Next Things First

The (Even Longer?) Long Cold Winter by Rob Coppedge
another kind of long cold winter

another kind of long cold winter

Consistent with what we’ve been predicting offline, the WSJ reports that a critical number of institutional investors are reporting their private equity allocations to finally be met or exceeded. The article references Coller Capital’s periodic (and always interesting) Global Private Equity Barometer:

One of the big drivers of private-equity investment seems to be running out of steam, as research shows two-thirds of investors expect to reach or exceed their target private-equity allocations by the end of next year.

A survey of 107 investors by Coller Capital, a so-called secondaries firm that buys stakes in private-equity funds from investors, found 66% of investors expected to reach their target private equity allocations. The total included the fifth of respondents who expected to exceed their target allocations.

In their report, Coller goes on to say that institutional interest in private equity hasn’t decreased — just their ability to play:

The problem for investors is not appetite, but stretched allocations and a shortage of cash.

Portfolio management is predicated on ratios — and since the public equity market has tanked, the private equity allocation has grown larger as a percentage of the pie. What this doesn’t take into account is that the private equity valuations often trail the public markets (and significantly — by definition and design, they do not have the volatility of publicly traded, highly liquid securities).

So, for venture capitalists looking to go back to market for new funds and early stage companies looking to raise new capital, this news might add a few months to their long cold winter. We don’t know exactly how this will play out, but the net effect doesn’t look promising:

  1. It will (at best) not be a good year to raise a new institutional venture fund;
  2. Because of the uncertainty of the markets, compounded by the lack of new capital coming in (see #1), existing VCs are going to be extremely hesitant to place new capital; and
  3. So … start-ups are going to have a really really hard time getting capital, growing and perhaps even surviving.

Time to invest in a nice warm coat, gloves and hat … ?

Related posts: A Cold Winter for Start Ups / More on the Cold Winter … From an Entrepreneur’s Perspective

Posted by RobC


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