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American VC’s seem so far to have successfully stonewalled the demands by some limited partner investors to disclose details on the current values of their portfolio company investments. They’ve even managed to modify some state laws that would have otherwise required such disclosure when the limited partner was a state-owned fund.
Despite the apparent failure of limiteds to break open the VC’s information inner sanctum, we believe VC’s will continue to feel pressure for more complete disclosure, and that in general the VC model will change in ways that grant limiteds more power and lower costs, especially regarding the fixed annual percentage charges that VC’s levy against limiteds’ investment commitments.
We say this in part due to the fact that many underperforming VC portfolio company investments made during the dot.com boom years remain on the books at original valuations: eventually these businesses will either have to be sold or closed down for a loss. That development will threaten the future fund-raising ability of many VC’s and open the door for more concessions to limiteds.
Meanwhile, across the pond, the adventures of a large, venerable and public VC, 3i Group plc, provides us with a glimpse of how public disclosure can act as a source of market discipline on VC’s. In mid-May Reuters reported that the giant investor (it holds interests in thousands of portfolio companies) was the object of unwelcome take-over attentions from the likes of Goldman Sachs, Credit Suisse First Boston, Blackstone and KKR. While the market has apparently discounted the likelihood of these purported $9 billion bids, based as it was on the assertions of an unidentified source, nonetheless any public company whose stock has declined 65% since its dot.com high in August of 2000, will attract attention or at least rumors.
One wonders how the stock of many American VC’s would be performing today were they public: that would be of course the ultimate “mark to market” for VC assets.
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