private equity investment

[Thoraeus]

Hello all,

I am looking at investment opportunities available to accredited investors, mainly at private share purchases.  I am looking at the platforms SharesPost and EquityZen, though the former has a minimum investment amount that is too much for my liking.

First question:  does anyone have any experience purchasing pre-IPO shares through either of these (or other) platforms that they would care to share?

Second question:  As I am starting the due diligence for this process, it occurs to me that I have an embarrassingly low level of sophistication in regards to the basics of business evaluation, valuation, etc.  As someone who has solely invested in low cost indexes up to this point, I have had no occasion to sit down and attempt to value(ate?) a company.  Does anyone have a recommendation for a succinct source to learn the basics of business finance (EBITDA and the like)?

Thank you in advance.

[Thoraeus]

Nice, very helpful.  Will go ahead and download that book tonight.  As for further reading, I would love to delve deeper... interested to hear your expanded list when you get time.  No such thing as too much information.

Thanks.

[Matas]

The Great Courses has a 60-lecture business series that covers the material as well. Just another option.

https://www.thegreatcoursesplus.com/critical-business-skills-for-success

[Donnie]

As someone who works on Wall Street, I can assure you that Wall Street is rigged against you. Information is assymetric, incentives are misaligned, etc. Stick with index funds.

Learning about valuation is fine if you want though. You need to dive in fully and spend a lot of time learning about financial statements, modeling, capital structures, etc. I agree that’s it’s probably not worth it for what you are considering though.

To your specific quesion about EBITDA, EBITDA is a proxy for unlevered free cash flow. Generally EBITDA less non-growth capex is a better proxy than EBITDA alone for true free cash flow generated by a business. If you pay 10x free cash flow for a business, that investment can be expected to generate a 10% return before taxes.

[Thoraeus]

Donnie wrote:

As someone who works on Wall Street, I can assure you that Wall Street is rigged against you. Information is assymetric, incentives are misaligned, etc. Stick with index funds.

Learning about valuation is fine if you want though. You need to dive in fully and spend a lot of time learning about financial statements, modeling, capital structures, etc. I agree that’s it’s probably not worth it for what you are considering though.

To your specific quesion about EBITDA, EBITDA is a proxy for unlevered free cash flow. Generally EBITDA less non-growth capex is a better proxy than EBITDA alone for true free cash flow generated by a business. If you pay 10x free cash flow for a business, that investment can be expected to generate a 10% return before taxes.

Click to expand...

Fair enough; I understand that the system is certainly slanted against those who are not connected.  In regards to purchasing pre-IPO shares, how specifically would this imbalance manifest?  It is my impression that you pay fees upfront to get the legal work done and probably won't get the best valuation in the world, but if you select a company in its pre-IPO phase that goes on to do well, would you not still reap the benefits?

 

This is an honest question and I'm open to walking away from the idea of private equity entirely, but I am curious to hear more of your logic behind that statement.

 

Thanks.

[Donnie]

Why would anyone give you a deal? I can assure you that no one is looking out for your interests. The goal of people selling shares is to get the highest price possible. Whoever is selling through this channel has determined that unsophisticated investors are the best way to get the highest valuation.

Simply because you buy pre-IPO, does not mean that the company will IPO at a valuation in excess of where you are buying resulting in a gain. Furture capital raises could massively dilute your shares before IPO or valuation could decline. Even if the company does IPO, you may be locked up from selling for a period of time. If the company ultimately doesn’t IPO, you will likely never get a dime back.

[Zaphod]

Look at Blue Apron and other companies that IPO'd this year that were obvious garbage. Those IPO buyers are getting hammered. One good thing about this market is its punished severely some of these awful companies without a real model. Then again, there is TSLA.

[Dr.V. Investor]

there was an article in wall Street Journal today.  I think these are referring to private equity firms. few points:

https://www.wsj.com/articles/does-private-equity-really-beat-the-stock-market-1518520639

Private-equity firms lock up your money for years and the assets it invests in don’t have an easily observable price like a stock does. Further, private-equity firms measure how their funds perform using something called an internal rate of return, a complex calculation of cash flows—how much you put in and how much you get out over the life of a fund. Public market returns are simpler: you put your money in and then watch day to day whether it grows in value over time.

Private-equity returns are tricky because investors don’t put all their money in when they decide to invest in a fund, but when the fund manager needs it for specific deals. Also, they can’t pull money out of a private-equity fund when they want, they must wait until the fund manager sell assets from the fund and returns profits, minus fees. And unlike stocks investors can only get into the funds during specific fundraising windows.

Private-equity firms calculate internal rates of return for their funds, based on the year they started investing. So, funds that began investing in 2000, for example, generated a combined 15% return a year over their lives.An internal rate of return, or IRR, isn’t a straightforward number. It takes profits after fees generated by the fund, plus the current valuation of any assets the fund still owns. It compares that value to the initial money investors put in. It is further complicated because investors put money in, and take money out, at different times depending on when the fund decides to invest in a specific asset and when the manager decides to return the cash as profits, for example after it sells a company the fund owned.

books recommendations: security analysis, intelligent investor.

We were approached by a company to invest on them. It' pre venture capitalist stage.  We knew the risk and we evaluate the company same way we evaluate a stock.  We'll see how that goes.