The Long Tail of the Private Equity Secondary Market



The Long Tail of the Private Equity Secondary Market

By Wm. Blake Winchell

Hits Business? Blockbuster Mentality? High Inventory Cost? Lockstep Culture? In his book ‘The Long Tail’, Chris Anderson uses these terms to characterize the historical structure of (mostly) media and retail businesses, and how changes in the fundamental characteristics of those businesses has lead to ‘long tail’ opportunities for companies like Amazon, NetFlix and Rhapsody. Sounds a lot like the private equity industry to me, and the same arguments that apply to books and music apply to the nascent and exploding venture capital and leveraged buyout secondary markets for all of the same reasons.

While there are multiple factors that have contributed to the ‘long tail’ phenomenon in media and retail, Anderson cites four in particular; the decline of the blockbuster, the increasing cost of holding inventory, the ubiquity of data and the emergence of aggregators. All of these trends are very evident in private equity and have contributed to the rise in the secondary market.

The Decline of the Blockbuster

Just like the movie, music and book businesses, historically, the venture capital business has been a ‘hits’ business. The time honored formula for a venture capital portfolio of 10 companies is that 3 will be ‘zeros’ (shut down or sold for scrap), 4 will be ‘misses’ (returning ................
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