One man gathers what another man spills
Years ago, a colleague/mentor shared a truth about the investment industry that few people stop to think about. You can be a good investor, or you can be really good at the investment business…very few people are both. In an ideal world, investment managers combine people with both skills for ultimate success, but few ever find the right mix. But what’s the difference: A good investor, buys low, sells high and manages the risks between. Someone who is good at the investment business is generally really good at gathering assets. As we said before, the personalities of the individuals on either side of this spectrum generally prevent one from being the other.
So what does that have to do with SVB and the current state of private markets? During the last several years of free money, investors in the Venture Capital world didn’t have to be good investors because EVERYONE looked like they were good at the venture capital business. Silicon Valley Bank was a critical cog in making that happen. Their reputation and connections were top notch and borderline systemic. And if we may generalize, in 2022, investors in Private Equity markets looked very much like good investors. They had much better relative returns than other asset classes and that’s particularly notable in a big down market like last year.
As we look forward to remainder of 2023, we are at a crossroads for these asset classes. On one hand, the outperformance of PE meant that large institutional investors are faced with the denominator effect and finding themselves over allocated to the asset class. On the other, VC had a rough year and would ordinarily get some benefit from the denominator effect and a fresh allocation. But with SVB going down, part of this market is missing. Others will step up and maybe entrepreneurs go directly to investors, but SVB’s absence will mean a significant slowdown in new assets coming to market and that could prevent reallocation of capital that would normally happen at this time.
We’ve been banging on this drum for a while, but we wonder if this confluence of events doesn’t result in a reevaluation of Private Equity as an asset class and perhaps higher allocations longer term.