Dropping the Ball on 2011 & Ringing in the New Year

As we close out 2011—the year of the daily deal overvaluation, the inability of private equity to get “good ol’ days” financing, the onset of the angel investor gold rush—it’s time to lay down some prognostications and punditry for the new year. We’ve got a comments section (or, feel free to chime in here), so join in the debate, if you’re so inclined.

The Middle Market Gets Whacked on Both Ends: 2011 wasn’t a phenomenal year for middle market private equity. Firms on the smaller end struggled to cobble together financing—some of the Dodd-Franked out of their primary (or only) limited partners—while the KKRs and TPGs of the world feasted on billion-dollar checks from some of the country’s largest pensions. These same pensions—once, likely LPs for PE—are publicly distancing themselves from the asset class, and in some cases, after suffering PR nightmares after their executives became too cozy with private sector workers. To make things worse, the financing market was downright unforgiving. Some middle market firms that jumped ass-first into restaurant and dining sector deals could take a beating if commodity prices skyrocket (see: Friendly’s). Others that are long on the US consumer (retail, for example) will struggle to prove themselves to LPs if the economy tanks again, dragging their signature deals down with it. The IPO market isn’t looking good for PE, so where will the middle market generate its returns?

Large Cap PE Keeps On Winning: Part of middle market PE firms’ inability to fend for themselves in the future will come from their inability to bound into new countries the way, say, KKR or (to use an oversized middle market example), Riverside have. Developing economies in countries with many multiples the US’ population and far friendlier regulations are poised to drive a generation of investment out of the US and the biggest private equity firms have long had plans in place to export their strategies. Another part of large-cap PE’s success comes from the shift by LPs to consolidate the number of GP relationships—and, multi-billion dollar funds that have a successful history are poised to benefit from this as well.

The Angel Bubble Begins to Pop: Companies that patched together A rounds won’t all be back for a second successful funding. Lately, angel boardrooms have gotten packed as it has become easier to become an entrepreneur and easier to back companies (to put it the nicer way).

However, the Future Billion-Dollar IPOs of get B-round funding. They’re out there. Not every company to secure a little bit of angel backing, and perhaps one or two B to C+ VCs’ capital, is going to go under. The particles of the cloud economy are only beginning to gather (to provide one example of a budding industry) and there are plenty of businesses to be developed in the US—not just in Silicon Valley—in several industries.

Multi-Strategy VCs (IE, those in tech, Internet & life sciences) will increasingly whittle back to core strategies as the industry moves to a single-focus investment focus. Like just life sciences, or just Internet/tech.

If the Economy Tanks Again, expect mezz lenders to jump back into the driver’s seat for some short term boom times. And, if/when that happens, expect to see sellers in the private equity secondaries market reduce would-be buyers’ ante. Lately, I’m told, the secondaries market has seen many prices run up around par, so to speak.

Last but not least, these silly peHUB avatars that plague my existence will die a swift and just death. I’ll personally see to this last one.