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| Private Equity |
A House of Cards
Eileen P. Gunn
04/01/2004
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There is also the question of how venture capital firms report
results to both current and prospective investors. “Some firms have a meeting
once a year and give a handout. Others provide incredible detail about every
company in their portfolio,” says Schoar. To make matters worse, two firms
holding the same company can value it differently, based on both technical
issues, such as the terms for the round when they came in, and their judgment of
how events have affected a business. Third parties such as Thomson Venture
Economics provide benchmarks, but no data on individual firms or performance
rankings. So to assess how a fund is doing, especially compared to peer firms,
an investor’s best bet is to gather as many reports or prospectuses as possible
and pick them apart, something not all of us have the time or inclination to
do.
So those of us who are heading back into the fray are doing so more
soberly than perhaps we might have a few years ago. We are exercising more
caution and diligence than in the past. We are favoring funds with longer track
records, and even then we are asking for former and returning investors and
portfolio companies to provide references. And we are demanding more data than
ever.
Intersouth, for example, always invites potential investors to its
offices when it raises a new fund. “Previously, your old investors wouldn’t do
the site visit, just the new ones,” says general partner Dennis Dougherty, but
when the firm raised its 2003 fund, “every single investor came.” And the firm
had scores of spreadsheets ready. “We explained how we calculated returns,
provided lists of deals that worked out and that did not. If they didn’t,
investors wanted to know why not.” When they were through there, several
investors visited the portfolio companies to see for themselves how things were
going.
About five family offices that had invested in several of Intersouth’s
prior funds opted to sit out this cycle, at least in part because they did not
want their commitments to get ahead of their available cash. But the firm
replaced them with institutional investors whose regular firms were not raising
new money or had shrunk the size of their funds. Dougherty wondered whether
such small firms and individuals would easily be able to come back in when they
are ready, or whether the bigger players would push them out. Others wondered
whether small investors without a well-staffed research team would be able to acquire and take apart the information they need to make savvy
investment choices in this new environment.
The excesses of private equity’s
last few years are lingering but gradually “wringing themselves out,” as one
institutional investor put it. And the environment for making investments is, by
most accounts, improving. “If you have cash, this is a great time to put it to
work,” notes Liz Hart McMillan, an active angel investor in the New York area.
It remains to be seen, however, if 2004 is the year that venture capitalists and
angels break the congestion and get private equity moving again.
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