Sent to you by Sean McBride via Google Reader: The Cash Panic Sweeping The VC Industry via Silicon Alley Insider by Henry Blodget on 11/7/08 Why have VC firms clamped down on investments so fast? Why are they shouting from the rooftops that portfolio companies had better start cutting costs immediately?
Well, for one thing, because they're not boneheads. This economy has the potential to become the worst economy since the Great Depression (it isn't yet, thankfully). VCs see this and understand that: - Profitable exits are going to be a lot rarer in the next couple of years, and - Potential investments--including current portfolio companies--are going to get a lot cheaper in the next few years (and, therefore, future returns are going to get a lot higher) . That logic alone explains why money has gotten so tight so fast. But VC sources say there's also another important dynamic going on: The folks who supply the money that VCs invest--Limited Partners such as pension funds and endowments--are now so strapped that some are beginning to default on commitments. In VC-land, in other words, as elsewhere, the oxygen is being sucked out of the room. Here are some notes from SAI conversations with two VC sources this morning: There are now unbelievable difficulties in the LP world. Many of the best names are having liquidity problems. They are having trouble meeting capital calls from Private Equity and VC firms and need to sell stocks to get cash. Much of their stock portfolios are tied up in hedge funds with lockups, however, so they can't liquidate those positions. Some Limited Partners are starting to default on their commitments to VC firms. In some cases this can mean they lose their investment to date, but since the LPs think the the VC funds are going to be losers anyway it does not matter. Some second-tier VC funds are looking at the fine print to see if they can sue the LPs who don't follow through on their commitments. [In case you don't know how VC funding works: When a VC "raises" a $100 million fund, what the firm really has done is gotten commitments from LPs that they will deliver $100 million over the life of the fund. The firm then issues "capital calls" over the next few years and gradually draws the money down. It is these calls that some LPs are reportedly starting to default on.] The most agressive LPs have been hurt the most. For example, a rumor is circulating that Columbia's endowment fund is illiquid [can't raise the cash it needs to fund current commitments]. Harvard is reportedly trying to sell 1/3 of its private equity portfolio at a steep discount in a secondary offering. You would only do this today if you are really in deep doo doo. The market price for LP positions in VC funds on average is 75 cents on the dollar. Limited partnership positions in PE funds are selling for 50-60 cents on the dollar. This suggests that $50-$100 billion in value has gone in the past few months from PE funds alone. One VC thinks that all of the major university endowments are down 25-30% [this sounds extreme to us]. Big universities are heavily in commodities, PE, VC hedge funds, and very little in bonds. They are getting killed across the board Pension funds are a little bit less aggressive but they also may be more exposed soon. We have only spoken to a couple of VCs about this, and we assume many firms are not affected. We have heard the endowment scuttlebutt before, though (Princeton was a name that came up a few weeks ago), and it makes sense: University endowments need to fund massive cash spending every year, but they also don't like to compromise annual returns by keeping much of the portfolio in cash. So now that the value of ALL assets has plummeted and so many endowment investments are subject to lock-ups, it certainly sounds plausible that the funds are having trouble raising necessary cash. Any VCs or LPs care to weigh in? We'd love to hear from you. All sources obviously kept confidential. [EMAIL PROTECTED] Things you can do from here: - Subscribe to Silicon Alley Insider using Google Reader - Get started using Google Reader to easily keep up with all your favorite sites
