We Can Have High Times If You’ll Abide
There is a capital crunch going on. It doesn’t matter what market you’re in, capital is harder to come by than it was 2 years ago. The constraints that have come from increased interest rates and subsequent bank tightening are affecting everyone. The pace with which this situation has changed has been astonishing, and unfortunately, many market participants started feeling entitled to seemingly free capital through early 2022. That entitlement has led to a multitude of problems for many in deal-based industries, and more importantly, it’s changed the balance of power in every deal. To skip to the punchline first, it’s a buyer’s market.
The market where this is most obvious today is Venture Capital, where just 2 years ago, a founder could clip a coupon of liquidity for themselves worth millions of dollars when they sold shares to an investor. The investors would hardly bat an eye while it was happening, and it resulted in hundreds if not thousands of overnight millionaires.
On some level, investors always want their founders to get rich, but the preferred method by far is through aligned financial interests and an eventual sale. When investors had to compete for investments, this type of liquidity event became the norm… NOT TODAY!!!
Today, founders need to participate in the investment. They need skin in the game. We see this in the private equity market with increasing regularity where sellers notes and rolled equity have become commonplace. Even the real estate market is seeing GP-Coinvestments with increasing regularity. The point here is this, no matter the market, when capital becomes scarce, buyers have more power. Nearly 2 years after the wild ride that was 2021, the investment world has changed.
These changes may hurt deal flow and income in the short term, but reminders like this are ultimately very healthy and prevent excesses from turning into systemic collapse. What happens next, though, is where the real money is made… it’s time to start hunting for the opportunities that constrained capital cause.