Today, he brings up one of my favourite topics - private equity fund focus! He specifically talks about Spectrum Equity Investors and their decision to cut their next fund target down to $1.5 billion from $2.5 billion. He points out that this move was likely due to two factors, both of which make lots of sense.
Hilarious! This second point (B) has always bothered me about the industry. I absolutely & wholeheartedly agreed with the need some level of specific 'allocation' requirements by LPs, but if a fund has performed in the past under one set of guidelines...let it be don't change the rules of engagement because you think it might be better. If it ain't broken, don't fix it (that said, I have no idea if Spectrum was/is broken).(A) Spectrum launched its effort within the same general time period as did new funds from Providence Equity Partners and ABRY Partners, two firms that share Spectrum's New England roots and media/communications investment focus. Providence also shares the occasional deal with Spectrum, which would cause many smart LPs to shy away from investing in both.
(B) Spectrum also has fallen a bit into what I refer to as the JPMorgan Partners trap, in that it often appears like it's trying to be all things to all people. JPMorgan Partners was a particularly egregious case of this, thanks to its generalized industry focus and yo-yo approach toward investment stage ("We're a VC firm that does LBO deals. No ,we're an LBO firm that does VC deals. No, we're the world's largest producer of multi-colored confetti."). Most LPs today seem to want specificity (as opposed to generality), which Spectrum has in terms of industry focus, but not in terms of industry stage (i.e., half the JPMorgan Partners trap).
Now, my opinion - I think that institutional investors should either require an extremely specific focus for their LP interests or provide them a flexible mandate. For example, let's assume you're managing $1 billion (raised in, say, late 2000) in capital that is supposed to be invest in the NY Tri-State area and in Series B sized rounds in IT companies. Your core investment period lasts for about 3+ years, all of which is (as we all know) defined by a pretty brutal recession, a horrific terrorist catastrophe, and the lowest level of IT spending seen in years. Does this make any sense? Absolutely not.
There were plenty of good opportunities during the past three years, but frankly most of them were not in this specific category. So, the well-paid investment analysts are tied because some institutional asset allocator wanted to check a box. Now that's really intelligent.
I've dabbled on this issue back in April and earlier this month. That said, I do believe that certain focus can make sense; the type of portfolio company client focus that ComVentures has with telecoms, FTVentures has with financial services, or Carlyle has with the Department of Defense.
More on this subject later...
