What if the endowments pull back?

Talking with some folks about foundations/endowments and their continued support of private equity/VC.

 

The smaller ones might be in trouble.  We've seen high net worth individuals abandon their principle money before. This happened in the early 2000's.  Will smaller foundations follow suit during this crisis?  They may not be around to put more money into the sector. Any portfolio strategy that had you at 3% before, has you at 4.5% when you experience a 1/3 drop in value everywhere else.

 

In a similar vein, if you're a VC fund, and all your LPs are coming to you, telling you that they're either going to all drop you, or renegotiate the terms, you're probably going to renegotiate the terms.  Why?  Well it sucks to be the anchor of a fund, and have everyone else in the synidcate leave.  So if you can get the fund to slow down on capital calls, reduce the management fee, etc. it is worth your time to do so.

 

If this trend continues, then early stage VC, and even larger funds, may be more carry motivated, and smaller managemet fee.  For the smaller funds, there is a bare minimum that is needed for travel/expenses/lights/heat.  But for larger funds, the management fee might be dropped lower.  The days of 2 and 20 are gone.

 

Oh, and don't forget taxes.  The sector dodged a huge tax increase last year.  But will probably not be so fortunate this coming administration.  If, (ok When) carry is taxed as ordinary income, that'll take another bite into the wallets of the VCs.  We might start seeing options in the underlying portfolio company, or other ways to reduce the impact to the Partners.  These guys will have good tax lawyers, and just because a new system is imposed doesn't mean that they'll suffer too much.