DISQUS

VentureBeat: The private equity bubble, and what it means for startups

  • PE · 2 years ago
    As a tangent, does it not make sense, given that 1) LBO/buyout capital is still a small fraction of overall undeployed capital sitting in less than exciting instruments, AND 2) we are in a time where industry disruption is heightened, the deployment of buyout capital is natural and intuitive? Buyouts commonly occur in times of structural change where a part of the capital deployment is making contrarian bets on the longevity of established cash flow (when "conventional market wisdom" overcorrects on the assumptions of change pacing)?

    An amateur musing...
  • Deniel Panfield · 2 years ago
    The bigger question here is whether this "bubble" will burst or simply deflate. I think the later for the following reasons:

    1) The amount of money raised by the LBO funds are in forms of commitments and is still in the hands of the Pension and Endowment funds, mostly likely invested in short term securities. As the amount of attractive deals in the market decreases, the amount of capital calls from General Partners will decrease as well, presenting LPs with an opportunity cost. Pension Funds will have to find new ways to invest that 3-5% of their money they are allowed to dedicate to alternatives. However no major financial harm will be done.

    2) For the committed capital the situation is not as grim either. Unlike venture capital deals of 1999 - 2000, the Private Equity deals have much higher liquidation value. The possibility of complete loss of value is highly unlikely.

    3) The VC bubble of the year 2000 was inflated with the public market's money. This is clearly not the case here, since PE is not investing into the "next big thing" without proven cashflows. When funds liquidate their holdings by going public they usually present cleaner and more efficient businesses for investors to invest in. These companies usually get a fair price from the market, but never command ridiculously high valuations.

    Overall I agree with the author that some amount of new capital will most likely shift from PE to VC. However, it’s not the lack of money that was the problem in the past 2 years, but rather the lack of good ideas...