As we've noted frequently over the past month, the venture capital and private equity industries face a growing cash crunch as limited partners (the folks who provide the cash that VCs and PEs invest) get squeezed themselves. This is still far from a crisis, but it could get there. And it will cause VCs and PE firms to be even more cautious in making new investments and adding to existing ones.
WSJ: From pension funds to rich individuals to once-deep-pocketed financial institutions now in desperate shape, this year's plunging markets have made it much harder for some investors to come up with the money they promised to invest in venture-capital funds...
In October, Washington Mutual Inc. skipped a $700,000 capital call from a fund called Financial Technology Ventures Fund III and was listed as a "defaulting limited partner," according to a court filing by the Seattle company last month...
In late September, WaMu missed a $30,000 capital call to another fund, Arch Venture Fund V. The company now is trying to sell its venture-fund stakes to other investors. A WaMu spokesman declined to comment, and the outcome of Saturday's deadline isn't clear.
"Lawyers have said everyone should expect at least one default [from investors] in the next year," says Bryan Roberts, a managing general partner at Venrock, a Palo Alto, Calif., venture-capital firm...
[T]he largest U.S. public pension fund, the $179.2 billion California Public Employees' Retirement System, or Calpers, has asked private-equity firms to ease off on requests for additional capital it had previously committed to deliver...
"In all likelihood, a number of institutional investors will not honor capital calls," predicts Cynthia Steer, a consultant at Rogerscasey. While doing so could break legal agreements, there are few precedents for venture-capital and private-equity funds suing their investors, since they need to maintain long-term relationships with the investment community.
The industry got through this relatively easily after the 2000 bust (although many of its portfolio companies didn't). This time the crunch could be deeper and more prolonged, however, given the stress on the rest of the economy.
See Also: The Cash Panic Sweeping the VC Industry
