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Are Venture Investors Not Meeting Their Capital Calls?

from the or-just-threatening dept

Last month, we talked about how the financial crisis might impact the venture capital community, noting that many more limited partners (LPs, or the folks who put money into venture capital funds) were looking to sell their stakes in the aftermarket. Bloomberg is now taking a look at the issue, noting that more than double the amount of stakes is up for sale compared to a year ago, basically confirming that a number of LPs are looking to get out of their commitments. One interesting tidbit is that, in many cases, this has nothing to do with losses from venture capital, but due to the rules that the LPs (pension funds or institutional investors) have on allocation. As we mentioned in the original post, most of these investors set aside a certain small percentage of their money for such high-risk alternative investments. The problem is that with the rest of the market collapsing, these investors overall portfolio has shrunk, driving the venture investments over the self-imposed limits -- forcing them to sell off to rebalance. Partly, this shows the silliness of forced rebalancing under such principles. It's forcing firms to get out of investments that might be okay, just to keep percentages intact.

However, the bigger issue is hidden at the very bottom of the Bloomberg article. It's the question of whether or not any of these LPs are defaulting on their commitments to VCs. That's been the big fear. Since LPs merely commit to venture capital funds, and then wait for "capital calls" before actually handing over the money, the worry is that LPs would default. However, the article notes that there's no evidence that this has actually happened yet. It may still just be early, as the real market collapse is only a few months old, and there probably haven't been many (if any) capital calls in the last few months. But, does anyone know of any LP that has actually failed to meet a capital call? It would be interesting to hear if it's actually happened, or if it's just a concern at this point.

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  • identicon
    justg, 18 Nov 2008 @ 6:34am

    It might be silly...

    ...to re-balance like that, but if larger institutions had taken heed of risk components of their own portfolios, we wouldn't be in this mess...

    I'd much rather have a nicely fluid market that takes care of the monies we put into it. Yes, there will be an ebb-and-flow of offerings but it won't collapse.

    reply to this | link to this | view in chronology ]

  • icon
    Chris Maresca (profile), 18 Nov 2008 @ 8:27am

    I've actually heard....

    ... rumors that this has already happened at one or two firms. Because it's always the same names popping up, it wouldn't surprise me if this was the case.

    I'm also heard from some VC friends that LPs are asking for delays in capital calls until next quarter. Ironically, this seems to have made VCs more desperate to find good investments...


    reply to this | link to this | view in chronology ]

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