Thread by @cdouvos

1/ I've been having a few conversations with people in #VC about the denominator problem and I wanted to share this bit of math to put things in perspective:
If you run a $1B endowment, you may have a 15% #PrivateEquity target . . .
#Investing
#OpenLP

2/ So that means you're looking to have $150M in NAV of private holdings . . . and on top of that, you've got undrawn commitments of another 50 cents to $1.50 for every dollar of NAV depending on your positioning ands assumptions

3/ An old rule of thumb says that you should have $1 of undrawn for every $1 of NAV, but Dean Takahashi and Seth Alexander wrote a great paper a while back that refined that thinking, although the rule of thumb still seems to work for most people

4/ So now our hypothetical investor has $150M in illiquid NAV and $150M in undrawn commitments. If they've got a portfolio that looks like a 65/35 (which a lot seem to), that's down 21.96% in the last month (using Vanguard Wellington as a proxy)

5/ So now your 15% NAV looks like a 19.22% NAV and the same for your undrawn. That's almost a 30% change in that position.
These may not seem like they're huge numbers, but they are!
Also, if you think of the undrawn as an obligation (which it is, although a long-dated one)...

6/ That's way up, too. So your 30% NAV+undrawn now looks like almost 38.5%. Yikes!
Annnnnnd, when VCs/LBO folks start to see "value" or have to pay off their capital call lines, they issue cap calls that make people sell depressed stocks (and lock in losses) 😢

7/ Annnnd, this is on top of people already having had a "numerator" problem, as funds were coming back to market too fast and valuations were ballooning, so their NAVs were often above their target.

8/ So this is just a long winded way of saying that fundraising for funds is going to be pretty tough until the pig of NAV works through the snake (the, ahem, Exit Sphincter) and we start seeing distributions again because investing nirvana is when you're recycling distributions

9/ As an aside, one term I heard a lot in 2001 and 2002 from VCs was: "we're really focused on time diversity in this fund"

It's amazing how often we keep learning the same lessons.

10/ But the big lesson I learned in those days is to be empathetic. GPs are going through some hard stuff and so are LPs, who suddenly are in some very difficult conversations and whose jobs may be on the line, etc

#ThankYouForComingToMyTedTalk