IP: NYTimes.com Article: What's That Rumble in Venture Capital Funds?

[Dave Farber <dave () farber net>]

What's That Rumble in Venture Capital Funds?

March 3, 2002 

By NORM ALSTER


 

Venture capital and other private equity investors,
generally known for their patient long-term outlook, are
getting more than a little restless. Increasingly, they
want to escape the heavy capital commitments they made at
the height of the technology investing frenzy. Some are
suing to recover losses.

An outbreak of litigation in this relatively closed world
is one clear sign of investor frustration over the tens of
billions of dollars that have been committed but not put to
use. 

The mood contrasts sharply with that of the long bull march
of the 1980's and 90's, when venture capitalists and their
investors earned an average of more than 18 percent a year
by selling stakes in companies they had nurtured to
technology-hungry public and corporate buyers.

But with initial public offerings now scarce and with the
stock market soured on technology, tensions are rising
between the general partners who run private equity funds
and their limited partners - the banks, endowments, pension
funds and millionaires who supply most of their capital.

Limited partners have grown impatient over both poor
performance and high management fees. Perhaps more
significant, many limited partners now say venture capital
firms are sitting on far more capital than they can invest
profitably. With the air out of technology valuations and
no fashionable investment themes, the industry has $75
billion of uninvested capital, according to Venture
Economics, a unit of Thomson Financial that tracks venture
capital data. That amount easily exceeds total venture
investment from 1990 to 1998.

The manager of one large university endowment on the East
Coast, who spoke on condition of anonymity, said he was
particularly angry that some venture capital firms had
asked him and other limited partners to back companies that
had been assigned rich valuations but were now worth much
less. "They raised too much capital," the manager said.
"They paid too much for the deals."

<snip>

Whether displeased with their investments or just needing
cash, many limited partners are looking to sell their
venture stakes. Although general partners have veto power
over proposed sales and are understandably eager to
maintain a stable investor base, turnover is rising. Banks,
including J. P. Morgan Chase (news/quote) and Bank of
America (news/quote), have been sellers. Wider bank selling
is expected because the Federal Reserve is tightening cash
reserve requirements on the private equity investments of
banks. 

But with so much uncertainty over portfolio value, many who
want to sell cannot find buyers. Timothy Jones, investment
director at Coller Capital, a London-based buyer in the
secondary market, forecasts $4 billion to $5 billion in
secondary-market sales this year, up from an estimated $3
billion in 2001. But he also estimated that $20 billion in
assets would be available for sale this year, which leaves
"people with $15 billion or more in assets that can't find
buyers."  


http://www.nytimes.com/2002/03/03/business/yourmoney/03VENT.html?ex=10161572
05&ei=1&en=836860f93a42ba92


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