There's now a trillion dollars of uninvested capital in PE and VC firms
June 13, 2018 8:15 PM Subscribe
This Pitchbook report talks through this insane moment in private equity and venture capital. Some of the origins, some ongoing trends, and some potential effects it'll have on tech investing and our economy. Dizzying but interesting read.
Fascinating. Sieze every last dollar and spend it from public purses.
posted by AnhydrousLove at 8:41 PM on June 13, 2018 [12 favorites]
posted by AnhydrousLove at 8:41 PM on June 13, 2018 [12 favorites]
Also dry powder as a term appears to come from national gunpowder reserves from early gun warfare. Which I found interesting and apt.
posted by AnhydrousLove at 8:44 PM on June 13, 2018 [2 favorites]
posted by AnhydrousLove at 8:44 PM on June 13, 2018 [2 favorites]
Just wanted to note the insane moment documented in the report is June of last year, so our own insane moment presumably reflects higher amounts of uninvested capital.
posted by mwhybark at 8:46 PM on June 13, 2018 [1 favorite]
posted by mwhybark at 8:46 PM on June 13, 2018 [1 favorite]
Fascinating. Sieze every last dollar and spend it from public purses.
Well, a significant amount of those dollars are probably ordinary workers pension funds, so, you know...
posted by Jimbob at 8:51 PM on June 13, 2018 [5 favorites]
Well, a significant amount of those dollars are probably ordinary workers pension funds, so, you know...
posted by Jimbob at 8:51 PM on June 13, 2018 [5 favorites]
I'm not planning on leaving retirees penniless. If you had the power to sieze that trillion, you'd have the power to provide for the retired as well.
Also, are pension funds heavily into speculative VC investment? Because that seems irresponsible.
posted by AnhydrousLove at 9:00 PM on June 13, 2018 [4 favorites]
Also, are pension funds heavily into speculative VC investment? Because that seems irresponsible.
posted by AnhydrousLove at 9:00 PM on June 13, 2018 [4 favorites]
Is TL;DR ever more apropos? Can someone explain why I shouldn't be seething with anti-capitalist rage from the intro on?
posted by sir_patrick_o'veal at 9:06 PM on June 13, 2018 [3 favorites]
posted by sir_patrick_o'veal at 9:06 PM on June 13, 2018 [3 favorites]
I wanted to make sure my comment wasn't completely stupid, and I found a paper, which is admittedly quite old (2001), but it states that in the US over 50% of investment in venture capital comes from pension funds (link). This seems to be declining, more recent article put the figure at 20%. But that's still the largest slice.
posted by Jimbob at 9:08 PM on June 13, 2018
posted by Jimbob at 9:08 PM on June 13, 2018
I'll read this pdf later.
posted by the man of twists and turns at 9:11 PM on June 13, 2018 [2 favorites]
posted by the man of twists and turns at 9:11 PM on June 13, 2018 [2 favorites]
I'd guess they're not investing that money because they think investing it would reduce the value of their holdings as a whole, perhaps by causing a wave of inflation which would cause the Fed to raise interest rates sharply, which would in turn cause people to pull money out of stocks and put it into interest-bearing instruments.
If they did actually invest it, I have a feeling the who.e system could crash.
posted by jamjam at 9:15 PM on June 13, 2018 [1 favorite]
If they did actually invest it, I have a feeling the who.e system could crash.
posted by jamjam at 9:15 PM on June 13, 2018 [1 favorite]
I had no idea what “dry powder” meant either. But this link helped me understand a little and also made me seethe with anti-capitalist rage like Sir Patrick. Why isn’t this trillion dollars plus (of mostly pensions?) invested to grow the pensions? And yeah TL;DR and also TI(Infuriating);CPSR (Can’t Possibly Stand to Read).
posted by pmburns222 at 9:22 PM on June 13, 2018 [1 favorite]
posted by pmburns222 at 9:22 PM on June 13, 2018 [1 favorite]
I'd guess they're not investing that money because they think investing it would reduce the value of their holdings as a whole, perhaps by causing a wave of inflation which would cause the Fed to raise interest rates sharply, which would in turn cause people to pull money out of stocks and put it into interest-bearing instruments.
No. Most of this money is not earmarked for investment in publicly-traded companies. It is intended for privately-held companies, or to take public companies private.
(Anyway, the money's already in circulation, so investing it wouldn't cause inflation.)
"Dry powder": in the traditional PE model, the PE investment advisor raises money for a specific fund from investors (limited partners). Each limited partner in the fund makes a "capital commitment," essentially a promise to provide a certain amount of capital on short notice. The fund enters into a series of deals over the course of the first few years of its lifetime, each time calling on the LPs to provide the actual cash that is put up (these deals are usually massively financed). Then, over the later part of the fund's life, it sells the companies it's purchased for a profit, to be distributed back to the LPs. So, after the completion of the initial fund-raising phase, the fund knows how much capital is available to it. The capital that is available to fund upon capital call but not yet committed to a specific purchase is its "dry powder."
The accumulation of "dry powder" reflects two main things: (1) too much money in the hands of people who have no particular pressing use for it and (2) an insufficient supply of deals, even with the cheap financing of the last several years, that can be anticipated to reach the relatively high return rates that the funds don't-quite-promise to their investors. PE investments are illiquid, risky, and high-fee, so investors, at least in theory, are supposed to be demanding relatively high returns. "Dry powder" is not a good thing from the point of view of investors. It's expensive for them to keep the funds for their capital call at the ready (since it has to be in a liquid low-volatility form they can convert to cash on short notice), and uninvested funds earn nobody anything--except the PE investment advisor, which collects fees all day every day.
posted by praemunire at 9:36 PM on June 13, 2018 [27 favorites]
No. Most of this money is not earmarked for investment in publicly-traded companies. It is intended for privately-held companies, or to take public companies private.
(Anyway, the money's already in circulation, so investing it wouldn't cause inflation.)
"Dry powder": in the traditional PE model, the PE investment advisor raises money for a specific fund from investors (limited partners). Each limited partner in the fund makes a "capital commitment," essentially a promise to provide a certain amount of capital on short notice. The fund enters into a series of deals over the course of the first few years of its lifetime, each time calling on the LPs to provide the actual cash that is put up (these deals are usually massively financed). Then, over the later part of the fund's life, it sells the companies it's purchased for a profit, to be distributed back to the LPs. So, after the completion of the initial fund-raising phase, the fund knows how much capital is available to it. The capital that is available to fund upon capital call but not yet committed to a specific purchase is its "dry powder."
The accumulation of "dry powder" reflects two main things: (1) too much money in the hands of people who have no particular pressing use for it and (2) an insufficient supply of deals, even with the cheap financing of the last several years, that can be anticipated to reach the relatively high return rates that the funds don't-quite-promise to their investors. PE investments are illiquid, risky, and high-fee, so investors, at least in theory, are supposed to be demanding relatively high returns. "Dry powder" is not a good thing from the point of view of investors. It's expensive for them to keep the funds for their capital call at the ready (since it has to be in a liquid low-volatility form they can convert to cash on short notice), and uninvested funds earn nobody anything--except the PE investment advisor, which collects fees all day every day.
posted by praemunire at 9:36 PM on June 13, 2018 [27 favorites]
preamunire’s explanation helps me understand this on the PE side of things; can someone explain what this means for the VC world?
posted by mr_roboto at 10:12 PM on June 13, 2018
posted by mr_roboto at 10:12 PM on June 13, 2018
Pretty much the same dynamic
posted by JPD at 10:41 PM on June 13, 2018 [2 favorites]
posted by JPD at 10:41 PM on June 13, 2018 [2 favorites]
Also just so we’re clear I suspect this will all end very badly and history says funds committed to illiquid assets at peaks earn horrific irr, 1 trillion in commitments isn’t as stratospheric a number as it sounds. For example Vanguard alone is 5 trillion.
Like it still insane and very likely to end in tears, but I just thing that # needs to be placed in context ( yeah stock v flow, but in this case the flow is a large share of the stock)
Also there is so much dumb VC money it’s hillarious
posted by JPD at 10:47 PM on June 13, 2018 [3 favorites]
Like it still insane and very likely to end in tears, but I just thing that # needs to be placed in context ( yeah stock v flow, but in this case the flow is a large share of the stock)
Also there is so much dumb VC money it’s hillarious
posted by JPD at 10:47 PM on June 13, 2018 [3 favorites]
Nothing worth investing in (except people... we could improve the lives and productivity of people by providing piblic goods like education, physical, mental and drug rehab, green infrastructure, food for hungry kids, etc - all extremely good roi with long track records of success, but all icky because the profits are diffuse, long term and might help people of the wrong class, caste, complexion or virtue) so yeah, i guess there's nothing worth unvesting in :(
posted by Anchorite_of_Palgrave at 11:22 PM on June 13, 2018 [5 favorites]
posted by Anchorite_of_Palgrave at 11:22 PM on June 13, 2018 [5 favorites]
I've heard "dry powder" in corporate contexts anytime there's a resource that one might strategically wait before exploiting, usually juxtaposed with "it is what it is" and "bringing value to the table".
posted by RobotVoodooPower at 1:04 AM on June 14, 2018 [1 favorite]
posted by RobotVoodooPower at 1:04 AM on June 14, 2018 [1 favorite]
VC capital is not actually all cash either... sometimes it is the debt extracted out of their other offerings... meaning you paid in X1 dollars, I put Xall money in Toys R Us and then demanded we extract a*Xall money out of Toys R Us for an a% return. When Toys R Us can no longer return the cash, your investment may be worth far less than a*X1 and possibly even have a hard time getting X1 back.
Is VC a legalized Ponzi scheme? Noooooooo.
posted by Nanukthedog at 1:25 AM on June 14, 2018 [1 favorite]
Is VC a legalized Ponzi scheme? Noooooooo.
posted by Nanukthedog at 1:25 AM on June 14, 2018 [1 favorite]
"Dry powder" should be the opposite of "Cascade concrete", and that is all.
posted by away for regrooving at 1:33 AM on June 14, 2018
posted by away for regrooving at 1:33 AM on June 14, 2018
I'm a founder and CEO of a venture backed company and I'm currently raising a round. In fact, I should be doing due diligence paperwork right now, but I wanted to offer a different perspective. My company builds software products that put data mapping tools in the hands of people who are not experts in data. We have a product in the market and good traction and growth numbers.
I'm a woman, mom and hispanic...those are not great things to be statistically when it comes to venture capital. (Over 80% of funds went to all male founding teams last year.) My company is over 50% moms. I can tell that there are huge deal flow shortages out there because of the amount of success we've had at raising money. I know that there are probably some hiccups coming for the US economy shortly, so I asked for even more money and for once I have more interest than I expected.
I'm in a group of other women founders and while some of us are still struggling others of us seem to have turned a corner and aren't scrounging for cash for once. People are returning our phone calls. To me "dry powder" means that there will be capital available later to re-invest in me when I hit my milestones, so a lot here is good news on my side.
I will say that seeing the decline of Angel/Seed investments is terrifying because that's the mouth of the pipeline and it's going to exacerbate this excess capital problem for years to come. However, the trend is expected because most funders start small and migrate to larger and larger deals as they mature and raise subsequent funds.
posted by Alison at 4:37 AM on June 14, 2018 [13 favorites]
I'm a woman, mom and hispanic...those are not great things to be statistically when it comes to venture capital. (Over 80% of funds went to all male founding teams last year.) My company is over 50% moms. I can tell that there are huge deal flow shortages out there because of the amount of success we've had at raising money. I know that there are probably some hiccups coming for the US economy shortly, so I asked for even more money and for once I have more interest than I expected.
I'm in a group of other women founders and while some of us are still struggling others of us seem to have turned a corner and aren't scrounging for cash for once. People are returning our phone calls. To me "dry powder" means that there will be capital available later to re-invest in me when I hit my milestones, so a lot here is good news on my side.
I will say that seeing the decline of Angel/Seed investments is terrifying because that's the mouth of the pipeline and it's going to exacerbate this excess capital problem for years to come. However, the trend is expected because most funders start small and migrate to larger and larger deals as they mature and raise subsequent funds.
posted by Alison at 4:37 AM on June 14, 2018 [13 favorites]
You need dry powder so you can explore emergent synergies. Plus it helps patch the holes you make in your balance sheet by moving fast and breaking things. And it's popular at SV parties too.
posted by snuffleupagus at 5:26 AM on June 14, 2018 [3 favorites]
posted by snuffleupagus at 5:26 AM on June 14, 2018 [3 favorites]
Two other useful pieces of context: American tech giants are making life tough for startups, about the "kill zone" surrounding big companies like Google/Amazon/Facebook where startups can't raise money and the ones that do make it get quickly acquired. Also The impact of Masayoshi Son’s $100bn tech fund will be profound, about the Softbank mega-fund that exists to not only make big investments, but move the entire industry with its leverage.
The context for all this is wealthy investors have been desperate for something, anything to invest in that will do better than bonds with their historically low returns. The result is the stock market has done very very well for the past few years and there's a lot of money sloshing around for alternative equity investments like venture capital. But VC investing is a boutique process, it takes time to hand-pick something you think will be a winner. They literally can't invest fast enough to keep up with the demand from their backers.
It's all going to fall apart now that interest rates are returning back to historical levels. Even if we're lucky and get a soft landing a bunch of cash is going to be slowly withdrawn from equity markets and turned back in to loans. More likely though is the whole financial system lurches through another crisis.
("Dry powder" is one of those dumb shibboleth expressions for the tech finance industry. Perhaps you know the expression "Keep your powder dry".)
posted by Nelson at 6:43 AM on June 14, 2018 [3 favorites]
The context for all this is wealthy investors have been desperate for something, anything to invest in that will do better than bonds with their historically low returns. The result is the stock market has done very very well for the past few years and there's a lot of money sloshing around for alternative equity investments like venture capital. But VC investing is a boutique process, it takes time to hand-pick something you think will be a winner. They literally can't invest fast enough to keep up with the demand from their backers.
It's all going to fall apart now that interest rates are returning back to historical levels. Even if we're lucky and get a soft landing a bunch of cash is going to be slowly withdrawn from equity markets and turned back in to loans. More likely though is the whole financial system lurches through another crisis.
("Dry powder" is one of those dumb shibboleth expressions for the tech finance industry. Perhaps you know the expression "Keep your powder dry".)
posted by Nelson at 6:43 AM on June 14, 2018 [3 favorites]
It's all going to fall apart now that interest rates are returning back to historical levels. Even if we're lucky and get a soft landing a bunch of cash is going to be slowly withdrawn from equity markets and turned back in to loans. More likely though is the whole financial system lurches through another crisis.
Well. Shit. That should probably be the headline here.
There's what I take to be an airy dismissal of that kind of concern around p.20 of the link:
Will too much capital chasing relatively the same number of opportunities lead to prices high enough that they engender compression of returns? Worst of all, could that return compression lead to the allure of PE and VC consequently dimming, as they are increasingly unable to demonstrate significant outperformance of other asset classes?
Apparently not, because fund managers are shape-changing wizards and also I'm not sure the last bit is a sentence:
a bearish take would be rather myopic, as it is overly predicated on PE and VC approaches staying static. As we have already seen, fund managers are constantly adapting to an ever shifting environment—and one of the principal factors of that change has been the driver of an ever-increasing dry powder level.
'factor' has to mean 'effect' or 'impact' or something like that. I think?
posted by snuffleupagus at 7:14 AM on June 14, 2018
Well. Shit. That should probably be the headline here.
There's what I take to be an airy dismissal of that kind of concern around p.20 of the link:
Will too much capital chasing relatively the same number of opportunities lead to prices high enough that they engender compression of returns? Worst of all, could that return compression lead to the allure of PE and VC consequently dimming, as they are increasingly unable to demonstrate significant outperformance of other asset classes?
Apparently not, because fund managers are shape-changing wizards and also I'm not sure the last bit is a sentence:
a bearish take would be rather myopic, as it is overly predicated on PE and VC approaches staying static. As we have already seen, fund managers are constantly adapting to an ever shifting environment—and one of the principal factors of that change has been the driver of an ever-increasing dry powder level.
'factor' has to mean 'effect' or 'impact' or something like that. I think?
posted by snuffleupagus at 7:14 AM on June 14, 2018
Maybe it's something more like 'all the excess money sloshing around is one of the things driving' either the "shifting [of the] environment" or else the manager's "adaptation" to it.
Or maybe it's just nonsense.
posted by snuffleupagus at 8:10 AM on June 14, 2018
Or maybe it's just nonsense.
posted by snuffleupagus at 8:10 AM on June 14, 2018
Sighs and puts on "my retirement plan is the revolution" button
posted by The Whelk at 8:33 AM on June 14, 2018 [5 favorites]
posted by The Whelk at 8:33 AM on June 14, 2018 [5 favorites]
Everything is overvalued because money is cheap currently, that's why people go to VC/PE, because using their magic power they can get better returns, but they can't because anything worthwhile has been bid up.
posted by Damienmce at 12:01 PM on June 14, 2018
posted by Damienmce at 12:01 PM on June 14, 2018
Everything worthwhile from the point of view of rich white men and people who have learned to think like rich white men is arguably overvalued, yes. If sweet/dumb VC money really was that easily available, I'd be busy changing the world rather than playing Just Cause 2 and posting this shit on MeFi.
There's no shortage of things to invest in that can bring reasonably high returns with little risk in 3-5 years, but they aren't sexy so they don't get funded. Part of it is this strange expectation that established players who have proven themselves quite brittle in the face of change are outwardly intimidating if you believe their hype, so deals don't get done out of fear. Never mind that their ridiculously slow capital allocation cycle puts the new entrants at an advantage.
The downside risk appears lower on some shiny new app idea, so that's where the money goes despite the 90+% chance no money will be made on any given deal. The chance of hitting the lottery seemingly clouds the judgement of people who really should know better.
posted by wierdo at 3:10 AM on June 16, 2018 [1 favorite]
There's no shortage of things to invest in that can bring reasonably high returns with little risk in 3-5 years, but they aren't sexy so they don't get funded. Part of it is this strange expectation that established players who have proven themselves quite brittle in the face of change are outwardly intimidating if you believe their hype, so deals don't get done out of fear. Never mind that their ridiculously slow capital allocation cycle puts the new entrants at an advantage.
The downside risk appears lower on some shiny new app idea, so that's where the money goes despite the 90+% chance no money will be made on any given deal. The chance of hitting the lottery seemingly clouds the judgement of people who really should know better.
posted by wierdo at 3:10 AM on June 16, 2018 [1 favorite]
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posted by Jimbob at 8:21 PM on June 13, 2018