The Financial Times has a Lex column arguing that LPs are set to turn in favor of venture investing and away (a little) from their current ardor for buyout. While I agree, in general, it does gloss some important issues, not least of which is that venture is a much smaller asset class than buyout so it will never be able to soak up as many LP dollars. While that shouldn’t be as important as performance, never undestimate how much stock LPs put into finding places to put big slugs of capital, performance aside.
Buyout funds have fed on cheap debt and depressed equity valuations. But they now face tougher competition, with average acquisition multiples at historic highs, and deteriorating high-yield debt markets. The recent announcement by 3i, the high-profile UK private equity house, that it would return £500m to shareholders suggests opportunities are becoming scarce.
Meanwhile, average one-year returns for European VC funds, while still very low, turned positive again in 2004. And VC funds have done well over the longer term. With the buyout market under pressure, private equity investors might do well to revisit the mantra of who dares wins.