Raising money? Warning: Private equity is getting tighter

Editor’s note: “The Angel Connection” is a regular feature in WRAL Local Tech Wire. LTW asked consultant Bill Warner to share advice for entrepreneurs seeking angel investors and/or venture capital investment. He is chairman of the Triangle Accredited Capital Forum, an angel investor network with over 100 members throughout the Southeast.

RESEARCH TRIANGLE PARK, N.C. - More evidence is mounting that private equity is going to be increasingly harder to get. A Wall Street Journal had a cooling article about how large institutional investors are starting to be much more cautious with their investment strategies.

Also, pension funds and large foundations, the limited partners of private equity firms, are starting to turn down the opportunities to make investments in private equity firms. These limited partners are feeling the pain of the market downturn as a result of the reduced confidence in the economy and are reprioritizing their investment strategies. The article cited some examples:

• California Public Employees’ Retirement System, one of the largest pension funds, is asking its private equity firms to “ease off on requests” for additional capital.

• Harvard University is seeking to offload $1.5B in private equity investments.

• Kohlberg Kravis Roberts, who has been trying to go public, has reduced the valuations of several of its largest holdings.

• The market value of public private equity firms is falling like a rock, far greater than the overall market.

• The market selloff is putting some institutions in danger with oversized allocations of private equity investments.

• Many firms, like Madison Dearborn Partners are reducing the amount of money they are raising for new funds.

This is all eating away at the foundation of a house of cards. Follow each of the falling cards:

• As institutional money tightens, less money will go to the private equity firms (VC’s).

• The private equity firms will have less money to invest in companies, so that only the best of the best will get institutional financing as the hold more and more money to protect their portfolios.

• Angel investor backed companies, or any other companies that are expecting institutional money, are going to have to lean on their current investors to give them additional life.

• Angel backed companies are also going to feel a lot of pressure to conserve cash in order to lengthen the runway they have before needed any additional financing.

• Finally, angel investors are also feeling the same pinch that institutions are feeling. Their portfolios are squeezed and may have to reprioritize to less risking investments.

This is not good news for entrepreneurs, especially those who have companies that are strained for cash and in need of additional financing now. I just met with an early stage company this afternoon that has been stalled on getting a VC investment as the VC firm tries to close on a new fund from their limited partners. Who knows if they will ever see closure.

About the author: Bill Warner is the managing partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.