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In a wake-up call of sorts, Super LP Chris Douvos cautions GP universe that end of the day it's 'all about the Benjamins', impressive TVPIs not withstanding!...
'tis the central dogma of investing alright, but still leaves enough scope for a small repartee of my own - here goes;
My comment
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Not sure if it’s a norm,
but it’d surely surprise me if the GP takes an investment call in a particular
portfolio company without as much as doing a cursory review of its exit potential
& potential exit valuation – they probably do too, but don’t necessarily
assign a value, given the magnitude of arbitrariness in doing so. It hence is somewhat
ironic that the exit valuation in this model is merely a derivative of the
overall size/ value of the fund raised by the VC and doesn’t factor-in anything
that’d determine the potential of an individual investee enterprise – confounding
this further is the VC having to justify
this derived value.
So while the
proposed analysis does sound like a non-nonsense approach to assessing the fund
performance, that part about “reality checking those putative outcomes” would
still remain the single most challenging & expectedly the most contentious
aspect even as LP-GP engage with an intent to cracking the funding arithmetic.
Nonetheless, it’s good
to be reminded that for all practical reasons the sum of individual valuations
of portfolio companies in a particular fund is but an unexciting statistic to
the PE Portfolio manager in the LP organization keen on showcasing something akin
to the promise of an ‘absolute return’ his hedge-fund counterpart typically
presents :-)
