Mid-Market Funds Asking for 25% Carry

It is of course for the good of the LPs

Buyout firms have begun horse-trading size caps and carried interest on new funds, according to Buyouts Magazine. The article which I've since confirmed independently with several LPs “ alleges that numerous firms have raised carried interest on new funds from 20% to 25% (which LPs hate), in a de facto exchange for keeping fund ceilings below anticipated subscription (which LPs love).

It may seem equitable, but it's not. Moreover, it's intellectually dishonest.

This tradeoff gimmick is mostly coming from upper-middle-market firms, which make the following argument: "We only want to raise $1 billion for our next fund. That's more than we raised last time, but it's reasonable due to market opportunities, number of partners, etc. Our concern, however, is that even a $1 billion fund will not generate enough management fees for us to prevent top talent from getting poached by the $10 billion to $20 billion mega-funds “who obviously have a much larger fee stream. So we only have two choices: Either raise our fund size substantially (which we think there is enough LP interest to support), or increase our carried interest from 20% to 25%. We opt for the latter, because it's fairer to our dear limited partners."

....

Finally, let me briefly address the crux of this mid-market argument: That such steps are necessary in order to retain key talent.

I understand the sentiment, but think it's ultimately a red herring. If a firm like Blackstone wants to poach a mid-market investor, it will always be successful if compensation is the individual's deciding/motivating factor. Raising carry on a $1 billion fund from 20% to 25% might narrow the chasm a bit, but not enough to build a bridge. The reason that most mid-market pros stay put is because they prefer the mid-market biz which is yet another argument for sticking to fund-size knitting. If your performance is strong enough, LPs will likely consent to the carry increase anyway.

Full analysis of a Buyouts article by PE Hub

Great Moments in Strategic Thinking: Google MyMaps

Om Malik at GigaOm notes that now that Google Maps has created MyMaps, a feature letting users easily map data on Google Maps, it means tough slogging for a series of startups built around the Google Maps API.

Google is announcing a new service, My Maps, that allows anyone to create their own Google Maps-based mashups, reports The Wall Street Journal. Essentially, anyone can go in and plot all the great Thai restaurants in San Francisco, and save it as SF Thai Food Maps. You can also attach YouTube videos to these maps. Think map mashups for dummies! Microsoft already offers a similar feature with its stellar and constantly improving Live Search Maps service.

The consequences of Google's announcement could be quite dire for a gaggle of map mashup start-ups including Platial, Frappr, Flagr and Plazes, to name a few that have raised millions of dollars in venture capital.

Some use the Google Maps API as an underpinning for their offering. They now face the prospect of competing with Google, which also controls the API. However, a quick review of Google's new service gives upstarts an edge on user friendliness, even though on their blog, Google claims even caveman can do it.

I don't mean to be mean, but was there any doubt that Google would ultimately make a MyMaps-like feature? And more generally, if there is something quick and easy programmatic that you are building on someone else's API, I think you should expect this to happen.

Here is a general rule of thumb to keep in mind when competing with Google that is twice as applicable for mashups.

If it is relatively easy for them to do programmatically or in an automated manner, you are ultimately dead. Real value will come if you can access offline data or capabilities that are just too niche or painful for them to do. So if you go post underwater pictures of every reef in Belize on your site and integrated with Google Maps in a mashup, you are probably safe. If you just build an additional programmatic feature to Google Maps in your application, then, sorry, if it is any good, you will have it copied.

This is not Google-specific, it is a general rule that without a proprietary edge, long-term you are usually in trouble....See what is happening with Alexa/Alexaholic for more of the same.

Cyprus - Travel Update (2/2): Old Religions

Warning: We are off-topic with this travel post. Nothing in here about mortgage securizations or .tv names or startups. This is about the language of religion and its implication for foreign policy, so feel free to skip! Old Religions

The second thought I want to share about Cyprus was triggered by Easter.

Greek Orthodox services, particularly around Christmas and Easter, (which, to my family's dismay, are about the only times I make it to church) are extremely elaborate affairs with multiple priests, cantors and a choir all playing a role. The language is Byzantine Greek, the churches and the vestaments are ornate, there is incense and flowers and, overall, it is a very rich visual and auditory experience.

Even in Manhattan where I went last night to the Archdiocesan Cathedral of the Holy Trinity, you feel like you are stepping back in time.

Easter is particularly important in the Orthodox church (much more so than Christmas) as it reflects the resurrection of Christ which represents the defeating of death.

"O death, where is thy sting? O grave, where is thy victory?"(Corinthians)

is from the Easter Service . It is suitably visually dramatic as well. At midnight the church lights go dark and from inside the alter a single candle is lit and passes through and lights up the whole congregation and the priest comes out and declares "Christ has Risen"

So this is a long-winded way of saying that it is a very effective medium to communicate a message.

Outside the Church (74th Street between 2nd and 1st Avenue)

This brings me back to a point I have been wanting to make for sometime after my trip to Cyprus. This Christmas, my father dragged me, kicking and screaming, to a 6:00am service on Christmas Day at the church of St. John in medieval Nicosia which is where the Archbishop of Cyprus presides.

It is a small church, build in 1662, with beautiful 18th century painted walls and ceilings. Everything aspect of stepping back in time that I felt last night in church in Manhattan was magnified x 10 in a church like that within the medieval walls of Nicosia.

Church of St. John

Picture from dolanh via Flickr Creative Commons license

The aspect that struck me most, though was the sermon. The north of Cyprus has been occupied since 1974 by Turkey and the Church has been one of the most hawkish organizations in asking for its return. The basic theme of the sermon was: "We will not rest until we can, once again, freely perform our religious services and pay respect to our ancestors in the churches and cemetaries of our fathers and forefathers."

Now, I tend to be a pragmatist in foreign affairs and a message like this coming from a man on the street would sound like silly bluster to me.

This Christmas for the first time, however, I was able to see it through the eyes of the Church.

The Cypriot Orthodox church is the oldest Christian church in the world (something like 1,700 years old). In medieval times, in both Cyprus and Greece, under 300 years of Ottoman rule, the Church was the only institution that survived and transmitted Greek language and culture to the present day. It is not an exaggeration to say that the Greek Church is responsible for Greeks retaining a cultural heritage that draws back in an uninterrupted manner to Classical times.

That is when I realized that, to the Church, 30 years is *not* a long time. It is a blink of an eye. So of course that is how they are going to speak. And in that context, it makes perfect sense that you are not going to give up after 30 years.

And what is perhaps sobering is that a lot of the Abrahamic religions (Christianity, Islam, Judaism) are going to be the same way, and so language that sounds overly dramatic when read on the USA Today website on a laptop computer ("We will defeat the Crusaders, just like we did in the 15th century" for example) sounds perfectly reasonable in an 500 year old church, mosque or synagogue.

It is tough to see this state-side, because the US is a bit ahistorical and focused on the future and on tomorrow, but it is definitely the state of most countries and peoples and that fact should play an important part in thinking through foreign policy and communication.

In any case.. these are not our problems for today, so whether you are celebrating Easter, Passover or absolutely nothing at all, this is perhaps a more general spring-time message to leave you with:

Do not fear death and may there be light in your life

Cyprus - Travel Update (1/2): New Office

It has been a very hectic three months and I had promised some of you pictures from some of my recent trips: Cyprus, Phillipines, Belize. I am going to try, over the next 3 weeks, to give an update on each of these. I am starting with Cyprus

New Office

I was in Cyprus for eight weeks in December and January primarily to manage the opening of our new office for Global Learning Semesters and Ledra Capital.

We have been growing pretty rapidly at Global Learning Semesters and had outgrown our space at Intercollege which had been letting us camp out, as needed.

So in August we signed a lease in a commercial building within 500 feet on the Intercollege campus. The office had not been finished, so the ensuing months where spent on the landlord putting in floors, etc.

We made two decisions early on:

a) We would build US-grade office infrastructure in terms of structured cable, raised floors, dropped ceilings, server rooms, etc

b) We would give ourselves room to grow, both for Global Learning Semesters and other Ledra Capital initiatives.

I think both those decisions were correct.

Part A impacts daily productivity.

Part B was a reflection of our expectation that moving in and out of an office would be a complete nuisance which was also the case. It is remarkable how many decisions are needed to move into an office, to say nothing of trying to track down Cypriot sub-contractors which is the equivalent of herding cats. It took pretty much our whole senior team in Cyprus to make this happen and was definitely a learning experience.

We initially planned to move in in October. We did not actually move in until January 15th. Below are a couple of illustrative pictures...

Unpacking

The office is primarily open-space but we did close off 3 offices, a conference room and a student resource center. Most days there are about 10 folks working in the office, but we could easily fit 30 as we grow.

The Backroom (for future use)

My conclusions so far:

a) Offices are a nuisance (and expensive) to build out

b) Despite all the virtual tools we have, offices are still very helpful for most people in promoting collabroration and increasing productivity. Our productivity has soared since we opened the office.

c) Open space is a hit in terms of building a firm culture.