The Wall Street Journal reported today in the article "From $2 Billion to Zero: A Private-Equity Fund Goes Bust in the Oil Patch" that EnerVest Ltd.'s 2013 energy-focused private equity fund is "now worth essentially nothing."  According to the article, the $2 billion fund "borrowed heavily to buy oil and gas wells before energy prices plunged" and "is now worth essentially nothing."  Investors in the fund included leading pension plans, foundations and other institutional investors.

It's rare for a private equity fund to become almost worthless.  The article states that only seven private equity funds larger than $1 billion have ever lost money for investors, according to Cambridge Associates LLC, a leading investment adviser.  It's more common for early-stage venture capital funds to suffer losses, and I know of a few funds of the 1999 to 2000 vintage years that lost a significant portion of their value.

This is a good reminder that investing in private equity, growth equity and venture capital funds is risky, and includes the risk that the fund may become worthless and the investor may lose their entire investments.

Link to article:
https://www.wsj.com/articles/from-2-billion-to-zero-a-private-equity-fund-goes-bust-in-the-oil-patch-1500210002

​First time investors in private equity funds are sometimes alarmed / confused / surprised to learn that their fund investment has a negative return in the early years of the fund’s life.  Then, to their relief, as the fund ages, the fund’s return increases.  This is known as the ”J-Curve” and it is a common phenomenon in private equity, particularly early-stage venture capital.  

​A simplified hypothetical representation is of the J-Curve is below:

In a nutshell, Michigan has shifted public school teachers to a defined contribution plan, but allows teachers to opt for a more traditional defined benefit pension, but one that splits the costs 50/50 between workers and the state.  It's an interesting article and worth a read.

Link:
http://www.investors.com/politics/editorials/michigan-just-prevented-a-fiscal-crisis-are-other-states-paying-attention/ 

The private equity world has a lot of terminology.  In a prior post, I discussed the structure of a private equity fund, and introduced the terms "limited partners" (or "LPs"), the "general partner" ( or "GP") and the "management company."  In this post, we'll explore fund "sizes" and a little bit of how investments in private equity funds work.

The "size" of a private equity fund is based on the total amount of money all investors commit to invest in the fund - known as "committed capital."  Because a private equity fund invests capital over time, the fund does not need all of the investors' money at the inception of the fund, and so the fund "calls" capital over time.  Private equity funds typically have initial terms of 10 years, but most of the new investing occurs during the first several years (usually 3-5 years) of the fund, known as the "investment period."  As a result, the fund calls the bulk of capital from the investors during this investment period.
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​Let's use an example.

Basic Limited Partnership Structure
In a basic limited partnership, there are several passive investors (known as "Limited Partners" or "LPs") and the manager of the fund, (known as the "General Partner" or "GP").  The diagram below illustrates this basic structure.

Private equity funds (buyout, venture capital and growth equity funds) are typically structured as limited partnerships, which have two types of partners: limited partners, or LPs, which are passive investors in the fund; and a general partner, or GP, which is the manager of the fund.  As I evaluate funds, one of the fund terms that receives special attention is the amount of money the GP will commit to the fund - which is called "GP Commitment" or "GP Commit."  ​

I read an interesting article today titled "Nasdaq 6000: What It Reveals About Tech Stocks And Venture Capital."  The article discusses whether there is a tech bubble in the public markets (no) and whether there's a venture capital bubble (possibly).  It's worth a read.  Link:
http://www.nasdaq.com/article/nasdaq-6000-what-it-reveals-about-tech-stocks-and-venture-capital-cm779469

The Fortune article "Snapchat Actually Isn't the Hottest IPO This Year" argues that MuleSoft is actually a hotter initial public offering than Snap.  This argument is based on post-IPO trading metrics, such as first day "pop" (first day closing trade price vs IPO price) and price-to sales metrics.  It's an interesting article.  Link: http://fortune.com/2017/03/30/snapchat-ipo-snap-stock-mulesoft/ 

In a prior post "Mike Moritz on Private Equity (aka Leveraged Buyouts)" an opinion piece penned by the famed venture capital investor was discussed.  Now there's a rebuttal to Mr. Moritz's article.  ​

Mike Moritz, the famed venture capital investor at Sequoia Capital, has published an opinion piece on the New York Times called "Stephen Scharzman's Bad Business Advice."  In this opinion piece, he takes a swipe at the leveraged buyout business, which is now known as private equity.  He focuses on the amount of debt used in these transactions and the attendant cost-cutting that often includes layoffs.  I have met Mike Moritz on a couple of occasions, and found him to be a very smart and opinionated person.  His piece is worth a read, even if you don't agree with his positions.  

Link:  https://www.nytimes.com/2017/02/07/opinion/stephen-schwarzmans-bad-business-advice.html?_r=0

The BloombergBusinessweek article "The Tech Bubble Didn't Burst This Year. Just Wait" examines the current state of the venture capital industry.  The article provides various data points, and quotes Benchmark's general partner Bill Gurley as saying that the venture capital industry is "in a slow correction."  I agree with Mr. Gurley's assessment.  While venture capital funds are raising money at an incredible rate, it seems that VCs are being more selective and valuations are slowly rationalizing.  

Link:  http://www.bloomberg.com/news/articles/2016-10-20/the-tech-bubble-didn-t-burst-this-year-just-wait

The Harvard Crimson has an article "A Tale of Two Endowments" comparing the endowment performance between Harvard and Yale.  David Swensen, Yale's Chief Investment Officer, has posted some impressive returns over the past decade.  

Link: http://www.thecrimson.com/article/2016/9/29/a-tale-of-two-endowments/
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