Private Equity
Every start-up board is having the same conversation these last few weeks: How will this economic crisis affect us and what should we do in our own business? We had our annual investor meeting this week and warned our investors that it was going to get ugly over the next year or two (surprisingly, they indicated that some of their other VC investors had sounded positively pollyanna during this annual season). For all the reasons I described in my recent blog, "Short-Term Bear, Long-Term Bull," we remain a fan of the start-up economy in the long run. That said, CEOs need to take swift action to make sure they survive to see the long run. For as economist John Maynard Keynes observed, "In the long run, we are all dead." My partner, David Aronoff
1 min read · 10 October 2008
At a recent private equity conference, Stephen Schwarzman was asked why he thinks Blackstone’s share price has fared better than those of the investment banks (see Erin Griffith’s summary here). Schwarzman attributed Blackstone’s relative resilience to the fact that it has long-term capital and is not subject to the daily money-market pressures required to support trading operations. Indeed, a key benefit of the private equity business model is that you can afford to be patient with your portfolio companies. However, the long-term nature of private equity capital is often overstated. Private equity funds have commitments from investors to call capital as needed to make investments. Most funds hold just minimal cash or other assets that could be considered actual long-term capital. While skeptics may wish to dismiss as semantics the distinction between commitments for and actual long-term capital, in periods of economic stress this difference can be highly problematic. Individual investors are often the first to default on capital calls. In the Internet boom, many of the founders and early employees of recently IPOed startups made commitments to venture capital funds with ten-year partnerships. When the market value of their stock options collapsed, many of these investors were unable to meet their capital calls—so much for long-term capital.
4 min read · 08 October 2008
3 min read · 07 October 2008
5 min read · 03 October 2008
2 min read · 01 October 2008
2 min read · 01 October 2008
Investment cycles are predicted to last longer, exits will be tougher and firms will tighten their belts with new fund-raises coming further apart than before. Competition for a place at the table in firms will be greater, so expect compensation to begin cycling downward in this year and throughout 2009. We could very well see firms saying, in effect, this year’s bonus is that you get to keep your job.
4 min read · 30 September 2008
Politicians want growth so they allow rates to stay low. (Give the people what they want to get elected) Dad used to pay 10% for his $50,000 mortgage but times have changed and people want things they can’t afford – NOW! They want bigger, nicer houses and they don’t want to pay an arm and a leg. Thanks to low rates times are good – really good. In fact, times haven’t been bad for so long, most young people don’t remember any hardship. Get the biggest house with the cheapest and most flexible mortgage you can get and forget about it. Low interest rates create demand for home-loans. (Money is cheap) Your sophisticated older brother just got his MBA and is now a Wall Street banker. He hatches a pretty nifty scheme. He loans you $5,000 at 2% interest to build a new tree house.
10 min read · 29 September 2008
4 min read · 22 September 2008
The following is loosely based on a very good article in today's NYTimes WASHINGTON — After a series of government interventions in the private markets, one seemingly more astonishing than the next, lawmakers found themselves confronted on Wednesday with the question of when and where to draw the line on future aid. But with billions of dollars in financial backing already authorized for Wall Street, and with Election Day fast approaching, Congressional leaders seemed uninterested in denying help to large employers of Americans. Even as lawmakers in both parties unleashed a barrage of questions about the wisdom of a government rescue for the American International Group, support seemed to be growing quickly on Capitol Hill for $532 trillion in venture capital to assist the ailing start-up industry. The chief executives of 172,972 start-ups who have been unable to get VC funding this year met on Wednesday afternoon with House Speaker Nancy Pelosi. When they emerged, they expressed optimism that the investments would be included as part of a budget resolution that is needed to finance
4 min read · 18 September 2008
