2020.03.24
Over-specialization & consortium investing in PE & what's a dollar worth now anyway
Every once in a while, I’ll wish I was a specialist. I’ll wish I could just focus on one particular space, whether it be a sector, or a geography, or a sub-strategy. Then I’d become a master over some sort of domain, or someone that people may tag on LinkedIn or Twitter to settle arguments from time to time (or too often).
I’ve been getting over that thought the past six months. Focusing just on venture at the expense of buy-outs, or buy-outs at the expense of venture, or both of those at the expense of the rest of the world had begun to seem more and more like a mistake. Too much focus could keep me from seeing interesting opportunities right outside my periphery.
Which brings us to now. I can’t say with certainty where the best investments are at this moment—but, I can at least evaluate the world through multiple lenses. Volatile times require flexibility. They require investors who can help businesses with capital more creative than just regular-way control or non-control equity investments. Investors who have that ability will be able to remain active, providing solutions for companies that otherwise wouldn’t need them in more normal times. Those overly-specialized in a single framework will have to pull back and head to the sidelines, and wait for calmer times. Though if they’re too specialized, they’ll stay right there, awaiting an old normal that may never return.
We are in a severe recession. What now for both companies and investors? Gavin brings up the possibility of businesses choosing between government “wipeout” capital, or investments from private equity consortiums. The co-investment mores within private equity have evolved since 2008 and 2009—private equity firms are far more likely to syndicate investments to their limited partners than to other firms. Do those limited partners add value beyond their capital? The ones who market themselves as co-underwriters certainly believe so—however, most by and large know their role is to provide capital quickly, not to interfere with the lead investor. Fewer cooks in the kitchen should (theoretically) lead to fewer consortium disasters in recession.
The venture capital market is effectively frozen. Here is why. How does a venture investor set valuations in this environment? The world is rapidly resetting its expectations around what a dollar of free cash flow is worth today (and in the future). I think to Zach’s point about figuring out how to stop needing capital soon, founders will need to help those venture investors answer the valuation question—if conceding that very large point gives one the capital to survive in this environment… then so be it. Venture investors have the luxury of waiting (at least for a little while); cash flow-negative businesses do not. Unless they become cash flow-positive, which some say is also helpful to business survival.
As long as most of us aren’t flying, I may keep posting these window seat pictures—I always knew they’d be useful for something, someday.
Solid perspective - thanks for sharing this Peter! The fear of being a “jack of all trades, master of none” is a real one and very relatable! However, in that every investment opportunity has an opportunity cost of foregoing alternatives, having a holistic perspective on markets is key.
Great thoughts - per the above comments, in times like these, a holistic perspective (and lessons borrowed from other markets) can be extremely valuable. On the VC side, we'll be seeing from actions GPs take today whether they truly differentiate themselves as partners (both to GPs and LPs).