Cognitive Dissonance Meets PE Fundraising

History shows that the best private equity returns come from investments made in economic downturns. The worse the fiscal shitstorm, the better the ROI.

For example, Cambridge Associates reports that the best vintage for PE funds over the past two decades was 1991 — a year that opened in the midst of a recession. The next-best vintage was 2001, which played host to a recession for eight months.

Considering that 1991 and 2001 can’t hold a candle to our current fiscal mess, PE funds raised in 2010 should eventually be considered on par with a 1996 Borolo (yes, I had to look that up).

Except for one not-so-little problem: Precious few firms are able to raise funds right now.

It’s not for lack of trying, but rather for lack of LP interest. Just ask Blackstone Group, which has secured less than $1 billion in commitments over the past year. Or any number of firms that have suspended fundraising activities, hoping that “next year” will be the path of least resistance (i.e., kick the can down the road).

During an LP discussion I moderated last week at Columbia Business School, panel consensus was that LPs would mostly sit on their hands until 2011. When I pointed out the contradiction between that strategy and the time-tested way to maximize returns, I got nervous laughter, shrugs and some denominator effect claptrap (true eight months ago, much less true today — as evidenced by Stanford University’s decision to pull all those fund positions from the secondary auction block).

Some might suggest that fundraising lulls are the very conditions that produce outsized ROIs, as there are fewer buyers competing for deals. Perhaps, but I have a hard time believing that explains why LPs — one step removed from direct dealmaking — aren’t making many new fund commitments. Instead, I think they are in the midst of collective cowardice.

You know that old line about how you can’t get fired for buying IBM? Well, today you can’t get fired for passing on a private equity fund. Doesn’t make it a good decision, just a safe one.