Benchmark Capital’s Bill Gurley yesterday wrote on his blog that the VC industry is going to shrink substantially over the next several years. Specifically, he argues that large institutional investors will decrease their allocations to venture, although not abandon it entirely (due to CAPM and contrarianism). The typical reaction from readers — including many of you who sent me emails — was appreciative slobbering.
I strongly encourage you to read what Bill wrote. Go ahead, I’ll wait.
Ok, now let me tell you why I think he’s wrong. Not on describing the overall environment (he’s got it nailed), but on what the end result will be.
Specifically, I believe that the number of institutional investors cutting back on VC commitments will be small, compared to the number either maintaining or increasing their allocations. It’s easy for us ! to get caught up in the doings of big-name, liquidity-challenged endowments like Harvard and Yale, but they really are just a tiny drop in the overall LP bucket. In fact, all the Ivy Leaguers combined probably have less committed to venture capital than does CalPERS alone (and it recentlyincreased its alternatives allocation)…
The most recent Coller Capital Barometer showed that 20% of respondents plan to decrease their alternatives allocation over the next 12 months. This compared to 15% who plan to increase allocations, and 65% who plan to maintain current levels. Not terribly significant.
A counter, of course, would be that allocations have little meaning compared to the actual dollars they represent. This is the denominator effect argument, which helps explain why there has been so little successful VC fundraising so far in 2009. But the denominator swings both ways, and it does appear that the market bottom is behi! nd us (save for the dreaded “double-dip”). Moreover, the sizes of futu re mega-buyout fundraising efforts have shrunk, thus freeing up new cash for venture when institutions reopen their purse-strings (that extra $100m originally dedicated to KKR could be used for five or six VC fund commitments).
Then there is the presence of funds-of-funds, many of which are contractually obligated to keep putting money to work. When a Harvard or Yale drops out of a legacy VC investment, there is almost always a fund-of-funds lurking to take its place. Some of these fee-doubling aggregators will certainly fall by the wayside, but not many of them. After all, most institutions plan to maintain their alternative allocations at the same time that they’re being hit with budget cuts. The likely result is more outsourcing of investment activities.
Moreover, a new meme is taking hold among some LPs I’ve spoken with – that falling VC investment activity are bringing us back down to 1995 and 1996 levels, which could/should produce outsized returns. It’s! a cozy argument, albeit one that ignores how those falling investments are being made by oversized funds. Bill Gurley’s firm, for example, was investing out of an $85 million fund back in 1995. Its current fund size is $500 million.
To be clear, I think the venture industry should shrink. Particularly in terms of fund sizes and GP compensation. The industry’s returns have been terrible for some time (save for the top 10%), and there is growing evidence that 1996-2000 was the exception rather than the rule. As one LP told me yesterday, “I’m not sure venture really scales.”
But I just don’t see it happening. Instead, I see a lot of hemming and hawing over the status quo, and then almost everyone continuing to follow it. Kind of like what happened after the dotcom bubble burst.
*** The FDIC vote on rules governing PE investments in banks is at 3:30pm ET. We’ll be covering it live on the website. We’! ve also posted a bunch of stuff already about what to expect. Just skim through the homepage, and our video page.
Top Three
Terra Firma Capital Partners has acquired Everpower Wind Holdings, a U.S. wind farm operator, from Good Energies and company management. No financial terms were disclosed, although the deal is reportedly worth around $350 million.
Bridgepoint Education (NYSE: BPI), a San Diego-based provider of online and campus universities, has filed to sell 11 million common shares via a secondary public offering. Sellers will include Warburg Pincus, which currently holds around 34.5 million common shares (64.9% ownership stake), and members of company management.BoA Merrill Lynch and JPMorgan are serving as co-lead underwriters. Bridgepoint Education went public earlier this year, raising$141.75 million in an IPO at $10.50 per share. It closed trading yesterday at $20.79 per share. www.bridgepointeducation.com
Eric Leathers has stepped down as a partner with Capital Z Partners, in order to join Pine Brook Road Partners.
VC Deals
Reval, a New York-based provider ofrisk management and hedge accounting software,has raised $16 million in Series B funding from return backers North Bridge Venture Partners and Commonwealth Capital Ventures. In related news, Reval has acquired Fxpress Corp., a provider of treasury software to the Fortune 1000.
Tremor Media, a New York-based online video advertising network, has raised an undisclosed amount of strategic funding from SAP Ventures. It previously raised around $40 million over three rounds of funding, from Meritech Capital Partners, Canaan Partners, Masthead Venture Partners and European Founders Fund.
Buyouts Deals
Ashworth College, a Norcross, Ga.-based provider of secondary and post-secondary distance education program, has raised an undisclosed amount of growth equity funding from Sterling Partners.
Celerity Partners has sold its 17.2% stake in PEER 1 Network Enterprises Inc. (TSX: PIX) to Clairvest Group Inc. (TSX: CVG) for US$23.36 million. PEER 1 is a Vancouver-based online IT hosting provider.
The Reader’s Digest Association yesterday won court approval to access the first $100 million of a $150 million DIP loan provided by its lenders. The publisher’s U.S.! unit recently filed for Chapter 11 bankruptcy protection, as part of a reorganization that will wipe out equity sponsor Ripplewood Holdings.
United Spirits, an India-listed spirits maker, said that it has ended talks to sell an ownership stake to Diageo (LSE: DGE). It is continuing talks with private equity firms.
PE-Backed M&A
Yellowstone Landscape Group Inc., a Dallas-based portfolio company of Gridiron Capital, has acquired Floridian landscaping company Dolphin Landscape. No financial terms were disclosed.
PE Exits
Enersys Inc. (NYSE: ENS), an industrial battery maker, has filed to sell 3.2 million shares of common stock in a secondary public offering. Selling shareholders include Metalmark Capital, which plans to sell around 2.9 million shares. If successful, Metalmark’s ownership stake would be reduced from 10.8% to 5.32 percent. Other sellers include Performance Equity Management. Enersys stock closed yesterday at $21.15 per share. Goldman Sachs is managing the offering.www.enersys.com
Webster Capital has sold Comfort Keepers, a Dayton, Ohio-basedprovider of non medical in-home services, to Sodexo. No financial terms were disclosed. Webster acquired a majority stake in Comfort Keepers over two years ago, with leverage and an equity co-invest from Allied Capital.
Firms & Funds
Aureos Capital has closed its debut Latin America fund with $184 million in capital commitments. It will invest between $2 million and $10 million in mid-sized businesses in Mexico, Central America and the Andean region. It had originally targeted $300 million, and later revised the target downward to $200 million.
Human Resources
Nance Dicciani has joined Advent International as a Boston-based operating partner, with a focus on the chemicals and materials industry. She is the former president and CEO of Specialty Materials.
Michael Shannon, a founder of KSL Capital Partners, has joined the board of supermarket company Safeway Inc. (NYSE: SWY).
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