Lessons learned

In 2008, when I started covering private equity, this was a different industry.

The story on everyone’s mind was: Who is the next to fall? Which firm was going to lose another portfolio company? Which limited partner would be unable to meet a capital call and default? Whose fundraising was about to freeze solid?

It was an interesting way to get introduced to the industry, totally missing out on the bubble years and coming in on the downswing.

Things are different these days, obviously, but from my perspective, people do seem to have learned a thing or two.

Fundraising numbers are up, but they are nowhere near the peak levels of 2007. GPs have been distributing record amounts of capital to LPs, who in turn are reinvesting it with a very careful eye – looking only for those firms that have solid, proven track records.

That’s why fundraising in today’s inflated environment remains somewhat muted, at least relative to what was going on in 2007. LPs are smarter. They aren’t as ready to fall at the feet of self-proclaimed or media-proclaimed Masters of the Universe.

This is a good thing.

It shows lessons were learned, and institutional memory at LP organizations has remained intact, enough that investment officials and board members are heeding the call of the past. Let’s hope anyway.

The issue I see now is the seeming mesmeric spell some GPs cast over the LP community. While LPs are pickier these days, when a top-performing manager comes to market with a new offering, much of the LP world herds together and rushes to put money to work with the superstar.

Past performance is not a guarantee of future success, goes the saying. But in the LP world, you can’t get fired for putting your money to work with the known quantity. The unknown manager – the young firm, the spinout shop, the emerging market cowboy – this is where making a bet can get you in big trouble with your employer.

So capital floods into the superstars. This kind of demand is leading to some managers setting more aggressive terms on their new offerings, angering their longtime limited partners, some of whom are re-thinking their relationships. Some of these one-and-doner’s will raise too much money, expand beyond their sweet spot and investors will suffer for it.

And in miniature, we’ll go through some of what we went through in 2007. But to a lesser extent this time, because investors are being more careful today. Hopefully the lessons of the past have been burned solidly into the fabric of the LP community, so that every up cycle doesn’t become a bubble.

A quick note: I’ve been tapped to head up private equity coverage for Buyouts Insider, publisher of Buyouts magazine. As such, I’ll be guiding our coverage for Buyouts as well as sister publications peHUB and peHUB Wire. David Toll, the longtime editor of Buyouts, is now Executive Editor of Buyouts Insider, overseeing all editorial coverage for the group. He will continue to write for the magazine, time permitting.

As some of you know from my peHUB role, I’m open and eager to chat. So contact me anytime or if you’re in NYC, let’s grab a beer.

Reach me anytime at chris.witkowsky@thomsonreuters.com and follow me on Twitter @ChrisWitkowsky.