Evergreen Funds/Permanent Equity
Looking for someone to poke some holes in my sloppy Friday night thinking here.
Basically, I don't really see the point in selling any company unless the offer is stupid/far above market value. I get why traditional funds do it, but if you were managing your own money, why would you do it? It seems to be incredibly inefficient. I know a few big boys are offering evergreen vehicles now.
Finding a suitable place to park capital sucks.
Finding fundamentally great businesses is difficult. Regardless of your specific industry focus...unicorns with beautiful cash flow mechanics aren't prancing around, and if they are, then some investment banker is trying to sell you the unicorn for an insane multiple.
Then there's transactions...running DD, hoping the deal doesn't fall apart 87% the way through, then executing in-line with how the deal was underwritten is all real work/money/time. If anyone has spent any amount of time working in PE, they know just how frustrating this is. The staff tied to this part business is also very very pricey/hard to nail.
Then there's the pressure of deploying/sitting on cash. Every day a dollar sits in your bank account = money on fire.
You lose access to great talent/can't build shared services out for the portfolio. This is probably my biggest regret any time I have exited a position previously. It feels almost like you're pressing the reset button.
Currently can more or less move people around between portfolio companies when I need help with something specific, and it's quite nice + cost effective. Basically shared services taken to the next level as you can give these people equity upside tied to the whole portfolio. It's a great recruiting pitch for everyone from senior management down to entry level managers/technical specialists. The upside is easy to pitch when there are multiple portfolio companies and new opportunities are always opening up.
In turnarounds specifically since you're hemorrhaging cash from day one and firing a lot of incompetent people quickly - you need a bench of people you can bring on quickly to stop bleed. Yeah cash can help with this, but you're not necessarily going to be able to recruit faster. Just went through hiring a COO and the guy I ended up with was half of our budget, but had to interview ~65 people.
Portfolio Level Debt/Bigger Balance Sheet
You can get leverage at the portfolio company when buying a new company. Debt is cheaper when you're getting it on $5M of EBITDA instead of $2M.
Evergreen structure is much easier to manage. Dealing with LPs is usually a huge time sink that doesn't help your portfolio. Even worse, the time usually comes from founders of a firm. Plus you can avoid a lot of objectively stupid decisions. For example, sitting on a great company with solid growth potential but you have to sell it because your fund's lifecycle is coming to a close? Depressing.
Plus no pressure to raise a new fund as soon as your IRR looks sexy, less time spent managing new LPs, etc...
And this is why you have to love Vista. If you look at their vintages you can tell that their primary focus is not on exiting but rather building incredible businesses and then exiting when the time is right
Thoma on the other hand, imho, honestly has better IRRs only because they are more willing to take a 2x return in 2 years than wait for a 4/5x return down the road.
Also I think this takes time to realize but MOIC > IRR - Buffet's returns aren't that great, Simons has blown him out of the water on a returns basis over the last 30 years, but Simons is worth significantly less because the machine he built focuses on IRR and can't compound. Berkshire was (is) an incredible compounding machine.
This response reflects a lack of nuance. You know who cares more that Thoma exits in 2 years - the LPs. The fact that Thoma can rapidly deploy capital and raise new funds in short time spans is a testament to their capital allocation abilities.
Completely aligned on thinking here, I've had this conversation with friends more than once.
short hold periods are largely dictated by GPs who want to realize carry. Not the most advantageous for LP's, which have to pay out carry and capital gains tax with every transaction. From an LP's perspective, longer hold periods provide exponentially better equity value creation because you don't have these transaction-related frictions... at the expense of a long or indefinite lockup period.
Now, if going with a long-term strategy, then periodic dividend payouts make sense... in which case, you will eventually recoup cost basis and everything after that is gravy..... and your point, if it's a healthy, cashflowing asset that is humming along nicely, why liquidate in the first place?
As the market is getting more and more flooded with traditional PE firms, returns have gone down and hold periods have also decreased. Eventually, believe there will be a point where LPs will shift more to this strategy.
As I think about starting an investment firm one day, this is exactly what i'm going to do.
Really interesting thread, thanks for the read. +1
One potential contrarian argument is that evergreen funds (could) lack urgency in getting after value creation opportunities. If I'm a traditional buyout fund, I only have 3-5 years to execute on my value creation strategy so I'm going to urgently attack the market opportunities I see, upgrade the management team, etc. so there's less of a chance for the business to get fat, lazy, and happy. The counterargument would be that traditional buyout funds tend to be short-term focused and won't invest in high NPV projects where there's a long-term payback, but my experience is that most "next buyers" will pay for some level of future earnings that haven't been realized yet as long as the initiatives have been actioned.
One question regarding Permanent hold companies. What are the most efficient vehicles for returning capital in these cases?
Steady dividends, refinance the business with low debt and return invested capital?
I'd argue since you know the asset very well and interest rates are so low...why not keep it very levered and pay out more dividends?
Refi with low debt is one option, but simpler option is keeping debt free and paying out steady cash distributions.
This is why you're seeing a lot of GP-led single asset transactions in PE right now. GPs are choosing to keep their best assets in-house, rather than sell them to a competitor. The current LP base can cash out if they want, the company gets "sold" to a new SPV still managed by the GP, and the LP base is refreshed by Secondary investors.
Do you have an example for this?
Does anyone have insight into what type of LPs allocate capital into a PE/PE-like evergreen vehicle and what that redemption process looks like (i.e. how long of a notice)? If I were an LP, why wouldn't my evergreen strategy be more on the credit side, assuming I favor current income more in that strategy? You'd allocate evergreen capital to some smart credit managers and your income stream, whose returns can also be levered, is better risk-adjusted than equity distributions.
To the first question: I've seen there be pre-determined off-ramps before. After X years (2,4,6 whatever) there are three options: 1) sell entire LP stake to new LPs at NAV/discount to NAV, 2) you can choose to "pause" and then you have a portfolio of assets that slowly gets sold down over time, and 3) continue being invested in the fund and can contribute more LP $ on top/roll returns into new companies. It's a much more complicated situation and the GP has to balance old LPs, new fundraising and new LPs, and ensure the fair treatment of all. It's almost easier to do single asset continuation funds for those assets that you truly don't want to sell.
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