Which style of investing allows you to have the best grasp of companies?
I’ve been thinking recently what style of investing do I want to do after banking.
My motivation for IB was always to become an investor. Naively, my thought process was always ‘I want to be able to look at a company and decide whether it’s a good or bad company, and subsequently make a good investment in the company despite the answer to the first question’.
To broadly approach this ideal, I’ve been thinking which is the best investing role to step into:
Private equity/Growth equity: equity story driven, core understanding of the business, moat, cash flow, all the basics.
Credit: Cash flow & covenant driven, down side Monte Carlo & debt sculpting, risk averse (mainly).
Mezz/Hybrid Cap: is really where my question lies…
Is looking at a business from both the equity & credit story together the best way to develop investing acumen, skill, and an understanding of businesses? (Forgive me I know a lot of this comes down to the individual) but I hope you understand my point.
A good example would be BX’s Tac Opp Blitzer throwing cash left right and center at any opportunity.
Can I hear from some hybrid cap or mezz investors on how their role compares to PE or credit. I’d like to hear if you enjoy your role and if you believe it has some upside to only investing in just equity or credit.
IMO Public markets special situations or activist investing wherein you invest across the capital stack and across as many unique, hairy situations as possible would make you the best investor. You need to understand the specific situation, quantify and qualify risk vs. reward to determine best security / structure and setup, drivers / catalysts that make it an appetizing investment opportunity, with the added complexity of public markets (all things held constant, likely more complexity of operating structure / divisions, capital structure, and financing considerations), and some of the strategic know-how to determine what operational levers one would need to pull (mgmt / board, pricing / packaging, cost structure, unit economics, competitive positioning, etc.)
However, it really depends on (1) your cost of capital to enable this investing opportunity (what is your NPV), (2) your time horizon (do you have patient / evergreen capital, more medium-term like a PE fund's 5-7 years, or do you need to put up quarterly returns) - these are different skillsets and an argument can be made across each, (3) your firm's structure, bureaucracy / organization (are you plugging to a specific IRR / return based on what your partner thinks might be most commercial internally to your firm, or is there free reign to invest in what truly looks like a differentiated opportunity)
Whether this is how I'd truly want to spend my time here is another matter - for me, as the financial industry and asset classes mature there's an increasing need to be "commercial" as opposed to the old wild west of investing of the 1980s and even prior, so it's really just finding an asset class / strategy / firm / sector that is going to play to my own strengths (that's an introspective question), with some investing mixed in so to speak.
The firm names that are top of mind are either Elliott or Berkshire Hathaway.
I’d also add that I think you’ll genuinely know the most about companies if you’re a principal investigator (AKA you’re on the front lines doing diligence and serving on boards because you own/control the majority of companies) versus receiving filtered information secondhand (earnings calls, lender reporting, co-invest/FoF piggybacked/borrowed diligence, etc.).
I recognize that understanding companies and being the “best” investor are not necessarily the same. Simply answering the question but also believe multiple paths can yield strong investment acumen.
To SaaSChimp's point (lol nice name), there have been a number of high-profile public markets firms that have hired reporters for investing roles, because the makings of a great "investor" includes the ability to do proprietary due diligence, and really hear the signal through the noise.
Of course, there's then the next step of determining what the signal implies (invest or don't invest, and how to invest).
Good mental masturbation and dick measuring content here
Hybrid and mezz can definitely sharpen investing skills since you’re forced to think like both a lender and an owner. It’s a unique vantage point that helps you see risk and upside in tandem, compared to the more singular focus of pure equity or credit
Standard buyout PE at a firm with some amount of actual price discipline and differentiation in their sub sector will do the job. It’s less about the strategy and more about working for people who are good investors and can actually explain a nuanced thesis to you and really be intellectually honest about risks and opportunities. A firm with some domain expertise in an actual sector will teach you how to actually build a nuanced thesis and actually pick the best assets within a space.
Avoid firms with no differentiation that follow the herd and execute on some generic roll up strategy. Their thesis usually only boils down to “everyone else is doing it”.
Would argue standard PE is a pretty bad early seat to develop investing acumen. Fewer reps, inflexible investment mandate, and spoonfed data (usually from "sophisticated" bankers) means the job is more about processing data rather than investing in the sense of maximizing alpha or finding the best use of capital.
PE firms are really more capital allocators rather than investors - your job as a PE "allocator" is to find businesses that fit the framework you think your LPs want. It's like jamming 100 deals into a round hole until you find one that fits. You aren't thinking of relative value (don't see enough deals to get a real sense of RV + might be forced to do a sub-optimal RV trade bc you don't know when you'll get another shot), macro / portfolio composition (narrow investment mandate + too much concentration), or what the hypothetical best use of capital is - would argue in a sense that's the role of the fund's LP. This isn't an argument against PE - as an asset class, it plays a valuable role in the broader investing landscape and requires a unique skillset, but it's really an execution driven seat.
As echoed above, any seat with a public-facing or broader private investment mandate (e.g. aforementioned hybrid startegies) will feel more like a real investor seat. Since there is a broader investible universe, you actually have to spend time to figure out where to invest and on fundamental business analysis and less on process dynamics. In the case of hybrid investors, it's a similar theme as now you have more tools and ways to express your view of the business. It's no longer a binary question of whether to "lean in," but now a question of what the most efficient structure might be.
hot take: i'd advocate for specialization and trying to learn the most you can within that lane, assuming you don't already have a calling (which doesn't seem to be the case based on your post). the world increasingly rewards specialization, and each of these spaces has its own rules / lingo / protocol. you need to understand fundamentals and what moves prices in order to make predictions about the future which might be a source of alpha. personally, i'm a generalist across assets and sectors. looking at my career vs peers who have specialzed, i suspect specialization would actually be rewarded sooner if your ultimate goal is to become a PM or head of a sector/strategy. take this all with a pinch of salt. plenty of smart / successful investors who have walked each road
Private credit is a great way to learn about LMM / MM companies especially if you chose to be sector specific. Know quite a few folks like this, weren't traditionally finance folks but pivoted to this space after years of operating / finance / legal experience and it seems more easliy accessible to folks to get into than others you listed. There is a ceiling on how lucrative it can be but the work sounds interesting, at least to me. And not as time consuming given it's not that hands on with the companies they work with
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