Best Asset Classes - AUM Growth x Career Development
Okay PE's retrenching. So what does that mean for where the "puck is going"? Here's a rough list of different asset classes ranked by relative attractiveness (comp more or less in the same ballpark as classic buyout), and assuming similar risk-profile in terms of size/maturity (i.e., not LMM or start-up funds where you have a big variance in outcomes).
1. Blue-Chip Non-Public buyout funds (e.g., the ~5-10 firms that have been around ~30-40 years and have survived multiple cycles and are not public yet). Lowest 'risk' of downsizing - but lowest growth trajectory. This is BBB investment grade bond risk/returns as far as careers go (but perhaps with a maturity date...)
2. Buyout adjacent - Infrastructure / Energy transition / Real Estate deep sector specialists - basically thematic PE (some of these are in a bubble too though - Tech/HC looking at you). Example - Blackstone started as a M&A advisory shop. It made its name in buyout PE - but the real driver of the business / AUM the last decade has been real estate and infrastructure. GIP sold itself to BlackRock for $12Bn.
3. Hybrid ("have your cake and eat it too") Capital - flexible capital funds that basically are somewhere between equity and credit (the more it leans equity and the wider the mandate, the more interesting and the bigger the carry potential). Sixth Street recently bought out its stake from TPG at a $10 BILLION valuation. Carlyle's entire market cap is $13B.
4. Credit / Credit Adjacent - but not CLOs, ideally not run of the mill direct lending - more of the Oaktree variety (a little deeper LTV - basically special sits on the debt side)
5. Funky / specialty stuff - asset-backed lending, insurance, hard-assets - take the road not often traveled. Reminder, a firm like Apollo despite its name didn't become Apollo because of its PE fund - its PE fund is effectively a special sits fund. And Apollo's closest comp is basically a financial Berkshire Hathaway at this point.
In my opinion, each of the options above are superior to the majority of regular way MM / UMM generalist PE funds going forward (PE business model is great for wealth accumulation for the owners of the GP but extremely bad for everyone who does not own the GP because owners can and do hoard all the economics, particularly when fund size goes down because the business is one of the most scalable businesses in the world).
How can you be an MD in PE and make the equivalent of a ranking thread with additional steps on WSO. Don't you have models to bang or something? Great post though.
I did my deal for the year. And I frankly enjoy thinking more about the business of alternative investments (because it’s dynamic and changing fast) more than the actual deal by deal aspect of PE (cause the 1000th CIM is pretty much like the prior 999 and the degree of innovation in buyout is more or less nonexistent).
I was talking about a different kind of models brother
What are your thoughts on venture, growth equity and growth-themed buyouts?
Interested in what sectors you think are promising too - whilst I see your sentiment regarding tech/hc, they are fundamentally are the areas humanity need most.
1) The further away you get from valuing stuff based on cash flows the further away you get from “knowables”. It is effectively impossible to predict the future as is. VC is effectively gambling.
2) I disagree. I won’t venture too far beyond what I know but most of Tech investing to me is some random niche SaaS that helps productivity a bit - nice to have, not changing the world. HC - oh boy - my hot take is PE shouldn’t really be in the HC business. Who exactly is benefitting from HC rollups? (See DoJ lawsuit against Welch Carson, Envision BK, Team Health / BX, Air Methods)
I actually think “real world” sectors are undervalued - roads, bridges, chip fabs, manufacturing capabilities, logistics, transportation, etc because at the end of the day we live in the real physical world (for now)
What's your view on the software focused funds today? MF's (Thoma and Vista) and also UMM (Francisco, Clearlake)? I assume a lot of deals were purchased at high multiples during ZIRP that will likely mute returns for the next few years at least?
If you were an Associate at a typical UMM fund today, what would you do/go to differently
To quote Ross - "pivot"
Wow - so for example you’d recommend a Berkshire associate to pivot out of classic PE?
Also where do you think most of the value will accrue in the next decade or so. Saw the o1 model from OpenAI come out yesterday and it’s literally equivalent to a top 50 in math + coding. Feel like this is fundamentally going to shake things going forward - things just seem to change at such an immensely fast pace even in comparison to just 10y ago
Think that infrastructure (digital / transporation / energy) is the best combination of AuM growth x Career development. There are countless opportunities and infrastructure will always be required. Despite the tremendous amount of fundraising from infra GPs, there is still a huge gap of investment needs and capital in the foreseeable future. Think infra PE & Infra Growth Equity is the place to be these days
Agreed — I see a similar thesis with real estate as the lines easily blur between the two.
What are your thoughts on infrastructure credit?
So a place like Bain Capital Special Sits or KKR Special Sits is pretty much ideal, in your opinion? As those funds hit on two or three of your points?
Probably going to get MS for this, but this thread is a great microcosm of why "PE is imploding." Quality poster offering his takes and asking for original insight from others is met by 80-90% of commenters asking questions which effectively amount to "tell me what to think."
Can you explain the rationale behind the rankings?
But what do you make of high yield investing at a credit shop like PIMCO?
I'm not sure how contrarian this argument is or isn't, but I could make the case that going into LBOs (or even growth equity / venture) right now, presuming you have capital to deploy, might be a good move. Funds that deployed in 2009 / 2010 / 2011 had great vintages because they were able to extract favorable terms and pick their investments selectively - at the end of the day, return profiles are largely made by the price and structure at which you invest in. Why not do that in the most favorable price environment possible, which is in a retrenching industry? If you believe that argument, then a junior person should want to go to the most blue chip fund possible in the hopes of deploying capital and putting the experience on the resume, and a midlevel person should optimize for some level of risk-taking (e.g., being able to get meaningful upward mobility and economics in a newer fund).
I would concede that the rate environment isn't likely to, nor should it, return to the ZIRP era, and should hopefully settle in the neighborhood of 3 - 4%. I don't view that as unhealthy; if housing and services inflation normalizes, you effectively end up with a 1 - 2% real risk free rate which has been, as I understand it, the "historical norm." I think that creates opportunities for lots of people in the cap stack where everybody can win, but if you're asking about the short to medium term dislocation, I'd argue it's private capital markets right now (both primary and secondary).
Now, there are all kinds of confounding factors regarding deficits (and therefore retraction of supportive fiscal policy), how much you really think AI / compute / renewables transition will impact the real economy (critically, how fast), and decoupling of the global economy... but this feels like too much for me to project, and if I could, well, I'd be a billionaire several times over.
I would typically agree with you, and I think PE can still be a good career for associates joining today given if they stick around they will be receiving carry and promotions coming out of an industry downcycle. However, the difference between now and 2009-2011, is that PE had a historic fundraising boom in 2019-2022 so that there is a ton of dry powder sitting on the sidelines. This has to be deployed, so good businesses are still being snapped up at relatively high valuations. Mediocre businesses aren't even coming to market as they wait for a more favorable environment (many still have cash from the ZIRP era). Bad businesses that must come to market aren't trading at all and a good amount of M&A processes are failing.
That was what I thought too, but google "PE 2009" or "VC 2009" and there will be articles proclaiming the death of these asset classes and wondering how all the dry powder that was raised in 2006 - 2008 couldn't be deployed. Obviously, that was solved for...
It's certainly not clear that we'll get the same rate cutting environment of the 2009 - 2022 era (quite frankly, better for the broader economy that we do not plumb the depths of the ZIRP + QE era) and it's not at all guaranteed that AI will turn out as well as the SaaS boom. The asset class is certainly more mature too, so I wouldn't at all suggest the same level of rebound. But there's an argument to be made that these asset classes are far from dead and might even experience a rebirth in the next few years as the deadwood is cleared away.
Can someone help me understand the hype around digital infra? Been in this space a while, and I've observed the following things:
Anyway, all of this to say that yes the industry is kind of on a rocket ship, but it's so crowded with so much expensive shit everywhere I find it hard to get real value unless you take on real risk (fiber upgrade strats, turnarounds, regional stuff) which then kind of goes against the value prop of infra in the first place.
Maybe. But I’m a bit surprised that nobody has brought up that you need to enjoy the job / asset class. Infra PE is quite a different gig than vanilla buy out. Assessing toll roads etc may be what you get energy from but that’s quite a big pivot from assessing operating businesses. Same answer for PE vs VC - I’m sure there are plenty people working at a discount to PE just because they like the job better.
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