The Absurdity of a Non-Cyclical Cycle

The buyouts market is actively courting a massive contradiction: One the one hand, you have a massive drop in deal volume, which is expected to be prolonged. On the other, you have a massive spike in fundraising, with firms raising their largest-ever funds (regardless of target market).

I discussed this with lots of people at Buyouts East, and most of them looked at me with condescending pity. “It’s just a return to more traditional investment periods of three to five years,” they said. “No one is worried about this.”

Kind of like no one was worried about how subprime would eventually slam the macro credit markets? Let me suggest that this is indeed a contradiction, but not yet mature enough for buyout firms to be grappling with. It is very reminiscent of early 2001, when venture capital firms continued raising record sums, despite noticeable economic troubles that would make it nearly impossible for all of that capital to be invested. The result there was LP pressure to cut fund sizes (which many firms did), but that didn’t really begin happening until 2003.

I’ve been told that buyout egos are too proud to follow a similar tact, but I really don’t see much ego difference between buyout pros of today and VCs of 2001. At some point, hubris always gives way to survival.