May 9 2009
by Todd Hixon

LP Panel: TLH notes from NVCA annual meeting

Title:  “The Delicate LP/GP Relationship”

Moderator:  Becky Buckman, Forbes
Context:   LP liqudity squeeze, mediocre VC performance [besides that, how was the play, Ms. Lincoln?]

Panel:  Nick Harris, Lexington Partners (secondaries), typically buying 5-yr old funds, believe in VC

Rebecca Connelley, FairView:  known for great names, very conservative, raise $300m/3 year cycle, keep it right-size, 30% is emerging manager mandates (Fund I-III), primarily spin-outs

Geoff Love, Wellcome Trust:  $19B, second largest medical research foundation after Gates, excellent (65%) long term IRR

  • broke away from hard asset allocation rules, pulled back from public equities (valuations were just too high), went to cash (10%)
  • VC portfolio down low teens yr/yr, benefitted from lb/$ change

Becky C:  median fund down 5-15%; some are up, some down >20%

  • not the bottom yet
  • bad news will keep trickling in, if the last cycle is a guide (“Chinese water torture”)
  • FAS 157 has not made much of a difference; everything is level 3
  • Flat rounds in 2009 are good

Geoff:  VC is not an asset class; it’s all about unique skills

  • # of names in portfolio down from 50 to mid-teens
  • increased allocation to target funds
  • $ are up in aggregate, partly because of reduced distributions, now 10% versus 5%
  • capital calls at 1/2 of 2008 pace

Becky:  #1 priority is maintaining existing relationships, stretch our dry powder [concerned about what happens in the next fund raising cycle?], taking a hard look at everything, but “feverishly loyal”

  • Starting to look at funds that have not made money since 2000, in the new environment, some “hard no’s”
  • tough to go forward if no exits in ‘06-’07
  • back Lighthouse and Gold Hill
  • taking HC up from 15% to 20%, less exposed to recession


  • $20B of PE for sale, mostly LBO funds, $16B transacted last year
    • 35-40% banks
    • 25-30% pension/endowment
    • not a lot different from what it looked like in past
  • Price by estimating exit value for each co in each fund, cash flow model, NPV = price, discount rate is 20% net, ranges up to 30% depending on GP quality
  • Today:  lower exit values, longer time => lower price
  • Don’t worry about carrying value
  • We like:  venture upside, unlevered nature of VC
  • Growth in secondary driven by LBO funds
  • Tail-end interests in funds have little upside

How fund-raising has changed?

  • BC:  some sources have dried up, tougher than ever, some top names having to work hard, not a black mark
  • If you get to a critical mass size, just move on, don’t keep fund raising
  • Funds are getting smaller, right-sized, rationalized by change in market:  Web 2.0 is less capital intensive, cheaper to start co.s, pulling back from later stage investing, let’s hope these lessons learned will last when the market improves
  • Pet peeve:  annex funds (“caught again with pants down on reserves”)
    • past annex funds did not do well
    • FoF on to next fund, conflict
    • usually low/no fee, maybe lower carry

GL:  less money around, great funds still getting raised, money will gravitate to better funds, good for all

  • smaller funds, but with a sidecar [that has no fee on uncalled capital?? Not clear]
  • Desired terms: all to do with alignment of interest, more equal partnership
    • GP appetite for risk declining, management fee is a lovely life style, carry is a “tip”, GPs happy to settle for less upside, results in a 2x multiple on a $500m fund => would like to see staged carry
    • GP skin in game:  how much of liquid net worth is in the fund?  Over 50% for hedge funds.  Average VC fund is 1% GP commitment.  Should be 5% – 10%.
  • but terms don’t make a good fund …

BC:  terms change coming from both sides

  • 15+ year partnership, can’t get out
  • want to feel like partners
  • now seeing premium carry over 3x hurdle versus from $1
  • fee:  2.5% is fine for smaller funds/newer managers, but older managers are fat on fee, what we see is faster tail on older funds and non-performing funds (saves IRR), seeing some 1.5% to 2.0% proposals

Lexington:  our terms are 1% fee, 10% carry on a total-fund basis

Return expectations:

  • BC:  look for 3x on a fund
  • Most distributions in recent years have come from M&A [no kidding …]
  • Believe in VC:  there is always a new, new thing, but, too much money out there, hope some of you go out of business (with apologies), less confusion in the market, fewer virtualization co.s, too many FoFs, too many LPs, let’s flush everything out …

Nick:  don’t expect distributions until 2011 in our pricing models

BC:  concerned that the exits are not big enough, need a better market

Geoff:  VC is the “sex and violence” part of our portfolio, expected to take big risk, need the big upside to make it work => shoot for big exits, need an IPO market

Advice for VCs:

  • Focus on staying alive until market improves is right
  • Be ultra transparent and communicative; come across with the bad news
  • Be realistic in your forecasts, prospects for next financing
  • Quarterly conference call is good:  1 hour webcast

Is over-allocation a long term problem?

  • Will correct as private assets are marked to market
  • Sales of PE assets are driven more by cash flow and bank M&A than allocation rules — $30B neg CF to LPs from PE, equal to pos CF of last 4 years
  • Maybe $100B of PE assets, $15B of VC, frozen by bid/ask spread, will come on market over next few years

GL:  Few funds in market, $13B at annual rate in Q4, that may be about the right number for annual VC fund raising, but everyone says they will raise in 2010

Hold IPO stock longer?  

  • Good to do if it is the right thing .. purely a financial decision
  • But VCs are lousy public equity managers, just want to remind you of that …

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