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.
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