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For the buyout side of private equity, 2006-07 will eventually be seen as the equivalent of 1999 for venture capital, said Ken DeAngelis, founder and general partner of Austin Ventures. “They bought lots of companies at record levels of earnings and leveraged those purchases with record levels of debt.”
DeAngelis gave the morning keynote speech at the tenth annual Entrepreneurship and Venture Capital Conference at Gleacher Center on November 14. Sponsored by the student-led Entrepreneurship, Venture Capital & Private Equity Group and the Polsky Center for Entrepreneurship, the day-long event drew hundreds of students to six panel sessions, a lunch keynote from Ron Packard, ’89, CEO and founder of K12 Inc., and a fireside chat with Scott Griffith, ’90, chairman and CEO of Zipcar.
DeAngelis warned that large numbers of impending layoffs and bankruptcies would result from the buyout frenzy because participants did not factor a big recession into their spread sheets.
“With unprecedented leverage and unprecedented purchase prices, those assets and those investments are going to turn into tremendous losses,” DeAngelis said. “The buyout guys took the $450 billion they raised in 2006-08 and probably leveraged it five times. That’s almost $3 trillion that’s in the ground, and you haven’t read about that in the papers yet.”
Average initial returns on venture capital investment of 17 percent over the last 20 years are misleading, he said. About 10 percent of VC funds return 90 percent of the mean, DeAngelis said. VC invested almost 10 years ago is losing money today on average.
“We stayed at the party too long and backed awful Internet models,” DeAngelis said. “We had inexperienced people and we burned cash like you wouldn’t believe. The venture returns in the internet bubble were driven largely by the internet bubble. The public who bought those stocks did not make any money.”
Nonetheless, DeAngelis called private equity a “fabulous business” that allows its practitioners to touch every aspect of company creation, growth, and value actualization. “It’s more fun than I can tell you, after 30 years in the business,” he said. “You can actually influence outcomes. It’s a little bit like being a consultant but putting your money where your mouth is. If you don’t like people, confrontation, or direct communication, this business is not for you.”
Despite its current dismal outlook, DeAngelis said, the positive aspects of starting a career in private equity today are that:
Second-year student Alana Perevalova attended DeAngelis’s presentation for its application to business in general. “It’s good to see what the practicing professionals think of the trends and what their take is on what’s happening at the moment,” Pervalova said. “Now is a very uncertain time but at the same time it’s very exciting.”
Phil Rockrohr