Abnormal Returns (yummy!) cites a piece in Paul Kedrosky's Infectious Greed on the growing overhang in venture capital. Part of the issue for both venture and buyouts, I think, is not that there is an overhang, or not just that there is an overhang, but that a huge number of people are in complete denial that an overhang even exists. As if the runups in prices we are seeing have nothing to do with the cash-up-to-the-eyeballs funds crawling out from under every banker's box.
A reader wrote me the other day to chide me for being "out of touch" with the market on this point. To quote a certain someone, "That's Absurd."
From the Kedrosky piece:
Doug Leone (Sequoia Capital): ...for some reason, there appears to be an insatiable appetite by limited partners to invest in a category (venture capital) that cannot sustain even a fraction of the capital currently within it. It is the craziest thing that LPs are willing to invest so much in a category that has yielded so little and from so few.
E&Y: Why is it crazy that LPs are willing to invest so much in venture capital?
Leone: The returns have been miserable. If you take away a couple of exits, such as Google and MySpace, there haven't been meaningful returns generated. There are [venture] firms that have never generated a positive return or have not even returned capital in 10 years that are raising money successfully. And that surprises the heck out of me. People talk about the top quartile-- its not about the top quartile, it's barely about the top decile, or even a smaller subset than that.
Of course, the problem in the U.S. is more severe than it is elsewhere. I happened to come across some figures from a 2005 PriceWaterhouse/VentureEconomics report on private equity. This little tidbit on all cumulative private equity investment and fund raising
1996 1998-2004 tumbled out:
That's only through 2004. Given the massive fund raisings that have gone on in 2005 and the first quarter of 2006, overhang is beyond unreasonable at this point. Further, I doubt very much that these figures include the multi-strategy hedge funds that are increasingly throwing their hats into the private equity rings.
It is, I feel, a sign of the general myopia on the subject that someone tried to convince me the other day that the fact that hedge funds are doubling the salaries of venture and buyout professionals to jump ship and move over the the dark side is a sure sign of the innate competence of these funds. No, it is not anything like the dot-bomb era. Not at all. (Gee, I wonder if he worked for a hedge fund).