Since the fall of 2008, LPs haven’t shown much appetite for stakes in either venture capital or buyout firms. It’s hard to blame them. Having overdosed on both earlier in the decade, they paid dearly for it once the global economic crisis struck, their public market holdings shriveled, and they were caught with a superabundance of illiquid assets.
Surely the market volatility we’re experiencing will exacerbate the trend, but not all LPs are willing to say so — not yet. According to one investor who represents a prestigious institution and asked not to be named, the current market has “no impact on commitments we are preparing to make. This is a long-term business and the commitments we make now will result in exits years into the future, so today’s stock market doesn’t impact our commitment plans.”
That kind of steadfast mindset is what investing professionals are desperate to see, certainly. During the first half of this year, U.S. private equity funds — both buyout and venture capital — saw an increase in capital committed over the year ago period for the first time in three years. None wants to see the momentum stall out now.
In fact, industry observers are quick to point out why it’s not September 2008 all over again. “One real difference between [the crisis begun with Lehman’s $600 billion bankruptcy] and now is the amount of effort given in the last three years to bolster financial institutions,” says Kelly DePonte, a partner at the San Francisco-based placement agency Probitas Partners. “Most have improved capital ratios. Their balance sheets are in better shape.”
DePonte adds that asset allocation doesn’t look to become an enormous problem again, either. For starters, he observes that the market would have to drop a lot more. “Between July 2007 and March 2009, public market value was chopped in half — even more than half. We haven’t begun to see anything like that” over the last week.
More, says DePonte, because LPs have been slow to hand out money in recent years, they now have “more wiggle room” than they did after committing so much to 2006 and 2007 vintage buyout funds.
Whether they use it is another question entirely.
“It always feels like in the private market we’re lagging — at the very least by a quarter,” says Lisa Edgar, a managing director at the San Francisco-based fund-of-funds group Top Tier Capital Partners, whose management team spun out of Paul Capital Investments in April.
“June quarterly reports are based on June numbers and June comps and won’t necessarily reflect what’s happening today,” Edgar says. “[But] now everyone marks to market, and they are marking a lot to market, including any late-stage deals with revenue and earnings. So we’ll take some hit in September, no question.”
It doesn’t feel like 2008 again to Edgar, but she sees “significant problems with the U.S. economy and its debt burden. And you can’t sweep it under the carpet any longer or pretend it doesn’t exist, which a lot of people did, thinking it wouldn’t affect them.
“There are certain investments built into our pipeline, or investments that are top of the list that we’ll still make. But the shaky economy adds considerable uncertainty, and since the downturn most institutional investors have been treating every bit of capital as precious.”
Even DePonte has his concerns. “Because [the Fed purchased Treasury securities to stabilize the financial markets] and because it dropped interest rates, which papered over our economic problems, people thought they were behind us,” he says. The moves “took people’s blinders off to how sick the economy still is.
“If Spain or Italy ends up in a default situation on its sovereign wealth, I think we’re in new and uncharted waters. It could be to Europe what Lehman was to us.”