4 ms·

while I agree with the general premise (majority of VCs are not good investors) it's important to remember the money they raised isn't sitting in a bank account

by thdxr 4y ago

while I agree with the general premise (majority of VCs are not good investors) it's important to remember the money they raised isn't sitting in a bank account. It's likely still in the LPs stock portfolio, doing a capital call when everyone is down a lot can be tricky. You need to sell the investment more even though they agreed to give you the money when you asked

seibelj 4y ago
Yeah I was super confused by this. VCs generally don’t have all the money ready to invest. They may have raised a $300 mil fund but they don’t get that money until they call it in. If the LP says “no deals for 6 months” that’s how it is.
- EGreg 4y ago
  What if the LP says no deals for 50 years? These “fund raised X” means nothing if they can’t enforce capital calls
  - killjoywashere 4y ago
    That should be actionable as a breach of contract, with a notable exception of sovereign wealth funds, which may or may have immunity: https://www.reedsmith.com/en/perspectives/2013/11/capital-call-facilities-basics-challenges-and-oppo https://www.reedsmith.com/en/perspectives/2013/11/capital-ca...
- ericd 4y ago
  If the LPs don’t meet the capital calls, they’re in breach of their investor agreement, and the penalties are generally quite harsh, including potentially forfeiting a lot of the value they currently have in the fund.
  - jacquesm 4y ago
    Exactly. You either have the capital ready to roll or you should not engage in any such commitment.
- jacquesm 4y ago
  As an LP in a large fund: that's definitely not how it is. As an LP you pre-commit to a certain level, and when the capital call comes you perform or you will be found to be in default when a whole pile of clauses kicks in that you really do not want to have to deal with. You will have to have an extremely good reason (such as being already bankrupt) to be able to avoid a capital call that you have committed to.
  - Bubble_Pop_22 4y ago
    There are LPs and LPs. The LPs which the user above refers to are the APGs, the PFZWs type.
    - jacquesm 4y ago
      Show me a contract where an LP gets to renege penalty free on their obligations to a VC and I'll be happy to believe you. I have been part of 222 VC/PE deals to date (that's not a typo, just a coincidence) and not once has an LP reneged on their obligation to honor a capital call without penalty. That's not saying it doesn't happen, it may well happen, or it may have happened and it was kept so quiet that nobody picked up on it (which is somewhat believable, because it would reflect very badly on the fund). Just to give you one example: a VC enters into a deal, signs a non-binding terms sheet conditional on doing DD, goes through a full DD and then has to back out of the deal because a large LP does not honor their commitment. The fall out from that would be massive. What is far more likely to happen is that a VC can't find a good way to spend the funds committed capital. In that case there might be extensions of the funds run or they might end up simply not calling up the available capital. This I've seen a couple of times. But an LP that refuses a capital call I've yet to see. I've even seen an estate that was held to perform when an LP ended up with the very best reason for non-performance of all.
      - Bubble_Pop_22 4y ago
        I understand all the above, but the general rules kinda supercede it all.The general rules are that when you are the best/biggest thing around the block, rules just don't apply to you. Also in general when government is involved rules don't apply to it. 80% or more of the amount of money that LPs as a whole administer are either Govt. Pension Funds or SWFs. So in the case of big LPs it's one of the rare cases where both the above rules are at play to give them carte blanche.
- spoonjim 4y ago
  No, that's not how it is. If the LP doesn't pay their capital call they go into default and the returns on all the money they've invested so far can be taken away. The only LPs who default on the capital call are individual investors who are flat out broke. They will of course default on their capital call before their mortgage.
  - grey-area 4y ago
    What if there are no returns on all the money they have invested so far? This is quite possible in a bubble followed by a downturn.
    - jacquesm 4y ago
      Then you refer to your contract where on page 1 it states fairly clearly that there are no guarantees of returns and that the management fee is on the amount 'under management', and that a capital call will be inbound. Obviously all of these scenarios tend to be covered by the contracts and if you can't read a contract of that level of complexity then you should not be playing this game.
akharris 4y ago
Fwiw - my general premise isn't that the "majority of VCs are not good investors." My point is that there's a serious disconnect in the markets right now, and that it is rooted more in fear than a lack of opportunity. On the second point - you're right that the cash isn't literally sitting around, but VCs (generally) do not have to ask LPs for approval on a deal by deal basis. Capital calls can happen either as tranches or in response to a deal, and it is unusual for an LP to successfully refuse a capital call because of a specific deal.
- fullshark 4y ago
  If you just view VCs as any other business, it involves revenue (exits) and costs (investments). The market turmoil is affecting the volume and size of exits in at least the short term, which means they are cutting costs. It's not clear the number of opportunities have grown/shrank but i guess fewer people trying to invest means the number of available opportunities to you as a player has grown.

by thdxr 4y ago

seibelj 4y ago

Yeah I was super confused by this. VCs generally don’t have all the money ready to invest. They may have raised a $300 mil fund but they don’t get that money until they call it in. If the LP says “no deals for 6 months” that’s how it is.

EGreg 4y ago
What if the LP says no deals for 50 years? These “fund raised X” means nothing if they can’t enforce capital calls
- killjoywashere 4y ago
  That should be actionable as a breach of contract, with a notable exception of sovereign wealth funds, which may or may have immunity: https://www.reedsmith.com/en/perspectives/2013/11/capital-call-facilities-basics-challenges-and-oppo https://www.reedsmith.com/en/perspectives/2013/11/capital-ca...
ericd 4y ago
If the LPs don’t meet the capital calls, they’re in breach of their investor agreement, and the penalties are generally quite harsh, including potentially forfeiting a lot of the value they currently have in the fund.
- jacquesm 4y ago
  Exactly. You either have the capital ready to roll or you should not engage in any such commitment.
jacquesm 4y ago
As an LP in a large fund: that's definitely not how it is. As an LP you pre-commit to a certain level, and when the capital call comes you perform or you will be found to be in default when a whole pile of clauses kicks in that you really do not want to have to deal with. You will have to have an extremely good reason (such as being already bankrupt) to be able to avoid a capital call that you have committed to.
- Bubble_Pop_22 4y ago
  There are LPs and LPs. The LPs which the user above refers to are the APGs, the PFZWs type.
  - jacquesm 4y ago
    Show me a contract where an LP gets to renege penalty free on their obligations to a VC and I'll be happy to believe you. I have been part of 222 VC/PE deals to date (that's not a typo, just a coincidence) and not once has an LP reneged on their obligation to honor a capital call without penalty. That's not saying it doesn't happen, it may well happen, or it may have happened and it was kept so quiet that nobody picked up on it (which is somewhat believable, because it would reflect very badly on the fund). Just to give you one example: a VC enters into a deal, signs a non-binding terms sheet conditional on doing DD, goes through a full DD and then has to back out of the deal because a large LP does not honor their commitment. The fall out from that would be massive. What is far more likely to happen is that a VC can't find a good way to spend the funds committed capital. In that case there might be extensions of the funds run or they might end up simply not calling up the available capital. This I've seen a couple of times. But an LP that refuses a capital call I've yet to see. I've even seen an estate that was held to perform when an LP ended up with the very best reason for non-performance of all.
    - Bubble_Pop_22 4y ago
      I understand all the above, but the general rules kinda supercede it all.The general rules are that when you are the best/biggest thing around the block, rules just don't apply to you. Also in general when government is involved rules don't apply to it. 80% or more of the amount of money that LPs as a whole administer are either Govt. Pension Funds or SWFs. So in the case of big LPs it's one of the rare cases where both the above rules are at play to give them carte blanche.
spoonjim 4y ago
No, that's not how it is. If the LP doesn't pay their capital call they go into default and the returns on all the money they've invested so far can be taken away. The only LPs who default on the capital call are individual investors who are flat out broke. They will of course default on their capital call before their mortgage.
- grey-area 4y ago
  What if there are no returns on all the money they have invested so far? This is quite possible in a bubble followed by a downturn.
  - jacquesm 4y ago
    Then you refer to your contract where on page 1 it states fairly clearly that there are no guarantees of returns and that the management fee is on the amount 'under management', and that a capital call will be inbound. Obviously all of these scenarios tend to be covered by the contracts and if you can't read a contract of that level of complexity then you should not be playing this game.

akharris 4y ago

Fwiw - my general premise isn't that the "majority of VCs are not good investors." My point is that there's a serious disconnect in the markets right now, and that it is rooted more in fear than a lack of opportunity. On the second point - you're right that the cash isn't literally sitting around, but VCs (generally) do not have to ask LPs for approval on a deal by deal basis. Capital calls can happen either as tranches or in response to a deal, and it is unusual for an LP to successfully refuse a capital call because of a specific deal.

fullshark 4y ago
If you just view VCs as any other business, it involves revenue (exits) and costs (investments). The market turmoil is affecting the volume and size of exits in at least the short term, which means they are cutting costs. It's not clear the number of opportunities have grown/shrank but i guess fewer people trying to invest means the number of available opportunities to you as a player has grown.