The New York Times awoke to the surge in private market investing yesterday with an article that contributed relevant quotes about why many CEOs prefer to avoid an IPO. They even found a tech CEO who admitted to being “terrified” of the public markets. Ouch. The NYT article can be found here
The article highlighted for me how often the public – and even experienced journalists – forget the fundamental structure of our industry. The NYT writes:
The author, and much of the population, are forgetting the basics. The capital in PE and VC funds comes largely from pension and endowment funds. These funds manage money for some high net worth investors, but the big pool of total capital comes from public employee funds. The retirement money of school teachers and police officers. The other significant source of capital is university endowments, the biggest purpose of which is to fund scholarships, endow professorships and to construct buildings. Those new or refurbished campus buildings that provide a nice flow of construction jobs.
So yes, if the Unicorns do not fly, the General Partners of these funds, the Venture Capitalists, will lose some money. Most GPs have a material investment in their own funds. They certainly will have opportunity cost as the years spent to find, win and nurture these investments will not produce a gain. However, most of the cash losses will hit the Limited Partners, often state pension funds. New York’s Union Square Ventures was crowned recently as the most successful creator of “Unicorn” companies. The large investors in Union Square – who should be thrilled to be investors in USV given its outstanding results – include pension plans like Los Angeles County Employees Retirement Association and Oregon Public Employees Retirement System. Firefighters and School Teachers.
It is easy for the public soundbite to disconnect the venture capitalist from the Firefighter. HIghly successful investors end up in the media kite surfing, driving Teslas, buying basketball teams and dining near Presidents. The “who cares if those guys lose some money” meme is easy for a journalist to propagate, even if it is incomplete. We in the industry are part of the problem. We create euphemisms like “Institutional Investors” to describe people whose job is to fund the collective retirement of our teachers. We talk endlessly about the companies we have built, but seldom about the security of a retired firefighter in LA that results from USV’s Fred Wilson being very good at his job.
Many (most?) pension funds invest against David Swenson’s Yale allocation model:
The absolute return (often hedge funds) and private equity allocation here is over 40%. Not all of that capital is exposed to late stage private companies of course. However, enough “permanent” capital is invested under this allocation that a healthy private capital market does, on the margin, matter to “most Americans”. Financial journalists should be better at explaining that impact of the markets. Investors should also be keeping this in mind, perhaps even when considering the next round at a couple of those Unicorns…