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>> Rule number two is that there’s no recycling. Once they cash out of a deal, the money goes away -- never to be invested, for the rest of the decade. What i
by alok-g 16y ago
>> Rule number two is that there’s no recycling. Once they cash out of a deal, the money goes away -- never to be invested, for the rest of the decade.
What is the rationale behind this? This sounds insane, and results in some more insanity that the author is trying to explain with this one!
- danshapiro 16y agoI don't know, but I have a guess. Investors model VC returns very carefully and use them in their portfolio to achieve a certain kind of risk profile. That model is based on each dollar being invested once. If it's invested more than once, the model gets exceptionally complicated. But like I say in the article - I'm not an expert in this stuff; I'm just a well motivated student. I hope someone from a firm will weigh in with a more definitive answer.
- alok-g 16y agoThis was one of the most informative articles I read on the subject by the way. Thanks so much!
- joshu 16y agoThis isn't actually strict. There are funds that don't cash out. They are called "evergreen" funds, and are rare but do exist. Part of the issue is that funds are judged and compared by their IRR. I'm an LP in eight funds. I don't care about IRR, just absolute return, and would love to see more evergreen funds. Finally, some of the funds that I am in do recycle returns if the return was under some multiplier. Anything under, say, 1.5x does not go back to the investor.
- robk 16y agoYep - it's more common to see a multiple for recycling in the sense you can recycle money 1.25x, after which the money goes back to the investor. This is generally done to provide liquidity to investors. Many investors prefer liquidity, nothing more or less.
- danshapiro 16y agoThanks, that's great info! One of the funds (arguably two or three, depending on definitions) in my last company was structured as an evergreen fund. It's a good model, but tends to be common in funds that only have one LP.
- robk 16y agoThis is not always the case. In my experience, it's much more common to see recycling allowed up to a certain amount, then the capital would be returned to the LP after that point to provide liquidity back to the LP.