The puzzle of private equity
PeHub reported a somewhat scathing piece in The Economist about the value-add of private equity. One of the lines that caught my eye was:
“You are far more likely to achieve billionaire status by running an asset management business than by setting up an operating business”
This may be true by looking at raw statistics; obviously there are many more operating businesses out there with many lesser qualified owners (than those running PE firms). I think the question that’s more relevant (though likely untestable) is whether a suitably qualified person is more likely to achieve billionaire status from an operating or asset management business. Anyway, it’s mostly trivial, though in the same vein, I think the media trivialises how easy it is to do well in private equity. Sure, some people do very well, but in a previous post I showed how financially unrewarding life can be in private equity.
One of the other lines to catch my eye was:
“Aha, I thought, evidence that finance, not good management is at work.”
Private equiteers typically (emphasis on typically) aren’t entrepreneurs. They often aren’t even senior managers from operating businesses. So, would that suggest their greatest value-add is in private business managerial improvement? What would it suggest if we knew most private equiteers were lawyers, accountants, consultants, b-school grads, etc?
When we talk about experiential value-add for private equiteers, I tend to think of the following:
- Financial and legal engineering – it’s true; most private equiteers have a financial, law or consulting background, and unsurprisingly, they use this background to create value the way they know how
- An external eye – you don’t necessarily need a private equiteer for this, but someone with business experience can often find simple and obvious improvements in even the best-run businesses
- Value creation experience – by fact of investment in various businesses and involvement in various value creation strategies, private equiteers have experience creating value, and that can be handy
Just my thoughts.
I think you’re entirely right to say that the statistically most ‘rewarding path’ across the entire financial population will differ significantly from the most rewarding path for a specific individual.
As someone with the consulting background, I dived into private equity knowing full-well my personal way of looking at things…etc would serve me much better than had I gone into a hedge fund…etc. However, you’re also right to add that my experience rests with the mega-firms and their corporate problems – something that differs enormously from the problems of our much smaller porfolio firms.
Analyst
28 Aug 09 at 07:47
I agree with you. The ideas/perspectives generated from “The External Eye” are critical for value creation. I’ve looked at businesses and industries from this perspective numerous times, unlocking new, practical methods and approaches that resulted with real transformation.
I think that it may well be one of best selling features to an Investee for working with the right PE firm.
David Jung
28 Aug 09 at 11:57
Thanks for the notes.
Analyst: I’d be interest to know how you find the transfer to dealing with smaller firms.
David: agreed; though I often run into business owners who become very defensive when someone outside of the business (with little industry experience) makes suggestions. So, it usually takes a lot of tact.
The Private Equiteer
30 Aug 09 at 23:59
[...] is just another aberrant thought (following my response to The Economist article) on how private equity can beat public [...]
Equity returns for debt risk… please | The Private Equiteer - A Private Equity Blog
31 Aug 09 at 08:07
Private Equiteer: I intend to slowly collect my thoughts on exactly those sort of subjects and put them up onto a blog (inspired I will admit by this one but also a few others I follow assiduously).
Work in progress I’m afraid however – turns out I’ve got less spare time in this economy than I expected!
Also for the record, we’re not talking huge amounts of experience… I’m just an analyst after all
Analyst
31 Aug 09 at 15:10
Analyst: interested in what other blogs you follow. Am always looking for new info and will certainly keep an eye on your blog. Let me know when it’s up so I can link to it in my blogroll.
PS. Experience isn’t all that it seems.
The Private Equiteer
1 Sep 09 at 00:07
I agree with you. The ideas/perspectives generated from “The External Eye” are critical for value creation. I've looked at businesses and industries from this perspective numerous times, unlocking new, practical methods and approaches that resulted with real transformation.
I think that it may well be one of best selling features to an Investee for working with the right PE firm.
David Jung
11 Jan 10 at 01:48