KUHN CAPITAL Saturday, February 24, 2018
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Clawbacks, Lack of Liquidity Threaten VCs

The Financial Times continued its recent undressing of the global VC market in two articles.

The first threat it described is the continuing dearth of IPO exit opportunites for VC investors. There were only four venture-backed IPOs during the first quarter, raising just $345m (240m) compared with $7.3b in the first quarter of 2000 and $467m in the same period last year. The amount floated also compares sharply to last year's fourth quarter, when $751m was raised.

The companies that went public included ZymoGenetics, a biotechnology group owned by Novo Nordisk of Denmark; MedSource Technologies, a medical equipment group; Synaptics, a mobile computing group, and PayPal, the consumer online payment company.

VC's and investment bankers say there is no shortage of venture-backed companies for sale. The problem is an absence of buyers. The result? Some VC's are running short of cash and they're reluctant to provide their portfolio companies with further capital.

As a result of this liquidity crunch, some VC's are also seeing other problems. Many of them have amassed large management fees on the committed capital of their limited partners investors, and those "limiteds" are now pressuring these VC's to give back or reduce the fees, a transfer called a clawback, unless fund performance improves.

Some limited feel they are entitled to clawbacks when a VC takes in management fees for a few individual investments, fees that later fail to be justified by the performance of the fund as a whole.

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