Easier VC
Mon, 02/25/2008 - 07:01 — jpark (not verified)
Credit crisis spreading
My job just got “easier”?
What do I mean? Risk adjusted return.
The floor of every risk adjusted rate had traditionally been the Treasury Bill. Backed by the full faith of the US government, the idea is the T-Bill is the most secure (least risky) place to put your money. All other instruments are supposed to have some amount of risk. And the more risk that’s in there, the higher the return is supposed to be.
When things go bad is when the risk and return are not aligned. See current/past/any financial crisis, and when too much risk was not compensated with enough return, bad things happened. So if Ron Insana is right, then the bar is going to be set at zero % interest rate. Meaning there is no “safe” investment. That there is effective deflation.
I agree that the credit problem has filtered itself in all forms of lending/notes. It’s pushed every form of borrowing around. Too much risk, not enough return has crept into many if not all notes. But what happens when the bar has dropped to 0%? It means the risk adjusted return for the public sector market has also dropped. And it means the risk adjusted target return for private equity has dropped as well.
So maybe folks will not be forced to promise 16% IRR on VC. Some shops will be able to get those returns. Others won’t be forced to reach so high.
Strange things can happen when 0 is thrown into the mix.
Then again, it might just end up a meaningless number.
My job just got “easier”?
What do I mean? Risk adjusted return.
The floor of every risk adjusted rate had traditionally been the Treasury Bill. Backed by the full faith of the US government, the idea is the T-Bill is the most secure (least risky) place to put your money. All other instruments are supposed to have some amount of risk. And the more risk that’s in there, the higher the return is supposed to be.
When things go bad is when the risk and return are not aligned. See current/past/any financial crisis, and when too much risk was not compensated with enough return, bad things happened. So if Ron Insana is right, then the bar is going to be set at zero % interest rate. Meaning there is no “safe” investment. That there is effective deflation.
I agree that the credit problem has filtered itself in all forms of lending/notes. It’s pushed every form of borrowing around. Too much risk, not enough return has crept into many if not all notes. But what happens when the bar has dropped to 0%? It means the risk adjusted return for the public sector market has also dropped. And it means the risk adjusted target return for private equity has dropped as well.
So maybe folks will not be forced to promise 16% IRR on VC. Some shops will be able to get those returns. Others won’t be forced to reach so high.
Strange things can happen when 0 is thrown into the mix.
Then again, it might just end up a meaningless number.
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Jean-Luc Park
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