Is the Private Equity Bubble About to Pop?

Maybe it's my paranoia.

But when I read over the weekend that venture investment in 2007 was up 11% to $29.4 billion -- a six-year high -- I got really nervous. Seven and eight years ago, VCs were pumping money into businesses that had no business being in business. Six years ago, they stopped, and a bloodbath ensued.

Forty-seven companies filed for bankruptcy from January to October 2001. Among the more high-profile failures that year was virtual grocer Webvan, whose shutdown came less than two years after a $375 million IPO.

Here's why this should matter to you: Even though 2007 was a banner year for public offerings and VC investments, financiers cut their private equity commitments by 8% from the third quarter to the fourth quarter. That's not necessarily a bad sign, but it isn't a good one, either.

It makes me wonder if any of 2007's top IPOs -- VMWare (NYSE: VMW  ) , JA Solar (Nasdaq: JASO  ) , MercadoLibre (Nasdaq: MELI  ) , and Yingli Green Energy (NYSE: YGE  ) , for example -- will be the next Magma Design Automation (Nasdaq: LAVA  ) , which nearly doubled in the weeks following its November 2001 offering only to produce a seven-year total return of ... negative 35%.

Perhaps 2008 won't be a repeat of 2002. But many fear that the recession we saw back then is once again upon us, including, apparently, the Fed, which yesterday chopped key interest rates by 75 basis points.

As an investor in tech highfliers and recent IPOs such as SuccessFactors (Nasdaq: SFSF  ) , I take all this as a warning. You should, too. Keep away from Mr. Market's flavor-of-the-month club. Focus instead on tech businesses that have:

  1. Defensible competitive advantages.
  2. Excellent management.
  3. Limited, or inept, competition.

That's a strategy that works in any market.

Invest in related Foolishness:

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 558643, ~/Articles/ArticleHandler.aspx, 10/25/2016 12:58:47 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 3 hours ago Sponsored by:
DOW 18,223.03 77.32 0.43%
S&P 500 2,151.33 10.17 0.47%
NASD 5,309.83 52.43 1.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
LAVA.DL $0.00 Down +0.00 +0.00%
Magma Design Autom… CAPS Rating: ***
VMW $73.97 Up +1.06 +1.45%
VMware CAPS Rating: ***
YGE $3.98 Up +0.02 +0.51%
Yingli Green Energ… CAPS Rating: *