance maintains the dominant private asset to invest in by volume, and has shown fairly steady growth over the last decade, mostly unaffected by the trends of other industries.

As the economy winds down, so does frequency and volume of investments from the wealthy.

COVID made a clear impact as illustrated in many charts, however the economic inflation surely caused aggressive stimulus that is now correcting.

However the trends of investments change, first-time filers still maintain as the dominant private security sellers. While this does not guarantee that these are first-time raises or exits, it surely suggests it.