Well, for one thing, because they're not boneheads. This economy has the potential to become the worst economy since the Great Depression (it isn't yet, thankfully). VCs see this and understand that:
- Profitable exits are going to be a lot rarer in the next couple of years, and
- Potential investments--including current portfolio companies--are going to get a lot cheaper in the next few years (and, therefore, returns on future investments are going to get a lot higher than today's) .
That logic alone explains why money has gotten so tight so fast. But VC sources say there's also another important dynamic going on: The folks who supply the money that VCs invest--Limited Partners such as pension funds and endowments--are now strapped for cash because the values of their own portfolios have plummeted (and so many of the investments are illiquid). Some are reportedly beginning to default on or defer commitments. In VC-land, in other words, as elsewhere, the oxygen is being sucked out of the room.
Here are some notes from SAI conversations with two VC sources this morning:
There are now unbelievable difficulties in the LP world. Many of the best names are having liquidity problems. They are having trouble meeting capital calls from Private Equity and VC firms and need to sell stocks to get cash. Much of their stock portfolios are tied up in hedge funds with lockups, however, so they can't liquidate those positions.
Some Limited Partners are starting to default on their commitments to VC firms [this is scuttlebutt, not firsthand knowledge; the sources' firms have not seen defaults]. In some cases this can mean they lose their investment to date, but since the LPs think the the VC funds are going to be losers anyway it does not matter. Some second-tier VC funds are reportedly looking at the fine print to see if they can sue the LPs who don't follow through on their commitments.
[In case you don't know how VC funding works: When a VC "raises" a $100 million fund, what the firm really has done is gotten commitments from LPs that they will deliver $100 million over the life of the fund. The firm then issues "capital calls" over the next few years and gradually draws the money down. It is these calls that some LPs are reportedly starting to default on.]
The most agressive LPs have been hurt the most. For example, a rumor is circulating that Columbia's endowment fund is illiquid [can't raise the cash it needs to fund current commitments]. Harvard is trying to sell 1/3 of its private equity portfolio at a steep discount in a secondary offering. You would only do this today if you are really in deep doo doo.* [Private Equity Online is reporting this--see below]
The market price for LP positions in VC funds on average is 75 cents on the dollar. Limited partnership positions in PE funds are selling for 50-60 cents on the dollar. This suggests that $50-$100 billion in value has gone in the past few months from PE funds alone.
The major university endowments are reportedly down 25-30% on a mark-to-market basis [sounds extreme, but certainly possible]. Big universities are heavily in commodities, PE, VC hedge funds, and very little in bonds. They are getting killed across the board
Pension funds are a little bit less aggressive but they also may be more exposed soon.
We have only spoken to a couple of VCs about this, and we assume many firms are not affected. We have heard the endowment scuttlebutt before, though (Princeton was a name that came up a few weeks ago), and it makes sense: University endowments need to fund massive cash spending every year, but they also don't like to compromise annual returns by keeping much of the portfolio in cash. So now that the value of ALL assets has plummeted and so many endowment investments are subject to lock-ups, it certainly sounds plausible that the funds are having trouble raising necessary cash.
Any VCs or LPs care to weigh in? We'd love to hear from you. All sources obviously kept confidential. hblodget@alleyinsider.com.
See Also: Harvard, Yale, et al, Down 25%-30%?
Harvard Management Company is looking to unload roughly $1.5 billion in private equity stakes in the secondary market.A secondary market source described the university endowment, which had $36.9 billion in assets as of 30 June, as a highly sophisticated limited partner making a proactive decision to seek liquidity and rebalance its portfolio based on cash flow models.
Although the volume of supply in the secondary market has risen of late, secondary investors expect it to surge further in the first half of 2009 as more LPs make a similar move to access needed liquidity...
Harvard’s secondary sale will drive down prices in the secondaries market because it will take $1.5 billion of demand out of the market at a time when supply is not rising, the investor added.
For the 2009 fiscal year, Harvard has a target private equity allocation of 13 percent up from 11 percent for the 2008 fiscal year. The endowment currently has roughly $4.5 billion in private equity commitments, according to sister data web site Private Equity Connect.
No comments:
Post a Comment