From the outset, The Private Equiteer was designed to be a thoughtful journal about the inner workings of an otherwise clandestine industry. It’s much bigger than me though, so I’d like to steer it back on course by opening it up to others.

I’m looking for other private equiteers to join “The Private Equiteer” to help continue the legacy and benefit from the spoils.

What’s in it for the selected person/people?

• You get a voice in the industry
• You get a chance to articulate your ideas
• You can get industry exposure (named and/or anonymous writers)
• You get contacts from being one of few private equity thought-leaders
• You get a chance to develop your writing and problem solving skills

What’s in it for me?

• I get to continue what I started and work with other energetic people

What’s involved?

• Writing regular posts (say once a week or more) on private equity topics

What are the prerequisites?

• You absolutely must be someone that gets things done; you know who you are; you’re one of those people that just “takes care of business”
• You must have a good command of written English
• You must be thoughtful; someone who thinks about the world and private equity
• You must have a visceral interest in private equity, but you don’t have to be a GP

What’s the process?

Write a guest post for The Private Equiteer:

• not too long, just the average size, say 250-500 words
• it doesn’t have to be groundbreaking, just something I haven’t covered already
• it can be on anything PE-related (doesn’t have to be GP related)
• let me know if you want your name published
• send it to (blog [at] theprivateequiteer [dot] com)

I may publish your post and will then get back to you as soon as possible

What are the conditions?

• Your writing is licensed to The Private Equiteer; you can publish it elsewhere, you can even sell it as your own, but TPE may always display it
• Your writing may be edited for style, grammar, etc.
• This is purely voluntary at this stage; there’s no revenue share or royalty payments; though I’m open to partnerships and propositions with the right person

So, why would you even bother?

It’s not easy, I’ll admit that now. But it’s not hard either. It just requires some discipline, commitment and enthusiasm. The result is being part of something that people enjoy and value. And more than that, it’s an opportunity in one of the most revered industries in the modern world. This opportunity could be to expand the subject matter, the reader-base, the writer-base, the commercial arranges, or just to grow as a private equiteer.

You can contact me at blog [at] theprivateequiteer [dot] com

I mentioned a couple of months ago that I was leaving the world of private equity for the land of startups. It was a serious move. I was planning to leave stable employment, consistent income, lots of potential upside (carry), and an established career. But to be frank, it was the easiest decision I’ve ever made. I never once questioned it or procrastinated. It was automatic; like tying shoelaces.

So now after a couple of months, now that the reality has set in, I’m here to report on the remaining lustre of the dream.

There’s no denying that life is challenging now. For starters, I’m working more hours in a week than I previously worked in a month. And for all this work, I now have no regular income. The work is much more difficult and varied too. I thought life as a private equiteer was varied, but startup work is coal-face work; there’s no advising from afar. You design, implement, execute and improve, everything yourself.

With all of that said, I wouldn’t change it for the world. And that’s because it’s the ultimate challenge.

I’m now working in an office with a group of other enthusiastic entrepreneurs. And the air is electric. Everyone wants to be here. They’re giving their businesses everything. They’re passionate. They’re talkative. They have ups; they have downs. But they all keep moving forward at such amazing pace that it becomes self-propigating, creating a whirlwind of activity.

I learnt a lot from private equity and I enjoyed my time in what seems the perfect career. But startups are like cage fighting; they’re primeval and they reach to our roots. Maybe if I had the genetic composition, I’d have chosen cage fighting instead.

I’ve received a lot of email asking, “What’s the story, are you leaving PE?” The answer is, Yes, I am… I’ve had a great run working as a private equiteer and my time in PE has been exceedingly enjoyable, but it’s now time for a change and time to be true to myself.

You’re probably thinking, “what does that even mean… be true to yourself?” Well, I’ve come to realise a career in private equity is tangential to my overarching goals. I know, I know… that sounds very self-help-esque, but you’ll be glad to hear the result involves a very exciting startup venture (stay tuned).

So, what’s the future for The Private Equiteer? Well, as the title of the post suggests, I’m just leaving the building, not the blog. Conceivably, my new material will be refreshed by a different perspective of private equity; an “ex-insider’s now-outsider’s” view, if you will. I’ll also continue to post responses to your comments/emails and share all new thoughts on PE and VC.

All courses of action are risky, so prudence is not in avoiding danger (it’s impossible), but calculating risk and acting decisively. Make mistakes of ambition and not mistakes of sloth. Develop the strength to do bold things, not the strength to suffer. Niccolò Machiavelli

Private equity is a juggle of many roles, most of which rely on explicit risk calculation. And as with any juggling act, mistakes are inevitable. But that’s okay because we learn from mistakes and we probably learn more from mistakes than successes. However, there’s a catch.

If I touch a hot plate and burn my hand, I learn that it’s hot and that I shouldn’t touch it again. If I touch it again, then the mistake is reinforced. But if I continue to touch the hot plate, I’m not learning a whole lot more, I’m just getting burned.

We make mistakes of sloth (laziness) every day. We know laziness, contemplation and apathy are all toxic to progress. So, just like touching a hot plate over and over again, being slothful loses it’s punch pretty quickly. We may get some other benefit from being slothful (such as relaxation), but an education isn’t one of them.

On the other hand, mistakes of ambition are generally different day-to-day. We tend to learn something profound from each and every ambitious pursuit, even if it’s not immediately obvious.

In the context of private equity, you’ll learn nothing from NOT contacting a potential investee. But at a minimum, you’ll fine-tune your ‘get around the gatekeeper’ skills if you do call. And more than likely, you’ll have a valuable chat with an industry professional, which may even lead to a successful investment. The same goes for investee improvement; you’ll learn much more from conducting analysis and making suggestions, compared to doing nothing.

If things aren’t going as you planned, is it due to mistakes of ambition or sloth?

I checked the analytics of The Private Equiteer over the weekend and came across some interesting demographic info. Sure, this isn’t private equity theory, but I thought it somewhat interesting nonetheless.

• The most popular post, Stay Clear of Single-Owner PE Firms, received 1000+ visitors in just a few hours
• The largest source of referral traffic (excluding search engines) is pehub.com
• Of all traffic from search engines, 96% is from Google and 2.6% from Bing
• Surprisingly, 46% of browsers are IE, 34% Firefox, 10% Chrome and 9% Safari
• Operating systems: 86% Windows, 11% Mac and 2% iPhone (Blackberry is 0.2%)
• After English, Dutch and then French are the most popular language settings
• Visitors come from the US, then UK, Australia, India then Canada

As for keywords, the Top 5 traffic generators (not including versions of “the private equiteer”) are,

• “capex formula”
• “private equity blog”
• “does enterprise value include capex”
• “private equity due diligence”
• “how to calculate capex”

It’s interesting to see “capex” twice thrice in that list…

I haven’t posted anything opinionated for a while (except suggesting you should quit your job every 6 months), so what better way than suggest I have the mid-market private equity ’recipe for success’.

The role of a mid-market private equiteer is divided into, 1) Origination, 2) Analysis, 3) Dealmaking, and  4) Consulting. In simpler terms, 1) you find investees, 2) analyse them, 3) close deals with them, and 4) improve them. (Of course, you then need to exit your investments, but I classify that as dealmaking.) All of this is done to achieve target returns for investors, but more importantly, so you can take lots of carry home.

To find the recipe for success, we just need to deconstruct each of these roles and understand what is most important to achieve good outcomes.

Origination

This refers to finding leads that may turn into investments. You can sit back and wait for bankers to bring you deals, or you can use your resourcefulness to go in search of good deals. Both work, and both have their ups and downs, so it’s best to keep your nets spread wide and options open.

The main problem we face in proactive deal origination is just getting a few minutes of a business owner’s undivided attention. The recipe for success is to be amiable and tenacious. That is, be genuinely friendly to everyone (including receptionists) and try to contact business owners over and over again (not necessarily the same ones; just keep active). I guarantee, if you are nicer and more genuine than your colleagues, and you make MANY more calls than them, you’ll trounce your colleagues in terms of lead volume and quality.

Analysis

This refers to appraising a business before making an investment, plus the analysis required to help improve the investment later. The main problem is boiling the ocean. What I mean is, spending too much time building pretty (useless) financial models. The recipe for success is to ask yourself what matters most and just focus on testing a handful of related hypotheses. Are earnings maintainable and real? Do earnings translate well to cash flow? Are there any anomalies regarding Capex or working capital? Are exit opportunities plentiful? Etc. It shouldn’t take more than an hour with the information already at hand.

Keep in mind, great financial models don’t make great investments; great businesses make great investments. And great businesses aren’t found using financial models; they are found by getting away from the computer and developing your entrepreneurial intuition.

Dealmaking

This refers to turning a lead into an investment. The main problem is losing a deal due to a gap between your offer and the vendor’s expectations. The recipe for success … well, it really depends on the situation. Your offer doesn’t just include a monetary value. It may include prestige, future returns, profitable ideas, strategic synergies, and even friendships. If you deconstruct this, you’ll realise that a vendor is influenced by all of these ’soft’ offerings, and they may choose a lower price as a result, by monetary value is always a trump card. Depending which way the wind is blowing, a vendor can suddenly forget the connection you made and go for the highest price; that’s human irrationality.

But I don’t want to sit on the fence with this one. If I had to say there was one thing that constitutes a ‘recipe for success’ in dealmaking, I’d say it’s transparency. People are blown away when you’re amiable and transparent, especially when they’ve been dealing with ‘bankers’ all day. This theory is in stark contrast to some of my previous theories, but hey, it’s 2010 (that’s my official reason for everything this month).

Consulting

This refers to giving advice to help improve it your investee. I call this consulting because that’s what it is. You’re not employed by the business, you’re only on the board (or not even that in some cases). And the board is there in an advisory capacity. The main problem is actually making a difference. Too often, private equiteers mess with the mojo of their investees by trying to implement textbook McKinsey concepts in a world they’ve never operated in. The recipe for success is to acknowledge your relative inexperience in the investee’s industry and listen to what people say (and talk to them). Then, deconstruct the investee’s issues by focusing on what matters most to desired outcomes. It’s that easy.

Above all, work with your investees, roll your sleeves up and get your hands dirty. Become one of them, earn their respect and be diplomatic with ideas; form ideas together and implement them together. Don’t be the private equiteer that drives up in his/her Porsche and walks around with some superiority chip. You don’t effect change unless you can connect.

A reader recently asked me to contrast the human elements of working for a larger fund versus a smaller fund. The reader specifically asked about differences in learning curves, compensation, quality of life and hierarchy. It’s a great question because larger funds mean larger deals… and larger deals mean a completely different set of competitors, vendors, deal sources and processes.

Learning Curve

• We’re not dealing with rocket science here, so the learning curve isn’t particularly steep for private equity; once you’re through the door (i.e. you get hired), it becomes more about your resourcefulness
• For larger funds, the focus is firmly on becoming a confident and polished dealmaker; this means developing great communication skills and fitting in with the culture at the big end of town (sounds easier than it is)
• For smaller funds, the focus is on becoming an amiable dealmaker and an articulate consultant; this means personally connecting with business owners (often ‘moms and dads’) and learning how to deliver pragmatic advice with confidence (which can be a challenge for some people)
• The other difference relates to structuring; larger deals are more likely to use complicated instruments, whereas smaller deals often stick to pref equity and senior debt; but, none of this is too difficult if you apply yourself

Compensation

• Make no mistake, in a large firm you will earn multiples of what your smaller firm counterparts make, and the gap only increases from the day you start
• Smaller firms will attempt to bridge the gap by offering carry (albeit, a small %), but don’t become blinkered by this; it takes a long time for your carry to fully vest (10 years+) and there’s a lot of fine print that will mean you get much less than your initial calculations (see this post on my real-world carry calculations, Part 1, Part 2)
• With that said, carry is the holy grail for private equiteers, but you need a relatively large fund to make it meaningful (or great performance, but don’t count on that); of course there are many other variables, but you know what they say about a bird in the hand (base salary)…

Quality of Life

• Private equity isn’t investment banking, we work pretty reasonable hours
• If anything, smaller firms will work you a little harder as they often have fewer people working on more deals
• Irrespective of firm size, before accepting a position at a PE firm, make sure it doesn’t have a PowerPoint culture; this can indicate they work 80+ hours a week pumping out decks, which as we know, is what most investment bankers do
• You can do the sums to work out the management fee income to work out if they’re running on fumes or flush with cash; there’s a lot to be said for frugality, but it can be downright dispiriting having to pay for your own gas to drive out to investees (trust me, it happens, especially in single-owner firms)
• Above all, you need to be inspired by the people you work with and you need to feel that you’re a part of something big; great teams will make 90-hour weeks enjoyable, and uninspiring teams will make 35-hour weeks painful

Hierarchy

• You operate much more autonomously at smaller firms and get experience across a wide range of domains; this is implicit in having fewer people and working on smaller deals
• At larger firms, you’re more likely to have a set of duties that complement the overall team
• If you pick the right mid-market firm, you can grow very quickly, simply by having complete autonomy to close deals, manage investees and effect exits; you’ll never enter a mega-sized fund as a junior with this level of autonomy
• With that said, you’ll quickly feel under-compensated if you’re closing all the deals as a junior and being paid a janitor’s salary; you need a different mindset regarding compensation and duties going into larger vs. smaller firms

Clearly my experience with mega vs. mid-market firms is limited to a sample that’s nowhere near the entire population of private equity firms. So I’d be interested to hear thoughts, disagreements, questions, etc.

You join a new firm and immediately think, “Wow, these people are freakin’ geniuses.” And it seems that way because you’ve just entered a different world, a world in which you’re a newborn. You observe these people, what they do, how they think, and you accept it all as your new religion. You use the same lingo, adopt the same mannerisms and start to think the way they think.

Then four, five or six months later, it all slows down. Now, you’re essentially one of ‘them’… and they don’t seem like geniuses anymore. In psych-speak, you’ve hit a learning plateau. You’ve learnt 80% of what there is to learn (at that particular firm) and you’ve realised these geniuses are just like everyone else; they only seemed like geniuses because they knew something unique.

With sports, music, and other discrete skills, smashing through the learning plateau separates the hobbyists from the champions. But entrepreneurship isn’t a discrete skill; it’s a collection of many discrete skills. And from my observations, entrepreneurs are rarely specialists; they become masters of many domains, even if originally they specialised in one. So, what does this mean?

The significance is as follows: The effort to move from 80% to 85% competence for a particular skill, could reasonably get you from 0% to 80% in a new skill. So, especially for an entrepreneur, it can be much more fruitful to string learning curves together (compared to smashing through a plateau). This would suggest you’d learn much more by joining new companies every 6 to 12 months, unless your environment (at the same firm) is constantly changing.

This won’t be a particularly popular view, but technically I think it has merit. Sure the process of becoming an expert is educational in itself, but that last 20% of competency is so easily lost once you change focus (and it requires so much more effort), that for future entrepreneurship, it rarely paves the road to success.

In private equity, despite counterarguments about ‘investing in the future’, we aim to spend less because we see so much waste on a daily basis. This doesn’t mean we’re allergic to investing for growth; rather, our experience shows reducing waste is a more fruitful endeavour (at least at first). We’d love the exposure of running global ad campaigns or buying corporate jets, but in private equity we deconstruct everything with our mind firmly on the exit.

Consider your exit as the day you can do anything you want: create startups, invest in other businesses, join boards of listed companies, or travel the globe. In order to apply private equity principles to achieve a better ‘personal exit’, you must learn to want less (and like it). This sounds like compromising, but it isn’t. As in private equity, keeping your mind on the exit helps you to see the real value (approximately none) of instant gratification. This is the characteristic that creates successful entrepreneurs, investors or even Olympians.

This concept of deconstructing a problem with a firm view on the exit or desired outcome isn’t new. Tim Ferriss talks about it incessantly and shows some very interesting real world examples (see his TED talk). And while you may see this as just self-help nonsense, consider that it’s built an enduring multi-billion dollar industry (the private equity industry, not the self-help book industry).

I just finished watching an interview on Mixergy (my new favourite website/blog) with Kareem Mayan as guest. The interview discussed the viability of digital nomadism. Without repeating too much, proponents suggest you can reduce your burn rate, learn more from customers, and generally increase your business awareness, by going global. Not global in the sense of creating a website, but global in the sense of physically travelling from city to city, spending 2 to 3 months in each, while working and/or running a business.

Okay, it’s a pretty far-out thought, but there’s one thing in particular that attracts me. I think we learn most from testing our limits, challenging our comfort zones and meeting new and interesting people. And… that’s global travel to a T. Life on the streets of a foreign city can be life-altering and give you an appreciation of business that you’d never gain from a pokey office in downtown San Fran.

For startups, there’s also the argument that funding in USD or EUR goes much further when expenses are in some third or second world denomination. Often, all you need is fast internet, a good supply of beans (see recipe at the end of Paul Graham’s post) and a laptop. So if this is all you need, why operate from the most expensive cities in the world. Sure there may be strategic value in somewhere like the Valley, but hey, sometimes it’s just heads down. And of course we’re blessed with Skype.

One day when globalisation advances and more private equity funds invest globally, maybe we’ll all be on the road living nomadically. A scary thought for some and an exciting thought for others.

This is Take 2 of my last post, Salary versus performance. I’ve had a rethink about the topic, or more specifically, about workplace performance. Let’s start with a few thoughts:

What does it mean to work at capacity?

Capability and capacity relate to more than just potential physical energy. For example, I could apply 100% of my physical energy to lifting tiles onto a roof, and by day’s end, move 500 of them. Or, I could use 10% of my mental energy and 10% of my physical energy to move 5000 tiles by hiring a conveyor belt (hypothetically speaking). The combination of mental and physical energy can move mountains.

How productive do you think you are?

I find that people are rarely honest with themselves about this question. Ask yourself how productive you are (in percentage terms of mental and physical capacity on an average day) and then ask yourself again. Remember, at 100% capacity you’ll be moving figurative mountains. So, imagine the mountain you’re capable of moving and compare that to how productive you think you are. Then, once you know you’re being honest with yourself, compare that to the productivity of your team and your expectations of your team.

How does salary affect workplace productivity and output?

In my last post, I lamented that managers don’t realise how unproductive underpaid people can be. However, this is only an issue when employees aren’t fully engaged (and inspired and challenged and appreciated). The problem is, I think most employees feel somewhat disengaged most of the time. So, when they cross a certain level of disengagement (even if only for a day), salary becomes an issue very quickly. Then once it does come up, it generally remains an issue until rectified.

My suggestion isn’t to grant six-figure bonuses; I think you can get much more value from being genuinely fair. Keep an eye on market rates and adjust your employees’ salaries without them having to ask. The average employee doesn’t expect you to be proactive with pay rises, so this token gesture can actually make a tangible difference to productivity, loyalty and even engagement.

But, what does that really have to do with productivity?

You’re hedging your bets. In the rare (likely) case you don’t provide a fully engaging environment for your employees, at least they’ll know they’re being paid fairly. And maybe, just maybe, they’ll look to themselves to find the reasons for their disengagement. It means one less issue, a little more trust and a lot of potential upside.

Okay, protection is in place, but what about increasing workplace productivity?

This question is like asking “how do I lead a team?”… while there is so much subjectivity involved (borne by human emotion and irrationality), the underlying solution is still the same: communication. Don’t just sit their like a typical scheming, self-interested, self-conscious manager, ask your people what they want. “What do you need to be fully engaged, to think of the business like your own, to get the most out of yourself, to gush about your position to your friends, to think of new ideas when walking your dog, to figuratively move mountains; what do you need?”

If they look at you with contempt and put up a stone wall, give it a day to settle and try again. And, if you still get those looks tomorrow, fire them. You’ll be doing both of you a world of good.

Image: What on Earth to do? [source: Shutterstock]

This isn’t a post about bonuses and other monetary incentives. (That’s already been done to death and we’re none the wiser.) This is a post about the psychology of salary.

Let’s start with an analogy.

Imagine you’re a rock star. You arrive at a nearby hotel with the rest of your band after headlining a concert. The hotel manager tells you there’s only one room left, and due to high demand from the concert, the last room is renting at a premium. You feel the manager is taking advantage of your fame and extorting you. But, you pay the price anyway because you have no other viable option.

So, how will you and your rock star friends treat the room, given that you feel ripped off?

Simple-minded business people think a transaction ends when the money changes hands. But, it doesn’t. If you’re paying money for a product or service, your perceived value of the transaction will shape and influence your subsequent actions. You may not trash a hotel like a rock star, but you may use the liquid soap in larger quantities, or drink from the mini-bar without paying, or take a little less care when checking out.

The same goes for employees. As an employer, it’s your choice whether you underpay, fairly pay or overpay your staff, but be aware of the consequences. Sure, they can leave if they’re not satisfied, but in private equity and many other industries, work is scarce. There are people out there that will work for a pittance for the chance to enter certain industries. And, they do. But, employers must be careful with this power.

Just as a ripped off rock star can cause calamity, a ripped off employee simply won’t provide value. For example, would you rather pay a CTO $90k to work at 20% of their capacity or $140k to work at 80% of their capacity? For some CTOs, the difference in output (from 20% versus 80% capacity) might be negligible. But for most great CTOs, the difference would reach orders of magnitude. This is the choice you’re making every time you pay a wage.

They may not even know they’re underperforming, you may not even know they’re underperforming, but it’s the risk you take. So, don’t be a manager that underestimates the influence of fair pay. Great people make great companies and great people don’t work at high capacity (or for long) on paltry pay grades. This sounds obvious, but one-dimensional managers continue not to understand the concept.

Image: The pill or the money? [source: Shutterstock]

I just read a great quote by Jim Rogers, of Adventure Capitalist fame, and thought you may find it somewhat motivating (or de-motivating, depending on your situation).

If you ask a thousand people if they want to be rich, every one except the poet and the mystic will say yes. When you explain what is needed to become rich, maybe 600 of that initial 998 will say, “No problem, I can do that.” But when push comes to shove, when they have to sacrifice everything else in their lives–having a spouse and children, a social life, possibly a spiritual life, maybe every pleasure–to meet their goal, almost all of them, too, will fall away. Only about six of the original thousand will continue on the hard path.

Most of us don’t have the discipline to stay focused on a single goal for five, ten, or twenty years, giving up everything to bring it off, but that’s what’s necessary to become an Olympic champion, a world-class surgeon, or a Kirov ballerina…

Such goals take complete dedication.

While Rogers’ goal may have been to become rich, and while many of us think we’re after more noble pursuits (though mostly we’re just being righteous), it’s hard to deny Jim’s truth.