The lead article in Mass High Tech this week brings to light the precipitious drop in private equity deals, IPOs, and venture backed Merger/Acquisition activity in New England. I read about this on the same day I saw a segment on CNBC which provided essentially the same thesis: that since they’ve been keeping records at places like the National Venture Capital Association, there hasn’t been this little dealmaking, new IPO activity, or liquidation events for the private equity community. In other words, in the last 40 years we’ve never seen such a slowdown for private equity. Well, it turns out CNBC has had a slew of segments over the past few days that have addressed the topic.
Wow. What does that say about the state of our economy? When some of the brightest business people on the planet, whose mandate in their limited partnerships is to put the money to work so they can generate double digit IRRs decide it’s better to be in the business of operating the companies in which they’ve already invested, or decide it’s better to sit on the huge pools of capital they’ve raised in their LP funds and risk having to return the money to their partners than it is to place bets on new ventures, new technology and new products…then all I can say is WOW! That is not a good sign.
In fact it’s a terrible sign. It’s a terrible sign because the engine of capitalism is a process known as “creative destruction.” First used by Joseph Schumpeter to describe what he saw as the fundamental way that capitalism creates surplus value, the concept of creative destruction is what drives entrepreneurs to enter markets, innovate new technologies, and drive costs out of existing business. It is the essential process by which capital flows in to fund new ventures and products. It’s how you get companies like Cisco, Intel, Microsoft, Apple, Starbucks, and thousands of others. Frankly, it’s how the innovative companies of 100 years ago came to be; Gulf Oil, US Steel, Standard Oil, Westinghouse, and Sun Oil Company (Sunoco) to name just a handful.
So when I see that private equity activity has basically fallen off the table at a time when PE funds are flush with cash and credit markets are reeling from their foolhardy embrace of convoluted and contrived securitization deals coupled with unimaginably lax lending poIicies, I blanch at the thought of what that means for our economy 10, 20, or 30 years from now. Without private equity flowing into the hands of the creative minds who see opportunity where others do not, capitalism cannot flourish. It is the Sine Qua Non of the capitalist economy.
