Policy

David Morgenthaler: Mid-market private equity firms could thrive in tough times

U.S. financial markets are likely to get worse before they get better, according to venture capitalist David Morgenthaler. However, smaller, operations-minded private equity firms like those in Cleveland and the Midwest could come through the financial crisis as winners.

U.S. financial markets are likely to get worse before they get better, according to venture capital pioneer David Morgenthaler. But middle-market, operations-minded equity firms like those in Cleveland and the Midwest could weather the crisis better than most.

“It all sounds pretty gloomy,” said Morgenthaler, founder of the venture capital and buyout firm in Menlo Park, Calif. and Cleveland that bears his name.

But mid-market firms “are going to be needed more than ever,” he said. “And the distressed-debt firms ought to have a real field day.”

Morgenthaler, whose venture practice focuses on information technology and life sciences, spoke after receiving a lifetime achievement award by the Association for Corporate Growth Cleveland late last week.

The man who is widely recognized as a modern venture capital leader used his acceptance speech to give his views about our nation’s financial markets and where they may go in the near future.

“Expect several very bad quarters in the real economy,” Morgenthaler told a sea of blue-suited investment bankers, venture capitalists, and other financial and investing professionals in a downtown Cleveland ballroom Thursday evening.

Morgenthaler said he’s not sure whether the stock market reflects all of the bad financial news. “Generally, there’s more fear than I’ve seen since the Great Depression. And I think the fear is going to get worse.”

Keep in mind that Morgenthaler was a pre-teen during the Depression.

Private equity firms – especially big ones – could have a tough time raising money for their investment funds. Massive fund- and debt-raising by large private equity firms has “been overdone,” Morgenthaler said. “[These firms] have handled themselves very badly with Congress, and they have not done the rest of the industry a service.”

But Morgenthaler ended his speech on a positive note.

“We’re going to have some tough tomorrows coming,” he said. “It’s likely to be awhile before the good times roll again, but in my view, they will.”

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