Lowered Expectations

I had a brief chat (very) early this morning with Kevin Landry, chairman of TA Associates. At issue was a rumor I’d heard about how TA expects around 60% of its 2008 deals to be for companies that have already received venture capital or growth capital.

If true, it would be a step in the right direction for the overall private equity industry: Portfolio-heavy VCs selling off companies to fund-heavy buyout firms. Win-win. Plus, these are companies already used to having institutional sponsors, so they’d be less prone to culture shock.

What Landry gave me was a mixed bag. On the downside, he said that the 60% figure is wildly inflated. On the upside, though, he read off a list of recent deals that seems to put the figure at around 20 percent. That’s still much higher than it was just a few years ago.

I asked Landry for why TA was more likely to do these deals today than in 2003 or 2004, and suggested it was the byproduct of tech industry maturation. He dismissed my rationale, instead arguing that VCs have lowered their return expectations. It took a while, he said, but the lack of available exits finally took its toll.

So a follow-up for you, dear reader: If it took VC firms nearly four years to adjust their return expectations from the tech bubble years, how long will it take buyout firms to come down from their 2005-Q2 2007 cloud? Something I wished I had asked Landry, the moment after I hung up.