Private Equity
Discussion
Greenmantle said:
Serious question
when we talk about private equity we are not just talking about billionaires.
who are the other risk takers?
is it done directly or indirectly?
surely anyone who has made a couple of hundred million isn't going risk anything on these wild dreams?
in my experience, some people get in very early on projects and for a few K outlay can pull n huge amounts (life changing in some cases) . If it is really good then than may get mates involved. They then get to meet people who did similar, or have their own "fame" so that a venture capitalist firm may invite them in early to invest. It is a gamble - but very interesting. when we talk about private equity we are not just talking about billionaires.
who are the other risk takers?
is it done directly or indirectly?
surely anyone who has made a couple of hundred million isn't going risk anything on these wild dreams?
Also , in my experience, virtually no company manages to raise 'enough' in the first round of funding and will need far more cash at some point, diluting the share value, senior people get kicked, etc etc. I saw this so many times I believe in many cases it was deliberate ploy by the VCs.
I knew several multimillionaires in the City in the 2000s. Almost all drank too much. Liked a breakfast meeting, a nice lunch, evening drinks...
I raised money for my company using private, and corporate funding. Only relatively small 5 figure amounts in most case, It is a fascinating world. But many sharks. I got lucky, was small and flew under the radar - kept out of the way, plus I kept in the black.
Such a broad topic.
If you take the strict definition of PE you're talking about equity investment in private companies. There are lots of different subset strategies/flavours of this, ie venture capital, buy outs, growth, infrastructure, distressed, etc. All similarly take equity investments in private companies but of different sizes/scales/stages of maturity.
These days a lot of PE firms are also involved in private credit, ie lending money. Quite often you'll find companies where the fund manager both invests in the equity and the debt of a target.
In terms of the investors, plenty of every day people probably have indirect exposure to PE via their pension funds or insurance companies. It's not just billionaires/HNW individuals that are partners in PE investment vehicles, it's institutional money from pensions and insurance or sovereign wealth funds.
People may have other opinions but I think we're at (or past) the peak of the cycle with regards to PE. Lots of funds are running for longer than the manager would wish at the moment, as well as seeing more in-kind distributions (where the fund gives the investors their underlying stake in the companies rather than cash).
The returns have historically been pretty good (although you could probably argue that may not always be the case given fungibility, liquidity, high fees, and comparison to other asset classes) so rich people and institutions have been happy to allocate some of their money to PE.
The people that work at the firms have also done very well, with typical management fees of 1-2% of committed capital (ie, you are paying the fund manager the fee for all the money you've committed, even if it's not invested yet) and then sometimes crazy carried interest (performance fee) of 20% of profits (after some hurdles etc are taken into account).
Strategies like venture seem a bit crazy from afar, as the funds will essentially be making many, many bets and expecting a handful to succeed enough to
make up for the majority that fail. A bit like throwing a handful of darts at a dart board.
Other strategies like infrastructure or real estate are ways for investors to get access to income/cash flows (rent or tolls from bridges/tunnels etc).
Often investments are made indirectly via a fund, but if the investor is of a certain scale or the investment is particularly big, then some investors are invited to co-invest, ie where the PE firm buys a chunk for the fund (and the investor will own some indirectly), and then the investors also buy some directly.
Quite often people that have made 100s of millions from selling their companies to PE funds will be invited to then invest in that fund manager's next fund. If you've made that much money you're hardly going to let it sit in the bank and let inflation erode it.
Ultimately as part of rational asset allocation it makes sense to put some towards private equity. However it's not as easy as just rocking up to a fund and handing over the money, some of the "best" funds are heavily oversubscribed and you need long standing relationships / history of being able to pay the money when called / deep pockets to be able to get into certain funds.
If you take the strict definition of PE you're talking about equity investment in private companies. There are lots of different subset strategies/flavours of this, ie venture capital, buy outs, growth, infrastructure, distressed, etc. All similarly take equity investments in private companies but of different sizes/scales/stages of maturity.
These days a lot of PE firms are also involved in private credit, ie lending money. Quite often you'll find companies where the fund manager both invests in the equity and the debt of a target.
In terms of the investors, plenty of every day people probably have indirect exposure to PE via their pension funds or insurance companies. It's not just billionaires/HNW individuals that are partners in PE investment vehicles, it's institutional money from pensions and insurance or sovereign wealth funds.
People may have other opinions but I think we're at (or past) the peak of the cycle with regards to PE. Lots of funds are running for longer than the manager would wish at the moment, as well as seeing more in-kind distributions (where the fund gives the investors their underlying stake in the companies rather than cash).
The returns have historically been pretty good (although you could probably argue that may not always be the case given fungibility, liquidity, high fees, and comparison to other asset classes) so rich people and institutions have been happy to allocate some of their money to PE.
The people that work at the firms have also done very well, with typical management fees of 1-2% of committed capital (ie, you are paying the fund manager the fee for all the money you've committed, even if it's not invested yet) and then sometimes crazy carried interest (performance fee) of 20% of profits (after some hurdles etc are taken into account).
Strategies like venture seem a bit crazy from afar, as the funds will essentially be making many, many bets and expecting a handful to succeed enough to
make up for the majority that fail. A bit like throwing a handful of darts at a dart board.
Other strategies like infrastructure or real estate are ways for investors to get access to income/cash flows (rent or tolls from bridges/tunnels etc).
Often investments are made indirectly via a fund, but if the investor is of a certain scale or the investment is particularly big, then some investors are invited to co-invest, ie where the PE firm buys a chunk for the fund (and the investor will own some indirectly), and then the investors also buy some directly.
Quite often people that have made 100s of millions from selling their companies to PE funds will be invited to then invest in that fund manager's next fund. If you've made that much money you're hardly going to let it sit in the bank and let inflation erode it.
Ultimately as part of rational asset allocation it makes sense to put some towards private equity. However it's not as easy as just rocking up to a fund and handing over the money, some of the "best" funds are heavily oversubscribed and you need long standing relationships / history of being able to pay the money when called / deep pockets to be able to get into certain funds.
Hi OP
I'm currently running my third PE-backed business (first one a start-up; second one a turnaround; this one a carve-out from a PLC). Also been an Operating Partner for two big funds
Any specific questions I can help with (other than 'does the model work? to which the answer is on average yes!)
I'm currently running my third PE-backed business (first one a start-up; second one a turnaround; this one a carve-out from a PLC). Also been an Operating Partner for two big funds
Any specific questions I can help with (other than 'does the model work? to which the answer is on average yes!)
Greenmantle said:
Serious question
when we talk about private equity we are not just talking about billionaires.
who are the other risk takers?
is it done directly or indirectly?
surely anyone who has made a couple of hundred million isn't going risk anything on these wild dreams?
Well how do you think they made the money in the first place? The money for PE comes from everywhere, from pension funds, invest banks, bonds, family offices, insurance business, foundations and everything else. when we talk about private equity we are not just talking about billionaires.
who are the other risk takers?
is it done directly or indirectly?
surely anyone who has made a couple of hundred million isn't going risk anything on these wild dreams?
southendpier said:
Also , in my experience, virtually no company manages to raise 'enough' in the first round of funding and will need far more cash at some point, diluting the share value, senior people get kicked, etc etc. I saw this so many times I believe in many cases it was deliberate ploy by the VCs.
It’s entirely normal to raise money in stages as the product evolves and its market potential/liquidity needs are understood. Likewise people exiting along the way is normal. The skill set needed at startup is different to growth to maturity. Some people can make that transition, others cannot.
A classic mistake that a lot of startups make is giving early starters C-suite job titles. Much of the time it’s just storing up trouble for the future… a firm tried to lure me out of retirement earlier in the year, because they were failing to scale, and one of the major red flags was that all of the key functions (and some non-core ones) already had “C” post-holders. Not one of whom had ever operated at that level previously. It’s almost inevitable that they’ll lose some potentially useful people when they have to take those titles away/give them to new hires if they do manage to scale.
There is a lot being distributed into private banking clients. At the bank where I work, I probably see one private market opportunity a week on average. I say private markets - the majority is PE, but also infrastructure and other flavours, however very little private credit.
Where I‘m based in Switzerland the barrier to entry is to be a Qualified Investor, which means either:
- CHF 2m bankable assets
- CHF 0.5m bankable assets and appropriate knowledge or experience
- An advisory or discretionary contract with a relevant financial intermediary such as the bank
The UK has similar rules, but I don‘t know the amounts by heart.
Minimum investments vary by product, but (again in Switzerland) range from 10k to 150k. Different jurisdictions have different minimums.
Personally, I‘ve got investments in a couple of PE fund of funds that cover a range of strategies, a life sciences fund, an open-ended software fund and have just subscribed to a royalties fund.
I invest in the ones I like the look of if their risk (including track record), return, minimum investment and lock up periods align with my goals. Generally, I‘m happy to trade illiquidity for additional returns.
The PE FoF have got some interesting investments in them - all of the major AI players, Revolut, Monzo, Stripe, Chelsea FC (I raised an eyebrow at that one), but ultimately there are 100s of portfolio companies, so they sadly aren‘t going make my investments go to the moon, but should support an overall decent return.
Where I‘m based in Switzerland the barrier to entry is to be a Qualified Investor, which means either:
- CHF 2m bankable assets
- CHF 0.5m bankable assets and appropriate knowledge or experience
- An advisory or discretionary contract with a relevant financial intermediary such as the bank
The UK has similar rules, but I don‘t know the amounts by heart.
Minimum investments vary by product, but (again in Switzerland) range from 10k to 150k. Different jurisdictions have different minimums.
Personally, I‘ve got investments in a couple of PE fund of funds that cover a range of strategies, a life sciences fund, an open-ended software fund and have just subscribed to a royalties fund.
I invest in the ones I like the look of if their risk (including track record), return, minimum investment and lock up periods align with my goals. Generally, I‘m happy to trade illiquidity for additional returns.
The PE FoF have got some interesting investments in them - all of the major AI players, Revolut, Monzo, Stripe, Chelsea FC (I raised an eyebrow at that one), but ultimately there are 100s of portfolio companies, so they sadly aren‘t going make my investments go to the moon, but should support an overall decent return.
eyebeebe said:
Personally, I ve got investments in a couple of PE fund of funds that cover a range of strategies, a life sciences fund, an open-ended software fund and have just subscribed to a royalties fund.
I invest in the ones I like the look of if their risk (including track record), return, minimum investment and lock up periods align with my goals. Generally, I m happy to trade illiquidity for additional returns.
The PE FoF have got some interesting investments in them - all of the major AI players, Revolut, Monzo, Stripe, Chelsea FC (I raised an eyebrow at that one), but ultimately there are 100s of portfolio companies, so they sadly aren t going make my investments go to the moon, but should support an overall decent return.
Quick question; I'm currently starting with 2 clients who might benefit from this exact route of funding given their unique positioning. How does one get the deal to one of the originators at the fund for a look?I invest in the ones I like the look of if their risk (including track record), return, minimum investment and lock up periods align with my goals. Generally, I m happy to trade illiquidity for additional returns.
The PE FoF have got some interesting investments in them - all of the major AI players, Revolut, Monzo, Stripe, Chelsea FC (I raised an eyebrow at that one), but ultimately there are 100s of portfolio companies, so they sadly aren t going make my investments go to the moon, but should support an overall decent return.
Thanks in advance
Mr_Megalomaniac said:
Quick question; I'm currently starting with 2 clients who might benefit from this exact route of funding given their unique positioning. How does one get the deal to one of the originators at the fund for a look?
Thanks in advance
From the bank’s side, we are distributors who provide the funding via our clients rather than originating the buyout deals.Thanks in advance
Most of the funds tend to be HQ’d in the US, but some will have European arms too. I would have thought that a regional corporate finance department of one of the big 4 would have contacts on the origination side. Otherwise Partners Group are (IIRC) the largest public listed private markets business in Europe. LGT Capital Partners or EQT also spring to mind in Europe.
I’m sure there are others on the forum who could give better insight on this one though.
Greenmantle said:
Serious question
when we talk about private equity we are not just talking about billionaires.
who are the other risk takers?
is it done directly or indirectly?
surely anyone who has made a couple of hundred million isn't going risk anything on these wild dreams?
I don't think tax has been mentioned, but PE investment can be very tax-efficient. when we talk about private equity we are not just talking about billionaires.
who are the other risk takers?
is it done directly or indirectly?
surely anyone who has made a couple of hundred million isn't going risk anything on these wild dreams?
Its too much for a sentence on a car forum, but addressing the last query; if the investor has made GBP200m and has the choice of paying more than half in tax, or using it (with debt) to get GBP500m exposure to the next opportunity...
Greenmantle said:
who are the other risk takers?
is it done directly or indirectly?
surely anyone who has made a couple of hundred million isn't going risk anything on these wild dreams?
There are buy side participants, some of them are:is it done directly or indirectly?
surely anyone who has made a couple of hundred million isn't going risk anything on these wild dreams?
• Private wealth institutions and Family offices
• Foundations and endowments
• Sovereign wealth funds (SWF)
• Separately managed accounts (SMAs)
• Private investment pools.
• Mutual funds
• Private limited partnerships
And sell side participants:
• Dealer (Investment) banks
• Retail brokers
They also should be institutional quality, meaning institutions like SWF and Pensions(smart money) can invest in.
Historically, average PE returns higher than Global Equities for the last 25 year. There is also a pattern of loads of good companies either de-listed or stay private for all sorts of factors but mostly regulation, costs and transparency. PE (like LL other alternatives) have less regulations.
BobToc said:
That comparison gets flattered by the early vintages. Performance more recently is much less compelling.
Returns will obviously differ per vintage year so most seasoned investors would diversify across vintage years, in addition to other forms (sector/industry, geography)i guess there is the difference between the insider view of PE which is broad, deep and complex and highly skilled and and....... versus the public view of PE which is the cancer that took their favourite brand and offshored manufacture of their products and destroyed the product and the brand... or maybe the one that took their local amazing coffee shop and turned it into a horrible global chain etc. It's a matter of branding but for everyone outside of the bubble or who isn't personally wealthy, PE is quite a negative thing.
Isn’t it because of PE most water companies are poor performing, criminally so most would agree.
They buy in, take them off the LSE, asset strip and load them with over leveraged debt all outsides of normal scrutiny and in front of an inept regulator.
The only water company I can think that has remained outside of their grasp and still listed on the LSE is Severn Trent, which coincidentally or not is the top performing water company, go figure.
As previously said if you’re not on the insides you might have a dim view of PE, can’t think why.. ……
They buy in, take them off the LSE, asset strip and load them with over leveraged debt all outsides of normal scrutiny and in front of an inept regulator.
The only water company I can think that has remained outside of their grasp and still listed on the LSE is Severn Trent, which coincidentally or not is the top performing water company, go figure.
As previously said if you’re not on the insides you might have a dim view of PE, can’t think why.. ……
Blown2CV said:
i guess there is the difference between the insider view of PE which is broad, deep and complex and highly skilled and and....... versus the public view of PE which is the cancer that took their favourite brand and offshored manufacture of their products and destroyed the product and the brand... or maybe the one that took their local amazing coffee shop and turned it into a horrible global chain etc. It's a matter of branding but for everyone outside of the bubble or who isn't personally wealthy, PE is quite a negative thing.
There is certainly an element of truth in that - that PE houses can and have been a force for bad and there are some very egregious examples. However, it is not the complete picture and they can be a very good thing. They can be perfect for operators and owners who for various reasons are unable to access capital, investment and skills. The latter is often over looked because it is not uncommon to find a founder reaching the ceiling of their skillset and facing challenges that will either grow or destroy the business if they do not take the right advice. You can buy that advice in, but it is often more effective when someone has equity and thus skin in the game.
I work with PE houses along with high net worths, sovereign wealth funds, operators and lenders. Often with PE, they want an honest appraisal of an opportunity and then an honest view of their exit.
We can usually spot a PE house with a questionable business model a mile off and will refuse to deal with them. However, we work with some truly excellent ones who really build a business and deliver an amazing return to the founder/ original equity investors and also to their own. A good one will keep us for the journey - I work in a mix of real estate and direct operational in specific sectors, so for example, I will be hired to get a PE firm up to speed on a particular market segment and particular operator / acquisition target, then act as valuer, developer, critical friend and advise on areas where we can add value, including fresh acquisitions.
The best ones are built on a range of individuals form a range of markets and roles, not just dry MBA hires, and that often shows in how you deal with them, how they deal with owners and staff and how they build the business to exit.
the public opinion and my opinion are not necessarily the same. However, I can see in my line of work that PE and other associated infrastructural funding approaches have created a pretty toxic mess. Partly it is the provision side but partly also, I guess, human greed in the founders.
The industry I work in has changed so much that it seems no one actually cares about doing a good job or having a high quality product, or planning for a long term sustainable future. Everyone just wants to work towards a large liquidity event, earn out and f
k off.
It's quite tiring to try and paint a longer term picture when no one actually cares anymore about that.
The industry I work in has changed so much that it seems no one actually cares about doing a good job or having a high quality product, or planning for a long term sustainable future. Everyone just wants to work towards a large liquidity event, earn out and f
k off. It's quite tiring to try and paint a longer term picture when no one actually cares anymore about that.
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