hdas wrote: ↑
Mon Sep 23, 2019 7:51 am
The change can’t come soon enough...
Yin said Warren Buffett’s style of investing is a passive style that investors could use to hold private companies. Buffett famously invests for the long term and doesn’t always change a company’s management team. Yin argued that investing in private businesses doesn’t have to be any different from investing in public companies, which are often held for many years without investors pushing for changes to the business’s strategy. With a Buffett-style private equity model, asset managers could charge significantly lower fees and reduce the need to make disruptive changes at the corporate level to generate returns. In fact, some of the largest private equity firms have recently launched funds that use this approach.
According to Willis Towers Watson, part of the reason companies are staying private longer is because of short-term pressures in the public markets. But Yin points out that private equity investors can also exit investments after short periods of time. A new, longer-term private model could be appealing to a new segment of entrepreneurs and company founders.
Can’t find the “paper” referenced in the article.
The industry standard of "2 and 20" = 2% pa on committed (not invested) capital plus 20% carried interest has been around so long that it's hard to imagine it will "bust". There will be pressure, to be sure - The Sovereign Wealth Funds have demanded, and sometimes received, lower fees. Big funds are sometimes only getting 1.5% I hear.
But persistence of performance is the key to the asset class. Swensen is very clear on that - you have to be in the top quartile funds, and in Venture Capital, anything outside the top 10% (actually, funds run by the top 10 or so VCs, and no others) is effectively a waste of money (read the depressing Kaufman Foundation report on same).
I don't see how you can build a low cost entry point that gets around that. You are going to wind up being the money that gets invited into the deal when the established players with their networks of contacts, advisers and their active portfolio management strategies have turned down. PE is *work* - you sort through hundreds of deals looking for that gem. Or fight your way through dozens of Investment Bank-led auctions, and hope that in overpaying for this last asset, that you have not paid "the Winner's Curse" and there is some angle that the vendor and its advisers did not think of, that lets you squeeze a double digit IRR out of the deal.
It's worth a thought, whenever you see somebody making an excessive margin, there "ought" to be a way to disrupt that.
But I don't see one, and this all smells of 2000 mania - which ended quite unhappily. Whereas the big money is made in Private Equity by doing deals when the world around you is imploding (but I saw plenty of deals in 2000 that looked fairly dumb in 2002 when they were being refinanced at 1/0th the valuation).
Somebody give me a structure which combines the advantages of Private Equity (leverage, close portfolio involvement by the investor, alignment of management and investor interests) with lower fees?
Advent International managed to raise EUR 17bn with no threshold on the carry? i.e. 20% of *all* upside?
And remember American PE funds pay carry deal by deal, which is even more a perverse incentive than European funds (where at least the manager has to return the original capital before they start getting carry - i.e. fund carry not deal carry).