Thoughts on Private Capital

There’s an interesting conversation looking at capital availability in private markets, the returns in VC and PE funds, and whether there’s a current asset inflation.  Peter Rip offers:

I think VC valuations have historically lagged and not led the public
markets valuations.  This is part of what creates the boom/bust cycle.
So I tend to believe the rise in IRRs is inflation due to excess money
supply.  Great for entrepreneurs.  Not so great for VCs.   Worse still
for LPs. Boom for some. Bust for others.  It corrects, over time.

And Fred cautions:

The Nasdaq is down 9% for the year.

Yet the venture capital market, particularly for web delivered services, is white hot. Valuations are up, amounts raised are up, fund formations are up. This can last for a while, but not forever.  Over long periods of time the venture capital market and the NASDAQ are highly correlated.

Over dinner Tuesday night, a friend who’s a very experienced investor in private markets, raised the question if private deals are now a truly viable alternative for mature businesses to raise capital.  It’s in line with the disintermediation of financial markets: why pay an investment bank 7% when you can call call up KKR and Bain Capital for a few billion dollars?

A side benefit would be for corporate governance.  With Sarbanes-Oxley, the cost of being public has increased significantly.  Also, a PE firm has the right incentives, unlike an investment bank, to kick the tires well before an investment.  The argument for public markets is that they create liquidity.  I think a viable model would involve the LPs to raise money from main street, turn around and invest in PE firms, who have real incentives for superior returns to the LPs.

UPDATE: Auren reports *14* unsolicited VC inquiries for Rapleaf in two weeks.  This goes to the point of entry price pressures for VCs.

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