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nba559_2008_02_22_lecture_2__2_

nba559_2008_02_22_lecture_2__2_ - NBA 559 Lecture 2 LPs...

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Lecture 2: LPs Flight To Quality Jesse Reyes Managing Director Bear Stearns Private Funds Group NBA 559
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2 Overview Fundraising challenges The great venture experiment LP Flight to quality Performance challenges LPs at the poker table The search for alpha – tailwind or talent?
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3 Summary of Challenges Some LPs have decreased or eliminated VC allocations. Others only want top decile players. Allocations have been increased to buyouts, but there is bifurcation as to size question Is bigger better? Is smaller better? Pension funds have an actuarial timeline they need to meet in the next 12 years so have substantial expectations Private equity will probably not meet these expectations by itself given the current structure of the industry. Hence the interest and explosion in hedge funds and other absolute returns vehicles and focus on best
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4 Fundraising Challenges Velocity of commitments has increased – was not unusual to see 2007 allocation almost spoken for by May Re-up schedule accelerated Public Market volatility is challenging PE Allocations Allocations to private equity in limited partner portfolios are still at fairly high historical levels but… Some LPs will find their allocations to the best funds decreased substantially or eliminated.
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5 The Great Venture Experiment The late 1990s were the fourth major investment wave since 1970 semiconductors, PCs, life sciences, internet However the amount invested in 1990s was unprecedented in scale. As much was invested in one year alone (2000) as the industry invested from 1970 to 1998. Over half the companies ever financed since 1970 were financed between 1996 and 2000 The fallout of this has yet to be fully realized in the venture space and may stilll take another few years to sort itself out.
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6 US Annual Venture Investment 1980-2007 $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 $ Million Invested
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7 So what have we learned? Is there a difference in investment, speculation, gambling? GPs say this is now a time of “sustainable investment”, it’s the “right size for the market” Really means… Leave us alone – want to go back to inefficient “small” market as that is where returns are made We want auctionless valuations
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8 Is Venture Capital Broken Sevin Rosen – bows out of last fund Charles River starts ”new” venture program Not the first time – Crosspoint (2000) Means the markets are more efficient and if you can’t find inefficiencies in markets, pricing or technology, you have to change Lessons for Buyouts?
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Understanding LPs flight to Quality The Performance Challenge The J-Curve gets longer
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