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It's not accurate to describe that situation by saying the model is broken, because by that standard every investment model is broken. The bad VCs are simply t

by pg 17y ago

It's not accurate to describe that situation by saying the model is broken, because by that standard every investment model is broken. The bad VCs are simply tricking their LPs by selling them bad investments. That happens with every other form of investment, from land to equity to hedge funds.

rjurney 17y ago
No more IPOs or (lately) acquisitions, lots of funds failing to return principal, and yet those VCs still making money. Sounds like a broken model to me. Maybe this does point to a broader problem? Isn't this the kind of shenanigans that led to the current downturn?
- pg 17y ago
  What evidence do you have that the current lack of IPOs is due to the fee structure of VCs? All the evidence I know of suggests otherwise. VCs had the same fee structure back when there were lots of IPOs.
  - rjurney 17y ago
    The lack of IPOs is not due to the fee structure of VCs. The incentive model however, continues to compensate them extremely well even though the LP's profit model is broken by SoX. Which would seem to mean that the system as a whole is broken, and that the VCs incentives are now a problem. This would seem to suggest that these incentives need to be reformed to fix the system. More likely though is that VC will simply crash like housing before any reform happens.
dpapathanasiou 17y ago
You generalize about every investment model, but can you name vehicles where the '2 and 20' fee structure is standard? It's really only hedge funds and VC funds. But the real problem with the '2 and 20' (especially in a bad economic climate) is that VCs have less incentive to care about how their portfolio actually performs.
- byrneseyeview 17y ago
  1. Nobody else targets such high returns. 2. If investment banks structured themselves as hedge funds, they would have a higher payout. Employee compensation routinely hits 50% of pretax profit. Assuming a bank gets an average return on equity of 10%, and bonuses are as large as salaries (lots of small bonuses, a couple really huge ones), that's a 5 and 25 bonus structure. Damn.
  - dpapathanasiou 17y ago
    That's the argument funds use to justify their fee structure to their LPs. In most cases, the LPs do worse than anticipated specifically b/c of the '2 and 20' fees. As Harry Kat said in the New Yorker article: "They are charging more than they are adding. I'm not saying they don't have skill; I’m just saying they don't have enough skill to make up for two and twenty."

by pg 17y ago

rjurney 17y ago

No more IPOs or (lately) acquisitions, lots of funds failing to return principal, and yet those VCs still making money. Sounds like a broken model to me. Maybe this does point to a broader problem? Isn't this the kind of shenanigans that led to the current downturn?

pg 17y ago
What evidence do you have that the current lack of IPOs is due to the fee structure of VCs? All the evidence I know of suggests otherwise. VCs had the same fee structure back when there were lots of IPOs.
- rjurney 17y ago
  The lack of IPOs is not due to the fee structure of VCs. The incentive model however, continues to compensate them extremely well even though the LP's profit model is broken by SoX. Which would seem to mean that the system as a whole is broken, and that the VCs incentives are now a problem. This would seem to suggest that these incentives need to be reformed to fix the system. More likely though is that VC will simply crash like housing before any reform happens.

dpapathanasiou 17y ago

You generalize about every investment model, but can you name vehicles where the '2 and 20' fee structure is standard? It's really only hedge funds and VC funds. But the real problem with the '2 and 20' (especially in a bad economic climate) is that VCs have less incentive to care about how their portfolio actually performs.

byrneseyeview 17y ago
1. Nobody else targets such high returns. 2. If investment banks structured themselves as hedge funds, they would have a higher payout. Employee compensation routinely hits 50% of pretax profit. Assuming a bank gets an average return on equity of 10%, and bonuses are as large as salaries (lots of small bonuses, a couple really huge ones), that's a 5 and 25 bonus structure. Damn.
- dpapathanasiou 17y ago
  That's the argument funds use to justify their fee structure to their LPs. In most cases, the LPs do worse than anticipated specifically b/c of the '2 and 20' fees. As Harry Kat said in the New Yorker article: "They are charging more than they are adding. I'm not saying they don't have skill; I’m just saying they don't have enough skill to make up for two and twenty."