Here is a question for you. How long will it take a high net worth family or small endowment to grow from $100m value to $1bn value? If they earn 7%/year (10% historical stock market nominal return less 3% estimated inflation), then in 34 years, they will achieve $1bn.
What does this mean? It means that as we have a somewhat high number of families and institutions with $100m to put to work today seeking higher returns from "alternative" investments such as venture capital and LBO, in a few decades, if historical returns hold up, we may have many many more billionaire families and institutions seeking the turbocharged return promise of alternative investments.
What this says to me is that the absolutely staggering amount of wealth in the world today will grow many times from here, and there will not only be more yachts in the French Riviera, but the value of VC and LBO managers with "alpha" will grow over time, as probably will the value of beach front property in Carmel and the Hamptons. Why? The amount of money desirous of "beating the S&P 500" by investing in alternative investment vehicles is already so great as to almost be silly (for example, $2 trillion in hedge funds which as an asset class have a way of underperforming the S&P 500 after deducting 2% for fees and 20% of profits). Yet, it will get even sillier, and the few VCs with a proven ability to deliver true value, not just as investors but as co-entrepreneurs (think Kleiner Perkins, General Catalyst) will be in such demand by these growing trillions of dollars that it will make one's head spin.
The result will probably be, as it has been in the hedge fund business and I would argue also in the VC business and the LBO business, too much money chasing performance depressing the excess returns sought by the asset class and enabling many mediocre managers to earn large salaries for not adding true value.
Of course, the VC and LBO businesses will have cycles. VC returns peaked in 1999-2000 and perhaps LBO returns are peaking now... but the long term trend of the asset bubble funding the efforts by both asset classes seems to be well in place. And the growing investment interest by rich people and governments in formerly underdeveloped economies will only add fuel to the fire.
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