Private Equity

[Dr Oli]

Interesting article today on Wall Street Journal online, concerning private equity investing and the fact that the universe of private markets now exceeds public stock and bond markets. This seems incredible to me and I can't believe we don't talk more about it on this site. They quote a statistic that the number of public companies has fallen by more than half since 1996. Wowsa. This makes it seem that we are missing a huge chunk of growth and are making due with the leftovers in our Vanguard index funds. Food for thought as I'm about to plunge another big chunk into a Vanguard taxable account.

I understand that these investments are much more opaque than public markets, but does anybody else feel like they're missing out on something? Many of us here would qualify as accredited investors but personally I haven't been offered to participate in these types of investments. Am I missing something or are some of you involved with such investments, and if so how did you hear about/vet them and how have your returns been? Or is this a route to disaster and better to not dabble at all.

I don't think I would pursue these types of investments with any more than say 10% of my portfolio, but it's strange that so many posts on WCI involve such things as private Real Estate investing, Crowdfunding, etc and not directly in PE funds. Thoughts or experiences much appreciated!

 

 

 

 

[cgossage]

Most on this site will be better off sticking to Vanguard than investing in PE. Valuations in the space are such where you are taking significant liquidity risk for 7-10 years to hopefully earn a small premium. Then you have PE fund fees of 2% management and 20% performance which make it very tough for the average PE manager to outperform the Russell 2000. If you can get Top Quartile funds every year it can be lucrative but it very hard to access or find the best funds every year.

To properly invest in the space you need to diversify accross multiple funds, vintage years and strategies. Typically you need $50mm to pull off a strategy like this.

Alternatively you could invest in a Fund-of-Funds but the extra layer of fees end up eating up any alpha over time.

The only thing I would consider are Secondary Funds. The fees are still high but you can diversify accross years and strategies fairly cheaply. Even then, most are going to be better off sticking to the Public Markets.

[ajm184]

Agree with Clint, better be willing to burn $10 - $20 million to even think realistically about getting into the PE space across different areas, therefore a NW in the high 8 figures/approaching 9 (and you don't get to count the zero's after the decimal point  ) is a pretty steep hill to climb monetarily.  PE is still on the risk/reward curve, so not missing anything imo as most PE shops use a fair amount of leverage.

As for why PE has grown so much, I have a theory.  Basically, the accounting and public equity regulatory burden has grown significantly over the past 20 odd years making it more appealing financially to stay private.  Lower public scrutiny also makes easier for management to execute.  There are several very well run privately held firms; think Koch Industries or Cargill.  The regulatory avoidance issue is an issue when PE management teams are not running their businesses for the long term, rather for their next funding round.

[Zaphod]

Dr Oli wrote:

Interesting article today on Wall Street Journal online, concerning private equity investing and the fact that the universe of private markets now exceeds public stock and bond markets. This seems incredible to me and I can’t believe we don’t talk more about it on this site. They quote a statistic that the number of public companies has fallen by more than half since 1996. Wowsa. This makes it seem that we are missing a huge chunk of growth and are making due with the leftovers in our Vanguard index funds. Food for thought as I’m about to plunge another big chunk into a Vanguard taxable account.

I understand that these investments are much more opaque than public markets, but does anybody else feel like they’re missing out on something? Many of us here would qualify as accredited investors but personally I haven’t been offered to participate in these types of investments. Am I missing something or are some of you involved with such investments, and if so how did you hear about/vet them and how have your returns been? Or is this a route to disaster and better to not dabble at all.

I don’t think I would pursue these types of investments with any more than say 10% of my portfolio, but it’s strange that so many posts on WCI involve such things as private Real Estate investing, Crowdfunding, etc and not directly in PE funds. Thoughts or experiences much appreciated!

 

 

 

 

Click to expand...

Not really, I dont really want anything to do with the Ubers, Juiceros, and Theranos of the world. Theres a pretty good reason most of those kinds of companies didnt or cannot go public.

The other thing is most reference the dot com era number of companies and ipos as if that were a normal market, it wasnt, and a bunch of those were never going to be profitable or were outright scams. You then have lots of other issues, mergers/acquisitions are the number one, big monopolistic types buyer out competition, eager to sell out start ups, and decreased demand for smaller offerings. There is then the issue of a lot more accessible private market available.

PE firms traditionally have always had the goal of IPO'ing and it will be interesting to see how they ride out the next recession or tightening of the credit/ipo market.

Obviously, you can make lottery type winnings if you're early enough, which is usually not when people like get involved. You also tend to need a lot of money to spread around as the great majority will be zeros.

[Dr Oli]

I understand most of those issues, but what do you mean that there is a more accessible private market available?

[Zaphod]

Dr Oli wrote:

I understand most of those issues, but what do you mean that there is a more accessible private market available?

Click to expand...

Now accredited investors and PE shops exist, and all the way down to kickstarter and the like. New rules to allow funding to private companies, loosening what can be invested in by the average joe etc...The market used to be the only place.

[Donnie]

As others have mentioned, most docs don’t have a high enough net worth to make it worth PE’s time to try to get doc investors, so opportunities are limited.

PE isn’t all boom or bust like Uber or Theranos. That’s more venture capital. A lot of PE is focused on buying more mature companies that can be grown organically through better management or through acquisition. Classic example is buying a company run by a family and the next generation doesn’t want to run the business. PE comes in and replaces management, rationalizes costs, etc. growing profitability. PE then sells a few years later to another PE fund, which tries to take the company to whatever the next level is. Most PE finds don’t have an IPO as an exit goal. That’s much more hassle than selling to a strategic or financial buyer. Further, an IPO may not result in complete liquidity for the owner, so that’s not ideal for PE either.

[Zaphod]

Donnie wrote:

As others have mentioned, most docs don’t have a high enough net worth to make it worth PE’s time to try to get doc investors, so opportunities are limited.

PE isn’t all boom or bust like Uber or Theranos. That’s more venture capital. A lot of PE is focused on buying more mature companies that can be grown organically through better management or through acquisition. Classic example is buying a company run by a family and the next generation doesn’t want to run the business. PE comes in and replaces management, rationalizes costs, etc. growing profitability. PE then sells a few years later to another PE fund, which tries to take the company to whatever the next level is. Most PE finds don’t have an IPO as an exit goal. That’s much more hassle than selling to a strategic or financial buyer. Further, an IPO may not result in complete liquidity for the owner, so that’s not ideal for PE either.

Click to expand...

Yes, I totally conflated VC and PE. Did read an interesting article related to this yesterday in bed, talking about how there was so much available cash in private markets compared to past.

[Hatton]

In the 90s everyone wanted access to IPOs until that crashed.  Anything that is "private" really needs much more scrutiny and probably should be avoided.