I was looking at some redemptions data this morning, and Herman, it is getting a bit spicy out there. Have you seen what is happening with Stone Ridge and BlackRock? We are sitting here on March twenty-fourth, twenty twenty-six, and it feels like the floor is shifting. They are starting to pull the emergency brake on investors who want their cash back.
I have been tracking that very closely. I am Herman Poppleberry, by the way, for anyone just joining us. And you are right to be concerned, Corn. The gating of redemptions at firms like Stone Ridge, BlackRock, and Morgan Stanley is a massive signal. When a firm like Stone Ridge only honors eleven percent of withdrawal requests, it tells you the private markets are feeling a serious, systemic squeeze. It is not just a hiccup; it is a liquidity crunch in private credit and equity that we haven't seen the likes of in quite a while.
It feels like the exit doors are getting smaller while everyone is trying to leave the theater at the exact same time. Today's prompt from Daniel is about the structural and operational differences between Venture Capital and Private Equity. It is actually perfect timing because people often lump them together as just "big private money," but they are reacting to this twenty twenty-six liquidity crunch in very different ways.
They really are. While they both swim in the pool of private capital, the plumbing is completely different. Daniel wants us to dig into the history and the mechanics, and honestly, you cannot understand why BlackRock is gating funds right now without understanding how these two industries were built from the ground up. They have different DNA, different risk tolerances, and frankly, different ways of looking at a balance sheet.
Let's start with the basics then, the "thirty thousand foot view" as the consultants say. Most people hear Private Equity and think of corporate raiders from the eighties, and they hear Venture Capital and think of guys in hoodies in Palo Alto or the new AI labs in London. Is that still the right mental model, or has the line blurred too much in twenty twenty-six?
The line has definitely blurred, especially with growth-stage venture, but the fundamental mission remains distinct. Venture Capital is technically a subset of Private Equity, but it is the wild, high-stakes sibling. Think of it this way: Venture Capital is looking for the "zero to one" moment. They want to find a company that barely exists, maybe just a couple of founders and a white paper, and turn it into a global titan. Private Equity, in the traditional sense, is looking for a "ten to one hundred" moment. They want mature companies with steady cash flows that they can optimize, restructure, or load with debt to amplify returns.
Right, so VC is betting on a dream, and PE is betting on a spreadsheet. But they both use that famous "two and twenty" fee structure, right? Two percent management fee and twenty percent of the profits?
The "two and twenty" is the industry standard. The two percent covers the lights, the salaries, and the travel. The twenty percent, which they call "carried interest," is where the real wealth is made. It is the performance fee. Interestingly, the term "carried interest" actually comes from old-school sea captains in the sixteenth century. They would "carry" the goods across the ocean and keep twenty percent of the profit from the cargo they transported. Modern fund managers are basically just high-tech sea captains navigating the digital oceans.
I love that. I can just picture Roelof Botha from Sequoia in a captain's hat. But before we get into the modern AI-driven madness of twenty twenty-six, we need to talk about how we got here. You wanted to start with the history, so take us back. Where does the "Venture" in Venture Capital actually come from? It wasn't always Sand Hill Road and fleece vests.
Not at all. It really starts after World War Two. Before nineteen forty-six, if you had a crazy idea, you basically had to beg wealthy families like the Rockefellers or the Whitneys for a check. It was very informal, very "old money." But in nineteen forty-six, General Georges Doriot, who is often called the Father of Venture Capital, founded the American Research and Development Corporation, or ARDC.
A General? That sounds more disciplined and rigid than I expected for the origins of Silicon Valley.
He was a fascinating guy. He was a professor at Harvard Business School and a brigadier general. His goal was to encourage private sector investment in businesses run by soldiers returning from the war. He wanted to institutionalize the risk. The real "aha" moment for ARDC came in nineteen fifty-seven when they invested seventy thousand dollars in a company called Digital Equipment Corporation. That investment eventually grew to be worth over three hundred fifty million dollars.
That is a legendary return. Seventy thousand to three hundred fifty million. That is the "power law" right there in the nineteen fifties.
It set the template. But the industry was still relatively small until two things happened. First, in nineteen fifty-seven, Arthur Rock helped the "traitorous eight" leave Shockley Semiconductor to form Fairchild Semiconductor. That was the birth of the Silicon Valley ecosystem. Arthur Rock essentially invented the role of the modern VC as a coach and a connector, not just a checkbook. But the real rocket fuel—the stuff that turned VC into a global powerhouse—came in nineteen seventy-nine.
Let me guess, a change in the law? It is always a boring rule change that changes the world.
You nailed it. The ERISA Prudent Man Rule. Before nineteen seventy-nine, pension funds were basically banned from investing in high-risk assets like venture capital because it was seen as "imprudent." The Department of Labor relaxed those rules, allowing pension fund managers to put a small percentage of their capital into venture. Suddenly, the amount of money flowing into the sector went from a trickle to a flood. We went from a few hundred million dollars in total venture funding to billions almost overnight. It turned VC from a niche hobby for the rich into a massive institutional asset class.
It is funny how a boring-sounding rule change can create a whole industry. So while VC was learning how to fund semiconductors and software, what was the rest of the Private Equity world doing? Because the "Barbarians at the Gate" era feels very different from General Doriot's vision of helping returning soldiers.
Private Equity's modern era really kicked off in nineteen seventy-six when Jerome Kohlberg, Henry Kravis, and George Roberts left Bear Stearns to form KKR. They pioneered the Leveraged Buyout, or LBO. The idea was simple but aggressive: use a little bit of your own money and a whole lot of borrowed money to buy a company. You use the company's own cash flow to pay off the debt, improve the operations, and then sell it for a massive profit.
It sounds like buying a house with a huge mortgage, fixing it up, and flipping it, but the house is a multi-billion dollar corporation like Nabisco or Toys "R" Us.
That is exactly the mechanism. The peak of that era was the nineteen eighty-nine takeover of RJR Nabisco for thirty-one point one billion dollars. It was a cultural phenomenon. It showed that no company was too big to be taken over. But it also gave Private Equity a reputation for being "vultures" who just cut costs, fired people, and stripped assets to pay back the bank. It was the era of Gordon Gekko and "greed is good."
And that is a reputation they have been trying to shake for thirty years. Though, if you look at someone like Orlando Bravo at Thoma Bravo today, the strategy seems to have shifted from "cut to the bone" to "software operational excellence."
Orlando Bravo is a great example. He has been very vocal lately, especially this month in March twenty twenty-six, defending the sector against claims that we are in a "private credit debacle." He argues that modern Private Equity, especially in software, is about making companies better, not just leaner. Thoma Bravo buys mature software companies, fixes their pricing models, improves their recurring revenue, and scales them. It is much more "industrial" and systematic than the corporate raiding of the eighties. They aren't looking for a "vulture" play; they are looking for an efficiency play.
Okay, so we have the history. VC is the high-growth, high-risk child of the nineteen seventies rule changes. PE is the debt-fueled, operational restructuring engine. Let's talk about the math, because this is where the two really diverge in terms of how they handle a crisis like the one we are seeing today.
The math of Venture Capital is governed by the Power Law. In a typical VC fund of, say, twenty companies, the firm expects fifteen of them to fail completely or just break even. They expect maybe three or four to do okay. But they need one company to be a "fund returner." They need a company that goes one hundred times or one thousand times the initial investment.
Like Sequoia with WhatsApp. They were the only venture investor, put in about sixty million dollars, and walked away with three billion when Facebook bought it.
That one deal pays for every other mistake the firm made for five years. Because of that, VCs are comfortable with a ninety percent failure rate. They are looking for "convexity." They want limited downside—you can only lose what you put in—but unlimited upside. They are swinging for the fences every single time.
But Private Equity cannot work that way, right? If you are using debt to buy a company, you cannot just let it go to zero. The bank wants their money back whether the company is "disrupting" an industry or not.
You hit the nail on the head. If a PE firm buys a company for ten billion dollars and uses six billion in debt, they have a massive interest payment every month. If that company fails, the PE firm doesn't just lose their equity; they have a mess with the lenders that can ruin their reputation and their ability to raise the next fund. PE is about "downside protection." They are looking for steady, predictable four times or five times returns. They don't need a one thousand times return, but they absolutely cannot afford a zero. This is why they focus so much on cash flow. You can't pay interest with "vision"; you need actual dollars in the bank.
Which brings us to the liquidity crunch of March twenty twenty-six. If you are a PE firm and you are sitting on a bunch of companies you bought with debt, and interest rates stay high, and the IPO window is only "selectively thawing" as the reports say, you are stuck. You cannot sell the company to the public markets, and you cannot afford to keep paying the interest forever if the margins are getting squeezed. Is that why we are seeing this "gating" of funds?
It is a huge part of it. Investors in these funds—the Limited Partners like pension funds and endowments—are looking at their portfolios and seeing that they are "over-allocated" to private markets. Because public stocks have been volatile, the private portion of their portfolio looks too big on paper. They want to pull money out to rebalance, but the PE and VC firms don't have the cash because they haven't been able to sell their companies. There are no exits.
So they "gate" it. They basically lock the door and say, "You can only have eleven percent of what you asked for," like Stone Ridge did. That has to be terrifying for a pension fund or a family office that needs that cash to pay out their own obligations.
It is a classic liquidity mismatch. These firms promised high returns in exchange for locking money up for ten years, but investors are finding out that "ten years" can sometimes mean "whenever we can actually find a buyer." This is why the secondary market has exploded. We saw ninety-four point nine billion dollars in exit value move through the secondary market in the last few months of twenty twenty-five and early twenty twenty-six.
For people who don't know, the secondary market is basically the "used car lot" of private equity, right? If I am an investor and I cannot wait for an IPO, I sell my stake in a startup or a PE fund to someone else, usually at a discount.
A "used car lot" is a decent way to put it, though it is more like a high-end auction house for distressed assets right now. If you want out of a top-tier VC fund today, you might have to take a twenty or thirty percent haircut on the "official" valuation just to get liquid. There are specialized firms like Lexington Partners or Ardian that do nothing but buy these "second-hand" stakes. They are the ones providing the liquidity when the front door is gated.
Let's talk about where the money is actually going right now, because despite the "gating" and the liquidity issues, there is one area that seems to have an infinite appetite for capital. AI startups captured sixty-five percent of all venture deal value in twenty twenty-five. That is three hundred thirty-nine point four billion dollars. Herman, that is an insane concentration of capital. It is like the entire venture world decided there is only one game in town.
It is unprecedented. We have gone from forty-six percent in twenty twenty-four to sixty-five percent now. It is a "winner-take-most" environment. VCs are terrified of missing the next OpenAI or Anthropic, so they are piling into these massive "foundation model" rounds. We are seeing people like Vinod Khosla and Pejman Nozad at Pear VC making massive bets. But here is the catch: these AI companies have massive capital expenditures. They are spending billions on compute and electricity.
So the venture capital is basically just being funneled directly to Nvidia and the cloud providers. It is like a circular economy of hype and silicon. Does that fit the traditional VC model, or are we seeing something new? Because usually, software is high margin because you don't have to buy a factory. But these AI companies are basically building digital factories.
It is a hybrid. It has the "moonshot" risk of traditional VC, but the capital requirements of a heavy industrial project. Usually, VC is great because software has zero marginal cost. You write the code once and sell it a million times. But with these large language models, every time you "sell" a query, it costs you electricity and GPU time. The margins are different. This is why you see Sam Altman out there trying to raise trillions for chip manufacturing. The scale is just different.
I wonder if that is why we are seeing more Private Equity firms start to look at AI. Usually, PE waits for a technology to mature, but if these AI companies start showing steady recurring revenue, do you think the "Barbarians" will start moving in to optimize them?
We are already seeing it in the mid-tier. PE firms are buying up AI-adjacent service companies and specialized software-as-a-service providers that have integrated AI. They aren't betting on the next breakthrough model; they are betting on the "plumbing" of the AI economy. They want the companies that have the data and the customer relationships. They are looking for the "picks and shovels."
It is like the gold rush. The VCs are funding the people looking for the giant gold vein, and the PE firms are buying the companies that sell the picks, shovels, and sturdy denim jeans.
That is a classic framing, and it still holds. But look at the scale of the deals on the PE side. Global buyout deal value grew forty-four percent to nine hundred four billion dollars in twenty twenty-five. The Saudi Public Investment Fund just took Electronic Arts private for fifty-six point six billion dollars. That is a massive "take-private" deal. That is a mature company with huge cash flow and a massive library of intellectual property. That is the "buyout" side of the house showing its muscles even when the venture side is sweating over burn rates.
What about the geographic shift? We saw that EY report from March ninth saying India hit sixty point seven billion dollars in PE and VC investment in twenty twenty-five. That is their second-highest on record. Why India, and why now?
It is a "China-plus-one" strategy for a lot of these global funds. As geopolitical tensions make investing in China more complicated for American and European firms, that capital has to go somewhere. India has the demographic tailwind, a massive developer base, and a government that has been very aggressive about digital infrastructure. It is becoming the new frontier for both high-growth VC and operational PE.
It is also a hedge against the "gating" we are seeing in the West. If you are a global fund manager and your US portfolio is frozen because of a liquidity crunch, you are looking for high-growth markets where the entry valuations might still be reasonable and the exit environment is different.
But India has its own challenges with exits. You can put sixty billion dollars in, but can you get sixty billion out? The Indian IPO market has been active, but it hasn't yet shown it can absorb the kind of volume that the New York Stock Exchange can. That is the recurring theme of March twenty twenty-six: everyone knows how to buy, but nobody is quite sure how to sell.
Which brings us back to Daniel's question about the difference. If you are an entrepreneur or a business owner, which one do you want? If I am running a company, do I want the VC guy who thinks I am a "one in twenty" lottery ticket, or the PE guy who wants to check my margins every Tuesday morning?
It depends on your stage and your ego. If you want to change the world and you don't mind being diluted down to ten percent of your company in exchange for a billion-dollar valuation, you go VC. You get the "visionary" partners like Vinod Khosla or Roelof Botha. They will push you to grow at all costs because they need that "power law" return.
"Growth at all costs" sounds a lot more dangerous in twenty twenty-six than it did in twenty twenty-one when money was basically free.
It is much more dangerous. The "burn rate" conversation has returned with a vengeance. VCs are now telling their founders to get to "default alive"—meaning they can survive on their own revenue if the next funding round doesn't happen. That used to be a Private Equity mindset. The two worlds are converging because the "free money" era is over.
So the VCs are acting like PE, and the PE firms are buying tech companies. The distinction is really about the "capital structure," isn't it? PE uses debt as a lever. VC uses equity as a fuel.
That is the most elegant way to put it. PE uses the "leverage" in Leveraged Buyout to magnify returns. If you buy a company for one hundred dollars—using twenty of your own and eighty from the bank—and the company value goes up to one hundred twenty, you have doubled your twenty-dollar investment. That is a fifty percent return on a twenty percent increase in company value. That is the magic of leverage.
But if the value goes down to eighty, you are wiped out. Your twenty dollars is gone, and the bank owns the company.
That is the cliff. VC doesn't have that "cliff" in the same way. If a VC-backed company loses twenty percent of its value, the VC still owns their shares. They are just worth less. There is no bank coming to seize the keys unless the company literally runs out of cash. This is why PE firms are so obsessed with "downside protection" and "covenants." They are constantly looking over their shoulder at the lenders.
Let's talk about the "two and twenty" model again because I want to connect this to episode fifteen hundred two. We talked about how family offices are starting to bypass these firms entirely. If you are a massive family office with five point five trillion dollars in assets, why pay a PE firm a two percent fee every year just to hold your money, and then give them twenty percent of the profits?
They are asking that exact question. Why pay the "middleman" fee? Many family offices are now hiring their own teams of ex-Goldman Sachs or ex-KKR analysts and doing the deals themselves. This is putting huge pressure on the mid-market PE and VC firms. They have to prove they provide "alpha"—that they have a special sauce or a network that the family offices can't replicate.
Is that why we are seeing more "specialization"? Like Pear VC focusing purely on the seed stage, or Thoma Bravo focusing purely on software?
Specialization is the only defense against the commoditization of capital. If you are just "money," you are a commodity. If you are "the guys who know how to scale an AI infrastructure company in Southeast Asia," you can still charge two and twenty. But the days of the "generalist" fund that just buys anything that looks profitable are numbered.
I want to go back to the "gating" for a second because I think it is the most important takeaway for our listeners who might have exposure to these markets. When Stone Ridge or BlackRock gates a fund, what does that actually mean for the broader economy? Is this a "canary in the coal mine" for a larger financial crisis, or just a temporary logjam?
It is a sign of "stale pricing." In the public markets, if news breaks, the price of a stock changes in milliseconds. In private markets, valuations are often based on "last round" or "comparables." If a company raised money two years ago at a ten-billion-dollar valuation, the fund still carries it at ten billion on their books, even if in the real world of twenty twenty-six, it is only worth five billion.
So the investors want to pull their money out at the "ten billion" price before the fund admits it is actually "five billion." It is like trying to sell your house at twenty twenty-one prices when it is twenty twenty-six.
That is the "run on the bank" dynamic. The managers gate the fund to prevent a fire sale. They don't want to be forced to sell their best assets at a massive discount just to pay back a few nervous investors. It is a protective measure for the fund, but it also destroys trust. If I cannot get my money out when I need it, I am going to think twice before I put money into the next fund. It breaks the "illiquidity premium" promise.
It feels like a reckoning for that "illiquidity premium." For years, people were told that locking your money up was a good thing because it stopped you from panic-selling and gave you higher returns. Now, they are realizing that "illiquid" actually means "stuck."
The "illiquidity premium" only works if the returns are actually higher. If you are locked up for ten years and you get the same return as the S and P five hundred, you just paid a two percent fee for the privilege of being trapped. That is the conversation happening in boardrooms all over the world this month.
So, to summarize for Daniel's prompt: Venture Capital is the legacy of General Doriot and Arthur Rock—a high-stakes bet on the future, powered by the nineteen seventy-nine ERISA rule change that let pension funds join the party. It lives and dies by the Power Law.
And Private Equity is the legacy of KKR and the "Barbarians"—a debt-fueled engine for optimizing mature companies. It lives and dies by downside protection and debt service.
And in March twenty twenty-six, both are facing a liquidity crisis that is forcing them to gate redemptions, while simultaneously trying to figure out how to navigate an AI boom that is sucking up sixty-five percent of all available venture dollars. It is a wild time to be in the private markets.
It is a fascinating moment of transition. The "Barbarians" are still at the gate, but now they are using AI to figure out which gate to kick down. And the VCs are still dreaming of unicorns, but they are checking the "burn rate" and the "default alive" status before they sign the check. The era of "easy money" has been replaced by the era of "efficient money."
Before we wrap up, what is the one practical thing a listener should take away from this? If they are looking at their own investments or their company's future?
Understand the "capital stack." If your company is backed by VC, you are on a treadmill that only goes faster. You have to exit big, or you are a failure in their eyes. If you are backed by PE, you are part of a machine that needs to produce cash to service debt. Neither is "better," but they require very different types of leadership and very different types of stress tolerance. Know which game you are playing.
And if you are an investor, remember that "private" means "private." You cannot just hit a "sell" button on your phone like you can with Apple or Tesla stock. When the gates go down, you are stuck in the park until the rangers decide to open the exit.
That is a perfect place to leave it. The "liquidity" in private markets is often just an illusion that holds up until everyone tries to use it at once.
Well, that was a deep dive. Daniel, thanks for the prompt. It really forced us to look at the plumbing of the global economy. If you want to dig deeper into how the ultra-wealthy are handling this, definitely check out episode fifteen hundred two on the rise of the modern family office. It connects a lot of these dots about why the traditional firms are under so much pressure.
I enjoyed that one. It is wild to see how much power is shifting away from the traditional "Barbarians" and toward these private family empires.
Thanks as always to our producer Hilbert Flumingtop for keeping the gears turning behind the scenes.
And a big thanks to Modal for providing the GPU credits that power the research and generation for this show. We couldn't do these deep dives into the twenty twenty-six data without that horsepower.
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See ya.
