Lou Moelchert doesn’t fall prey to fads, and he never goes for broke. It’s why
“I wouldn’t say the venture capital model is broken, but we think it takes a certain type of equity market to get the exits you need to rationalize the risk, and we don’t see that in this market environment.”
Moelchert’s cautious style informs Private Advisors, which manages $3 billion in hedge fund assets, and $1 billion across two private equity funds of funds. (Private Advisors’ third private equity fund of funds is about to close on an undisclosed amount, according to one of its limited partners.)
Moelchert is quick to say that venture capital has treated him well in the past. The 66-year-old was schooled as an LP, literally, at the University of Richmond, whose endowment he helped grow from $50 million in 1975 to $1.2 billion in 2006. PE Week Senior Editor Constance Loizos caught up with Moelchert recently to ask him about his thoughts on private equity.
Q: What drew you to venture capital at the University of Richmond?
A: It became clear to me in the early ‘80s that the so-called riskier, alternative assets, including venture capital, were less volatile and offered higher rates of returns because the most talented managers were moving over to [manage] them.
Q: Has that changed, in your view?
A: I think it’s more important than ever to get access to a small number of ultra high-quality partnerships and if you can’t do that, it’s hard to justify putting the money to work there.
Q: The buyout firms you back manage about $230 million in assets, on average. Why has that become your sweet spot?
A: Two reasons. If you find talented GPs, you get venture-like returns for significantly less risk. We also think what you pay for an asset going in has an awful lot to do with how much profit you’re going to make when you sell it. A lot of our managers are buying companies with annual revenues of $150 million or less, and it’s much easier to double or triple your money than if you purchase a $1 billion company.
Q: You’ve been an LP for decades now. What’s the biggest lesson you’ve learned?
A: What I’ve learned over the years is that to be successful over time, you have to be more concerned about losing too much money in the downturn than in shooting out the lights during a bubble.
Q: Does that mean you’ll never back venture capital again?
A: Not now, but that may change. Things go into and out of favor. You have to keep flexible about your options.