Where’s The Wind?
The combination of springtime in San Francisco and positive sales momentum in our venture portfolio should be lifting my spirits. Strangely, it’s not. The venture market feels better, but somehow stuck. While we’re past the storms and there’s some wind blowing on the bay, the fleets of venture boats still require a lot of tacking to get anywhere. When will the winds return behind venture to turn it back into a money-making category?
The financial news highlights that that investors are still making more money by trading than making long-term bets. As a venture capitalist, I stubbornly believe that long-term investing can still be profitable. This article in the New York Times, If I Only Had A Hedge Fund? surprised me. While the article makes some debatable points, there is no arguing that there is a flood of money going into hedge funds. Maybe I’m just jealous, but waves of new capital should force returns to converge towards the index averages for equity.
We’ve seen a similar surge of new money into buyout funds. My prior post questioned whether or not competition from LBO funds would drive up prices and lower returns. I’m wondering now whether or not both shifts are a function of fear of buying and holding stocks. The recently announced $11 billion SunGard Data Systems deal is notable for its size. LBOs of even larger companies would allow them to hide from the distractions and regulatory expenses of the public markets, theoretically allowing growth. However, in order to make money on the investments, there would still need to be an exit. LBOs may end up being exercises in hibernation, not in creating attractive investment returns.
So where does that leave venture? Even if the IPO market remains picky, M&A can provide profitable exits. According to VentureOne, M&A prices rose again in the first quarter of 2005 to a median amount of $60 million, which compares to $24.4 million invested prior to acquisition.
The venture markets still offer a hospitable environment for buyers of long-term growth. As hedge and LBO fund returns wane, the whims and winds will return to favor venture. We’d look for more evidence of this shift through the end of this year.
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