Private Equity’s Common Bond

Readers often ask why this publication covers two asset classes that seem to have little in common: Leveraged buyouts and venture capital.

Part of it is publishing legacy — using the (then) flexible term “private equity” as a way to play market cycles. When buyouts were hot, we would cover buyouts. When VC was hot, we would cover VC. And vice versa.

But there is also something much less cynical: Each asset class is funded by the same group of investors. Not just the same institutions (public pensions, universities, etc.), but also the same individual investment managers. Sometimes they are “private equity officers” and sometimes they’re “alternative asset officers.” At smaller shops they’re the CIOs.

What this means is that there buyout and VC firms are engaged in an ongoing competition for dollars and LP attention, even if neither side consciously realizes it. Buyout firms have obviously won the battle in recent years, with consecutive years of record hauls. Venture has risen steadily too, but not at nearly the same rate. In fact, it could be argued that venture fundraising has increased at a lower rate than have average LP allocations to venture. After all, why listen to pitches from a dozen VC firms looking for $20 million, when you can just plug the same $240 million into a mega-buyout fund?

What I’m hearing from LPs and placement agents now, however, is that 2008 could finally be the year in which VCs begin to even up this tug-of-war. Not in terms of total dollars, of course, but in terms of percentage change over the preceding year. The explanation for this (possible) shift is that the credit crunch has scared LPs silly, and they are worried that those giant checks could soon come back to haunt them. Venture, on the other hand, is being viewed as overlooked, and possibly offering more reward with less risk. Feel free to laugh at that last part – particularly if you’ve seen median VC returns since the Internet bubble – but it’s no sillier than stocking up on mega-funds that club up and charge outrageous transaction fees…

 

Btw: U.S.-based buyout firms raised $276.7 billion in fund capital last year, compared to $225.6 billion raised in 2006 (itself a record). Of this, $135.1 billion went to funds of $5 billion or more.

U.S.-based venture capital firms raised $34.67 billion in 2007, compared to $31.7 billion in 2006. Here’s some additional detail on the VC figures: FundraisingRelease.pdf