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January 30, 2009

What's Next for Private Equity?

Catherine New
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Transforming market uncertainty into opportunity is the theme of the 15th Annual Private Equity and Venture Capital Conference, which is taking place at Columbia Business School today. More than 700 people are expected to attend the conference’s six panels.

Dan Primack, editor of PEHub and moderator of the conference’s panel on venture capital, said that one of the questions the panel will address is how the weak IPO market affects the basic model of VC. Primack said that VC must consider these questions:

How they will honestly make money without an IPO market?
Can VC make money without an IPO market?
Do you make different types of investments without an IPO market?

“The average investor’s chances of making of money would have been better if he’d put his money under the mattress. That may be true of public markets, too, but you can’t liquidate in VC. All those median funds are a loser,” Primack said. “That shows you that the industry has some fundamental problems and there must be some considerations to radical proposals.” (He recently blogged about one such proposal.)

David Snow, the executive editor and director of PEI Media, who is moderating a panel on how LPs can think long-term in the volatile market, discussed some of the trends he sees.

“Negotiating power has moved squarely to the LPs. During the boom years, right up through 2007, there was a sense that GPs were holding a velvet rope in front of funds and raising billions in commitments while giving the impression that they were turning down extra demand. That demand from LPs allowed GPs to receive favorable terms,” Snow said.

“Now there’s far less capital available and many signs that partners are willing to concede on some terms in exchange for capital from LPs. But many LPs are heartbroken because first, they wish they had more money to commit, and what’s more, many experienced investors are aware that the best time to invest is during a recession. The inability of LPs to do more buying is causing grief and heartache. So you see huge activity in the secondaries market, as many LPs are trying to free up cash to double down in this environment.”

Snow said he would ask panelists about the role of the accounting rule FAS 157 in private equity, which requires the use of fair-value accounting.

“I’ll ask if, because of FAS 157, LPs would be perturbed if GPs assigned huge write-downs to existing portfolios,” he said. “Of course, the silver lining may be that write downs in private equity might allow LPs to invest more capital, because lower private equity valuations will equate to freed-up private equity allocations relative to the rest of the institutional portfolio. Are LPs with a long-term view on performance begging GPs to write down portfolio values?”