who is the customer of PE ?

I'm not sure what you're asking, but generally speaking, the "costumer" for a PE company would be the Limited Partners investing in each individual fund vehicle. These LPs generally entrust their money to PE firms in hopes of getting an attractive risk adjusted return on investment. The firms and people at the firms have a fiduciary responsibility to the investor - basically they need to do what's best for the investor. For most private equity firms, these LPs are institutional investors such as pension funds, university endowments, charitable foundations and high net worth individuals/families. It depends on this size of the specific fund, but, at least in my experience, PE firms look to raise a minimum of roughly $5-10 million from each limited partner entering a fund.

IMHO, the customer is the person who buys the IPO.

If you can think of PE as a factory, the portfolio company is the raw materials and the limited partners are the shareholders. Therefore, the IPO is the finished product and the people who buy the IPO are the customers.

I say the customer is the LP... it's the LP for which the PE firm provides a service and by which the PE firm gets paid fees/carry.

Well, yes, it's the same idea as a performance bonus for the management of a manufacturing firm.

At the end of the day, though, most people agree that Ford's customer is the guy buying the Taurus at the dealership. I think it makes sense to say that the customers of a PE firm are those who they sell a product to. In this case, it would be people who participate in an IPO.

I understand the idea of LPs being customers, but at the end of the day, they're not actually buying anything from the PE firm. They're really the owners of the process of turning portfolio companies into something better in many ways. If there's a clear "customer" buying an end product- a person who really determines whether the venture succeeds or fails more than anyone else- it's the guy buying the stock in the IPO, rather than the guys who supply capital to the PE firm.

Illini - The PRODUCT you speak of is not the created company, but the investment judgement and resources we provide to L.P.s. L.P.'s are 100% the customer. We provide them with a service, not some hypothetical IPO offering buyer.

That's complete bullshit Illini, if someone refers to (for example) Client Services at a PE firm, that refers to the fund investors -- as they are "the client" PEs dont know and don't care who ends up getting the stock in an IPO exit, let the bankers deal with that

PE firms are not in the business of "fixing up" businesses. Sure, some actually market themselves as being that, and once they have a company, they will try to do so cheaply. However, what they are in the business of is magnifying their equity positions via paying down debt with stable cash flows. That is the primary objective, the rest is secondary.

PE firms are asset managers, not turnaround professionals. Their customers are investors purchasing the opportunity at above-market returns. Look at a hedge fund. Who are their customers? The firms they invest in or the markets they provide liquidity to? No, it's the LPs.

Again, sounds like a coin dealer or an art dealer that doesn't fix up paintings- buying firms on the cheap and turning around and selling them. Everyone would agree that an institutional broker/dealer's clients are institutions rather than the folks who put up the capital; is the PE model somehow different? You can operate a PE firm without the LPs if you have enough money- you can't operate the PE firm following the same model without the market. So from a traditional perspective, the customers are the market participants who buy the firm the PE shop has to sell like the customer who buys coins from the coin dealer.

PE firms are asset managers, not turnaround professionals. Their customers are investors purchasing the opportunity at above-market returns. Look at a hedge fund. Who are their customers? The firms they invest in or the markets they provide liquidity to? No, it's the LPs.

I give up. This guy is hopeless

I give up. This guy is hopeless

Well, you haven't answered my question- say the owners of the PE firm now have unlimited capital and don't need to raise any money from LPs. Every viable business has a customer of some kind- who's the customer now? At prop shops, traders would say that the market is the customer. What's your take on who an LP-less PE firm's customers would be?

The fact of the matter is that, in practice, the LPs are treated as customers. You're trying to look at this abstractly. Of course, if the PE firm had unlimited capital, this focus would change. That is not the case, however. The OP needs to know how PE actually operates, not what makes sense to some risk manager (you) intuitively. In the real world, PE firms treat LPs as customers. That's really all you need to know.

Fair enough. I'll buy that.

I am explaining my question -

If I am conducting a porter 5 forces analysis for a PE firm then should the LPs be "suppliers" (of capital) ?

Should the portfolio company be customer because the PE firm developes the industry or functional/product expertise to be able to cater to the portfolio firm's specific requirements? e.g. a PE firm focused on manufacturing industry and provides mainly growth capital.

I am still not sure.

Perhaps my question is irrelevant (because - say - nobody performs porter 5 forces for PE. Porter 5 forces is conducted on the portfolio company and not on the PE firm - so to say.)

...Why are you even trying to do a Porters 5 for a PE firm to begin with? It's not similar to other industries in that you can think of it in concepts of 'buyer power' and 'supplier power' for the reasons featured in the long discussions listed above. If you think the LP is the 'customer' (buyer), then would that make the companies available to be bought be considered a 'supplier'. No - you can't think of it in that way. Rather - that would just lead you to further question, well if PE firm ABC is interested in industries W, X, Y, Z - how are those specific industries doing that would result in potential companies to buy? That will then be quite messy.

Porters 5 is performed on the portfolio company that a PE firm is considering for investment.

Well, if you have to perform Porter's five on a PE firm, my high-level theoretical look at it might work for supplier's in purchaser's bargaining power.

Alternatively, you can talk about the supply/demand of management expertise and supply/demand for excess returns, but that gets kinda ugly.

If this is a homework problem where a PE firm is a theoretical business that fixes broken companies, the supplier and the customer is the market- just at two different times and in the market segments of "broken" companies and "fixed" companies.

IP, you can make the argument that ANY business has consumers as the ultimate end customer. Every business that makes a product or performs a service can ultimately be traced to a consumer somewhere. If I make engine parts for GE, who sells the engine to Boeing, who sells the plane to continental, who uses the plane to transport individuals, then yeah, my business relies on individuals, but they aren't my customers.

I actually agree with the analogy that LPs are the customers for a PE firm. The PE shop's services are sold to L.P.s and the L.P.s' money pays the bills.

The analogy sounds plausible.

If instead of the PE firm we are talking about a "private wealth management" firm that provides services to say rich people. Then the rich people are the clients/customers. The goal is the meet the wealth management goals of the rich clientele (preservation, growth etc).

I am 80% sure that the above anology is appropriate.

The 20% goes to the skeptical me.

My take on Porter's 5 for PE (from an industry outsider's perspective)

Existing competitors: other existing PE firms. I think this is pretty obvious

New competitors: potential new PE firms/funds that might start raising capital

Substitutes: investment opps other than PE. These represent alternative products that the LPs can choose over a PE fund (e.g. hedge funds, mutual funds, and so on)

Customers: LPs. They are the ones that can decide whether to buy your services (through investing in your fund), or look elsewhere.

Suppliers: “Market” for companies on the block (any type of equity owner might be a supplier). For example, in a strong equity market, companies going up for sale have significant leverage in driving up premiums, as there is a lot of competition for a finite number of potential targets

Just my 2 cents

Private equity firms offer a service - managing money. Who do they manage money for? Their LPs. It's as simple as that.

Just like with venture capital funds, the "customer" of private equity funds are the LPs. (Pension funds, univ endowment funds etc.). Just like with a Vanguard or Fidelity mutual fund if that helps you, the customers are the investors. If the firm serves it customers well by selling companies it buys for a good return on their investment, the PE (or VC) fund will be well paid.

The PE fund's "customer" is NOT the portfolio company.

Unless your intent was to embarass IP more, I agree that there was no need to bump this while adding 0 value.