Private Equity Lessons

By pjain      Published Dec. 7, 2019, 9:03 p.m. in blog Invest   

Private Equity Lessons and Keys - How they work

LBOs ~$1T/year by PEs

  • In first 10mos of 2019 $775b of Leveraged Buyouts mainly by PE
  • Valuations are higher than 10 years when LBOs done at discount to public markets

PEs Must deploy in few years or returns lowered => Rush to Invest

Private-equity investments have a lifecycle of five to 10 years, and money managers need to get that capital out the door within a certain time frame.

Return varies Greatly by Business Cycles

  • While VCs are well known to have greatly divergent returns eg 1970s had high quality returns like Intel, Microsoft, WMT, etc. But in late 90s they had shitty valuations and returns. 2005+ was stellar but then the SaaS era high valuations of 2015-16 was apocalyptic.

PROBLEM: Follow-on Funding - Doubling up needed to save investments, hunker down

--- LBOs and Cases

PE Core BM$: LBOs to Privatize Public Companies

public markets, where companies are increasingly being taken private — a trend that Rainey expects to continue.

TREND: Rising Public Market Valuations - Buybacks to PE money chasing deals

Expect more deal activity despite valuations, which are also elevated in public markets.

Tech PE Cases Recent

LogMeIn Dec'19

Remote desktop tool provider LogMeIn Inc said on Tuesday it will be taken private by a consortium of private equity firms, including affiliates of Elliott Management Corp and Francisco Partners, in a $4.3 billion deal. LogMeIn shareholders will get $86.05 in cash per share,

Health PE Cases Recent

PE Business Revenue Trends - Other ways PEs Create Alpha or Value

Strategic Spinouts

Privates Staying Private longer - plenty of Interim capital

Those who are already private are increasingly comfortable staying that way, partially because there’s plenty of capital at every stage. There used to be the notion that in order to get growth capital for any company you had to go to public markets — that’s simply not the case today. There continues to be huge investor conviction, and we continue to see capital flows into these private companies.

Mega-Startups Staying Private longer

Private Equity Trends - BM$, Investors POV - Returns and Fund Raises

PE 2%/20% rule?

Private Equity Performance

PEs Claim Performance 2x of SPY

Double-digit returns that have made the group so popular.

How PE perf of 14% compares with HFs 5.5%

Hedge funds are another popular investment vehicle that institutional investors, such as endowments and pension funds, are turning to. But the hedge-fund industry’s returns are lagging by comparison. Over the past five years ending in June, hedge funds posted 5.5% returns, compared with 14.4% for private equity - Preqin

PEs raising MASSIVE funds

  • They have been raising increasingly larger funds for institutional investors.

  • Just one Blackstone buyout fund raised $25B in Q4'19 — making it the largest of its kind in U.S. history. BX alone has many such funds

Fund of Funds

In some cases, mega PE funds just invest in other private-equity funds.

WHO: Endowments, Family Offices, Pension Funds

Public pensions, college Endowments, wealthy post-IPO and Family Offices are often seeking returns after doing the initial CFAs, and tired of public SPY markets that are overvalued.

Pension Funds are Underfunded and desperate for Returns

WHY: Search for Yield in low r% Global and $15T+ of NIRP

Investors are pouring into the private equity asset class.

Low Global Equity Returns as high valuations

Low global corporate yields - little Junk/BB premium to IG

US 10yr<2%

As the 10-year Treasury yield sank below 2% this year, investors went looking for better investment alternatives.

$15T+ of NIRP - ECB, BoJ

HOW: PEs raise money - ROIC - Investor POV

Steady cash stream into private equity has been driven by more investors expecting lower returns from public markets.

Analysts say investors are flooding to private equity thanks to low interest rates, hedge fund underperformance, and lower expected returns from public markets.

PROBLEM: Too much money $1.5T

Private investors are sitting on a record $1.5 trillion in cash, according to new data from Preqin. That is the highest on record and more than double what it was five years ago.

Valuations rising, RoI to fall as Money Chasing deals

The flush of cash means more competition for the same deals, however, pushing up valuations. Some analysts think returns will “disappoint.”

PE Politics, Negative Impact

Critic of the PE/HF industry as Bad investments and high cuts

Warren Buffett has long been a vocal critic of alternative investing, a category that includes hedge and private equity funds, among others, telling them to stop pouring money into expensive, high-end money managers. - Buffett: These investments are a 'fool's game'

HFs/PEs underperform broadly diversified index funds on the median and over time

They take a HUGE cut

  • Typical 2%/20% cut they take for their services, which can make billions of dollars for the managers but far less for clients

Game of Pay "Analysts/Consultants" to recommend HFs/PEs

Many institutions pay substantial sums to consultants who, in turn, recommend high-fee managers.

Do PEs destroy LT Growth by cutting R&D

PEs and Globalization - save a buck but destroy in-country presence, LT brand

SOC-NEGATIVE: Destroy Jobs with Layoffs to boost RoE

PE Carried Interest Tax Benefits builds Billionaires

Liberal Demos want to tax heavily

  • Warren plan to reduce inequality


PE Majors

BX Blackstone Group

CEO and Co-Founder Steve Schwarzman

  • Just one Blackstone buyout fund raised $25B in Q4'19 — making it the largest of its kind in U.S. history. BX alone has many such funds

APO Apollo


Bain & Co global private equity practice

  • Brenda Rainey, senior director

Vista Equity Partners

  • A tech-focused PE closed a $16 billion fund in Q4'19

Thoma Bravo

It raised $12.6 billion for its latest fund in Q4'19

PE Alternatives Cases

Is Softbank a VC or PE?

Is BRK a PE that never resells or even "fixes" up

BRK is sitting on a record $128 billion at Berkshire Hathaway.

BRK is very value - safety margin - oriented

In Q4'19, the Omaha-based firm has passed on multiple opportunities to acquire companies as the firm’s cash hoard grew. In November, Buffett stepped away from a bidding war to buy technology distributor Tech Data, and he declined to purchase luxury jeweler Tiffany when it was looking for a buyer last year.


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