Invest in Private Equity?

[EvelKnievel]

I would stay the course with what you are doing. You got this far without PE. Don't fix what isn't broken.

I was approached a while back and looked into it. I was very disappointed with what I found. I didn't feel like they were being straight forward with what the return was and might not even have understood what they were presenting. Metrics like IRR were presented and at least suggested to be comparable to annualized return. After looking at it closely and doing some research I decided not to invest. Everything is very complicated, any returns above and beyond what you would get in the public sector are minimal. The general partners only have to give the limited partners enough to make the limited partners THINK they are doing better in PE than the public market, even if the limited partners are NOT doing better. It's presented to potential investors that don't even understand the basics of public markets so the vast majority of people you talk to DO NOT understand it.

[Carguy85]

Sort of the same idea as whole life and how it’s sold. About the same time I thankfully dodged that bullet!

[Ladeedaw]

Well just got the news …reportedly yet another 2 years before a sale….yep…I’m NEVER investing in PE again!! LOL At least it’s less than 10% of my amount invested but still roughly a years earnings so not trivial…6 years ago when I invested with them I knew nothing about investing…thank you bogleheads!!

Thanks for the update. In all of the helpful comments, the idea that it won't be 6-7 years but probably more like 10 and maybe longer is what really opened my eyes to what I'd be signing up for. I've already let the general partners know I won't be signing up. They said they'd keep my posed on "other opportunities" I might be interested in. I'm now not interested in any opportunities with them, but I am interested to see what and how they pitch.

[Ladeedaw]

Update: I decided the day after posting this thread not to invest. You all helped me see that I had no idea way to vet this opportunity and that it likely wouldn't be as simple or good as it was being sold. I especially didn't like the idea that the timeframe would likely be much longer than I'd been told.

My business partner who mentioned this opportunity asked what I was thinking, and I summarized the main points from this thread. He talked to me a couple of days ago and said he'd reached out to a colleague of his who works on the other side of PE (getting PE funding for companies). That colleague made many of the same points on this thread, only more emphatically. So he won't be investing either.

Thanks again for all your helpful input!

[White Coat Investor]

Bogleheads, looking for some perspective and advice on a potential investment opportunity. Very rough financial snapshot for me: 45 years old, $3.8M in Boglehead 80/20 portfolio. Own my house and my second home outright. Own two SFH rentals outright, each valued about $475k, each net about $25k/year. Have a real estate deal that should net $200k in the next year. Own 25% of $1M commercial office building. Income is variable, but let’s say $600k. Spending about $50k/year; gift about $100k/year right now (charities, DAF, other giving). I will probably think about retiring to a second career in 2-3 years.

My business partner let me know of an opportunity he is taking with a PE firm. He knows one of the four partners personally and trusts him. They are currently aiming to raise $50M. They are essentially looking at businesses that need a bit of help to get profitable (they gave one example of a firm that does AI for schools that has a contract with a large school district). They are aiming for a 3.5x return over 6-8 years. Fund managers get 2%/year, then 20% of the profits besides that. They are “accepting” 75 limited partners. Minimum investment is $250k. They estimate that 50% of the gains will be tax free, because of a provision they are using for investing in emerging companies.

I’m on the fence, but leaning no.
Reasons for not investing:
I don’t need to
I am pretty well trained now to stay the course
It would hurt to lose $250k, which doesn’t seem likely, but it’s a non-zero chance

Reasons I think about investing:
The biggest reason is that I keep reading that there is less and less money in public markets. I’ve wondered if a small amount of diversification in private markets would be beneficial.
The partners have a decent track record and seem to know what they are doing (but what do I know?)
Probably a tiny bit of FOMO: what if my partner 10x’s his investment while I sit it out

So, what would you advise me and why?

Every private investment is unique and must be evaluated on its own merits and value when added to your portfolio. Certainly make sure you're a REAL accredited investor before partaking. That means you have the ability to evaluate this investment without the assistance of an advisor, attorney, or accountant AND you have the ability to lose your entire investment without any significant effect on your financial life. It's okay to feel a little sad if your investment goes to zero, but it shouldn't impact how or how much you spend.

About 15% of my portfolio and well over 50% of my net worth is "invested" in private businesses. They've treated me well overall, but I have two that will have gone to zero by the time all is said and done and who knows what will happen with my own business.

[corn18]

Update: I decided the day after posting this thread not to invest. You all helped me see that I had no idea way to vet this opportunity and that it likely wouldn't be as simple or good as it was being sold. I especially didn't like the idea that the timeframe would likely be much longer than I'd been told.

My business partner who mentioned this opportunity asked what I was thinking, and I summarized the main points from this thread. He talked to me a couple of days ago and said he'd reached out to a colleague of his who works on the other side of PE (getting PE funding for companies). That colleague made many of the same points on this thread, only more emphatically. So he won't be investing either.

Thanks again for all your helpful input!

Excellent choice.

Three years into my one PE investment that was supposed to pay out in a year and still no sign of an equity event. Although I am super happy that the drug they are developing actually works and saves lives, it's not increasing my net worth, yet. Maybe next year?

I'm six months into the second PE investment and it is ready for an equity event. The therapy works well and that is pretty cool. They are looking for a buyer but are funded for an IPO. Maybe this year?

I also got a job offer to help a private PE partnership develop a target after close. I floated the idea of becoming a partner with them (you know, one of the 2 & 20 folks) and that went over like a lead balloon. Drat.

[Carol88888]

This deal stinks to high heavens. 2% fee along with 20% of profits - are you out of your mind?!!

The profits are all speculative. Why in the world do you need this? There are plenty of good blue chips in the world with proven track records which you can buy in bundle of with only .04 expense at Vanguard in VOO.

Do not allow anyone to pressure you into this "deal" - you will be terribly sorry.

[SFAtty]

2% plus 20% of profits is highly unusual. That's a hedge fund formula, not PE. I'm in both a private credit and private equity fund (about 5% of my investments once all capital call are complete). These are with a very well known firm that I've worked with professionally for many years. Returns so far have been as expected in the offering memoranda (11% for PC, 20% for PE). Their fees top out at 1.75%, ie that's the highest % and can only go lower if performance is lower that expected. I would avoid this kind of thing unless you are very familiar with the fund, and the fund has a track record of at least 15-20 years. The one I'm in has been managing money for 30 years, I know the partners well, and this is the vehicle through which they manage their own wealth. Also, I could lose 100% of this piece and not really feel it (just a slightly smaller estate to leave). This is my relatively small dice roll in an otherwise very boglehead portfolio. "I know a guy..." isn't good enough for this sort of investment.

[corn18]

2% plus 20% of profits is highly unusual. That's a hedge fund formula, not PE. I'm in both a private credit and private equity fund (about 5% of my investments once all capital call are complete). These are with a very well known firm that I've worked with professionally for many years. Returns so far have been as expected in the offering memoranda (11% for PC, 20% for PE). Their fees top out at 1.75%, ie that's the highest % and can only go lower if performance is lower that expected. I would avoid this kind of thing unless you are very familiar with the fund, and the fund has a track record of at least 15-20 years. The one I'm in has been managing money for 30 years, I know the partners well, and this is the vehicle through which they manage their own wealth. Also, I could lose 100% of this piece and not really feel it (just a slightly smaller estate to leave). This is my relatively small dice roll in an otherwise very boglehead portfolio. "I know a guy..." isn't good enough for this sort of investment.

Are you investing in a PE fund? My PE investments are direct investments in an LLC. No returns until they have an equity event and that is not guaranteed. They have a 2% one time fee up front and then a 20% carry if/when they have an equity event. Expected returns are 5x for the most recent one and 50x for the longer term one. We'll see.

[Valuethinker]

2% plus 20% of profits is highly unusual. That's a hedge fund formula, not PE. I'm in both a private credit and private equity fund (about 5% of my investments once all capital call are complete). These are with a very well known firm that I've worked with professionally for many years. Returns so far have been as expected in the offering memoranda (11% for PC, 20% for PE). Their fees top out at 1.75%, ie that's the highest % and can only go lower if performance is lower that expected. I would avoid this kind of thing unless you are very familiar with the fund, and the fund has a track record of at least 15-20 years. The one I'm in has been managing money for 30 years, I know the partners well, and this is the vehicle through which they manage their own wealth. Also, I could lose 100% of this piece and not really feel it (just a slightly smaller estate to leave). This is my relatively small dice roll in an otherwise very boglehead portfolio. "I know a guy..." isn't good enough for this sort of investment.

20% PE return these days is .. it's top quartile. I suspect it's top decile. (Thinking buyout funds rather than venture. Venture returns will be all over the map, but the last 3 years I suspect very low to even negative (although that may not, as yet, be reflected in the fund valuations)).

Private Credit has been on a tremendous roll. Things are going to get a lot tougher and more competitive from here -- if you look at the money flows into the asset class (and conflicts of interest all over the place, with the same firm's credit and PE funds owning slices of the deal).

So yes, one does need to know well the fund & team behind it.

[SFAtty]

Yes, a PE fund, but not venture capital. There has only been one capital call so far (and fees only are charged on actual capital, not commitments). Focus is on privatizations, but this team looks at a wide variety of deals. Capital calls are only issued when there is a deal that has been worked up and just needs to be funded. Biggest investors are university endowments and VHNY individuals, including the partners themselves. I was only invited to invest, and at a much lower minimum than generally applies, because my firm does their legal work. So far, so good, but this is not something I bank on.

[Valuethinker]

Yes, a PE fund, but not venture capital. There has only been one capital call so far (and fees only are charged on actual capital, not commitments).

Unusually favourable (to LPs) unless market practice has changed?

Focus is on privatizations, but this team looks at a wide variety of deals. Capital calls are only issued when there is a deal that has been worked up and just needs to be funded.

That's usually the case w buyout funds? LPs tend to get a bit sticky if the GP draws down too far in advance of a deal?

As you will be aware, Venture Capital funds have been the Wild West (especially on the West Coast ). In the glory years, the GPs could name their price - and did. And now? There must be wholesale collapse. Although thinking of something like KKR in buyouts aka "no one ever got fired for buying IBM computers" -- I doubt Kleiner Perkins is going to go out of business.

(I do remember Forstman-Little, Hicks-Muse etc. It's not a given that firms survive the next supercycle in PE).

Biggest investors are university endowments and VHNY individuals, including the partners themselves. I was only invited to invest, and at a much lower minimum than generally applies, because my firm does their legal work. So far, so good, but this is not something I bank on.

Ticks all of Swensen's boxes for an alternative manager to invest alongside. "I would never want to be part of a club that would have me as a member" - Groucho Marx. As long as ABA and your firm don't see this as a conflict of interest, it's good.

Agree not to bank on, but the structure and the heavy commitment by the principals suggests it can keep going. There's "drift" in PE firms, as they need to raise bigger and bigger funds, and then do bigger ticket size deals, to keep the firm growing. Performance suffers. If a PE firm can avoid that, and stay in its chosen deal size & type parameters, there's a greater chance they can sustain outperformance.

I am thinking something like Bain Capital, which had just insane outperformance in early funds (60%+, hence Mitt Romney's fortune), but performance has by necessity declined as they do larger and larger deals (I have no privileged information on whether they are still upper quartile or not).

[corn18]

Well, one good thing about my PE investments is that they haven't lost any value in this down turn. Of course, they didn't go up over the last two years, either. I put the PE investments in my asset allocation computation but not in my retirement calculations. It's gone, but still an equity investment.

[DesertInvestor]

oh, well that should do it for due dilligence.

Haha, yes, that's what has become clear to me through reading the insightful responses. I've done almost zero due diligence and am not even sure exactly how to. So, yeah, a pretty big reason to not do this.

I like what Scott Galloway said, "if its super exciting and interesting i pass every single time. If its so boring I want to pull my hair out as they explain, I write a check." Linked his book below.

https://www.amazon.com/Algebra-Wealth-F ... 0593714024

I have investing in several private offerings. All of them underperformed except for some short term debt offerings. I have 7 figures in another from a business sale that has been a huge flail so far. I recall hearing that investing in small value index is a proxy for PE and way more diversified. So I would do that instead.

[DesertInvestor]

Well, one good thing about my PE investments is that they haven't lost any value in this down turn. Of course, they didn't go up over the last two years, either. I put the PE investments in my asset allocation computation but not in my retirement calculations. It's gone, but still an equity investment.

I was sold the same nonsense during covid. If they tried to sell today, they would be down like any other stock. The illiquidity premium is partly due to the fact you don't see the ticker symbol for your PE investment and its easier to hold the course. On top of that, you don't have a choice so even easier to hold to course.