A lot has been said about the “bridge to nowhere,” but here’s an idea that might be a win/win/win: Right now the larger private equity firms have raised significant capital that they have little ability to use for what could be some seriously real time. Their choices are to buy things with all equity (not a bad […]
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
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.
The mood was somber on the 5:52 a.m. train as it pulled into Greenwich last Monday. A week after passengers had been shaking their heads at the Lehman epitaph, Goldman and Morgan Stanley were sending out releases that signified, in the words of The Wall Street Journal, that “Wall Street…will cease to exist.” I am […]
It is now October 2008 – we are in the middle of the most significant financial crisis since the Great Depression and about a month before the most significant change election in a generation. At this unique moment in time, the world looks quite a bit different than it did when we approached the last […]
Last week, Reuters published a story with the headline Storied banks abandon Wall Street model. How about this headline: Reuters abandons news model in favor of 8 year old stories? Anyone who thinks it’s news that Goldman and Morgan abandoned their traditional business model has been asleep since 2000. Here’s the real story. The traditional […]
Every year, Microsoft bigwigs trek down to Silicon Valley and brief the VC community on their world view and plans for the future. They are kind enough to invite East Coast VCs, not just locals, and so I flew out last week to partake in the annual event alongisde a few hundred of my VC […]
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.
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.
I don’t need to repeat the facts behind last week’s financial turbulence – from Lehman Brothers to Merrill Lynch to AIG and beyond. To paraphrase Jon Stewart, it’s a good thing the audience can’t see me cry during the commercial breaks. Beyond the obvious coverage in the Wall Street Journal, Business Week, The Economist and […]