The Poor Venture and PE Firms
My heart goes out to Venture Capital and Private Equity firms who have had a tough go of it in 2023 as interest rates have remained elevated. The horror that may be around the corner in 2024 is, well, horrifying (note to readers: please don’t choke on my sarcasm).
Caught up in my feelings: I feel for Private Equity not being able to borrow at a point above a zero percent Fed Funds rate. I feel awful for Private Equity firms that have had to write down the value of their Commercial Real Estate holdings. Don’t fret, you will soon have more company as the calendar turns to 2024.
My bleeding heart: My heart bleeds for Private Equity firms as well as public company CEOs that have had to or are in the process of rolling over debt at much higher rates. Fear not, for you too will have significantly more company in 2024 as a mountain of corporate debt is due to mature. 2025 will see more of the same. I wonder if Steve Schwarzman corners Jerome Powell at cocktail parties?
The horror. The horror. To think that Private Equity shops now actually have to do quality due diligence AND have a long-term strategy for driving superior operating results in order to drive superior cash flow margins and exit valuations. Gone are the days of buying companies with 100% cheap debt and selling holdings to your buddy for an extra couple of multiple turns on what you bought it for. The horror. The horror. Col. Kurtz apparently saw this day coming.
VCs, where to begin? The venture game was always a gamble and stayed afloat on 15 years of ultra-low interest rates. With QE gone for over a year hopefully to never return, we will now see who is good in the venture space. It is no longer enough to spin a narrative. The good venture firms know how to identify talent and build companies, not goose revenue and user metrics for the sake of exiting in the subsequent round. This higher rate environment ought to bring Venture investors’ interests more in-line with entrepreneur interests. That has not been the case for 20 years where VCs and Entrepreneur partners have been anything but partners.