The Long Game - 20 years ago / 20 years from now

At my desk and have been thinking about the commentary of the PE industry returns shrinking over time and facing headwinds as competition becomes more saturated. Led me to thinking about a question for how we should view the game in the long run:

1) As we look forward 20 years from now, how should we feel about betting our careers on being indexed to the PE industry?

2) Any industries come to mind that might offer a more interesting dynamic or forward outlook?

3) How did folks in 2004 think about where the PE market would be in 20 years from then / how are we doing?

 
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Had an opportunity to get the views of a co-founder of a MF a couple of years ago. In his words, he doesn't "get it" why all of the smart young people flock to PE. He said something to the effect of "30 years ago we were creating and building an entire new industry and that's what made it fun and exciting". Asked what he would do today, said he'd probably be launching some tech venture now that all of the innovation has been institutionalized out of finance.

He said PE now is "where all the people go who are ambitious, but have no ambition" and that stuck with me as at least somewhat true based on observation.

 
Delphi

Had an opportunity to get the views of a co-founder of a MF a couple of years ago. In his words, he doesn't "get it" why all of the smart young people flock to PE. He said something to the effect of "30 years ago we were creating and building an entire new industry and that's what made it fun and exciting". Asked what he would do today, said he'd probably be launching some tech venture now that all of the innovation has been institutionalized out of finance.

He said PE now is "where all the people go who are ambitious, but have no ambition" and that stuck with me as at least somewhat true based on observation.

Last quote makes sense, especially at a MF, it's a stable, high income job versus creating something and potentially having little to no salary. The issue is in today's world kids think it's realistic to be the next Steve Schwartzman when that is literally impossible. No firm is going to go from $0 to $1T in AUM ever again IMO. They'll either get bought by one of the public MFs or just top out at a certain size.

 

Pure hypocrisy - with pardon.

Was PE as revolutionary and innovative as he says? 80s and 90s PE were just innovative corporate maneveures due to lax legislation. At best it required some understanding of finance and some legal creativity, but there was nothing revolutionary in it (see 19th century corporate transactions with JPM, Rockefeller, Rothschild, etc.).

Further, what about their background? Probably studying business to become a company man (an attractive career in the 1950s and 1960s), law, or studying something completely remote and then getting a job at as a trader (not the best choices for the the most innovative-oriented and entrepreneurial guys, don't you think?)

Why their interest in Wall Street? Because it was simply a continuation of the 1920s Wall Street's activities after the crash and WW2, e.g. Gutfreund was basically selling municipal bonds in the 50s before getting the big money. The others that joined later? Money.

No one was there because they wanted to revolutionize or do something creative. They were just pursuing their interest and they ended up in some favorable circumstances that allowed them to build the MF that exists nowadays.

If this is not hypocrisy, question why this guy ended up in finance in the 80s and not in IBM developing and building computers. Unless he gave this speech at MIT or some other STEM graduates, then this is bullshit. His remark is accurate, but I'm pretty sure that even without hearing his speech I'd still know that an employee is not as ambitious as an entrepreneur - revolutionary remark, I know, write it down.

I bet you also that this guy was giving advice to young people in 1998 to get in tech, and then, after the DotCom bubble, to join Merrill Lynch as a CDO trader to really be doing something "innovative and interesting" until the financial crisis hit (did I say that PE also had a blast during the 2000s before '08?). Now, again to tech. Hindsight bias at its full splendor.

Kids, just do what you're interested in it and avoid following the crowd, don't go in an industry that someone - especially from another generation - says, because probably this guy would be doing the same thing you're doing if it was your age.

 

Hm any suggestions on alternatives? Would product management in tech make more sense for a business minded student. How would you think about this advice in terms of looking for a first job out of college?

 

I got started in private equity 2006. my thesis 20 years ago was that there was going to be much more value being an allocator of Capital than an intermediary. And while Ianticipated industry growth, but not the explosive growth and drastic increase in number of funds and competition that we’ve witnessed.

on a go forward basis. I don’t think that this Growth and number of funds and increased competition is sustainable.

for sure it will erode returns, but even more so I think we will see a LP backlash from all of the growth of the private equity industry

 

Agreed, I think most people on the forum have an unrealistic view on how much it costs to live a relatively upper class life. 5M cash at a 5% return is 250k in perpetuity. If you have a paid for house and kids are grown, 250k goes a long way to the point where I think many people may struggle to spend it in useful ways. There's only so many material items you can buy before the marginal increase in happiness/excitement starts to decline.

 

It's a choice to date or marry a women that's irresponsible with money. 90% of households in America live on less than 250k. Get your head out your ass.

 

Lol no they don't. $250k is like 95th percentile "household" income. "households" includes 22 year olds living in studios in Bushwick, college kids, people living on disability & welfare, retired seniors, etc. Remove those and $250k is maybe 90th percentile, if that. So you aspire to the lower end of upper middle class? It's perfectly reasonable as an adult to aspire to $500k of after tax income (so call it $750k of W2 + a couple hundred of passive) during your "prime" so that your kids futures aren't hampered by your own lack of ambition or work ethic. Hundreds of thousands of people in the US make that much money. Now get to work, no more excuses out of you. 

 
Controversial

Once again, can you people read? What you laid out has nothing to do with what I said. I SAID FOR THE LAST TIME, IF YOU ARE RETIRED WITH A PAID FOR HOUSE AND YOU KIDS ARE GROWN AND OUT OF THE HOUSE, 250K IS MORE THAN MOST PEOPLE WOULD KNOW WHAT TO DO WITH. 

There is nothing that you just said that is remotely relevant to what I said. I SAID NOTHING ABOUT PRIME WORKING YEARS. 

And you contradicted yourself. The are hundreds of millions of adults in the US and you said hundreds of thousands are making that kind of money. 1 million people made above 500k pre-tax in 2023. 

Even with your incorrect assumptions and flawed logic, Idk if you're smoking crack but 90th percentile is not lower upper middle class by any stretch of the imagination..., By mathematical definition, 75th percentile is upper middle class...

 
PommesQT

How many people want to be in PE for 20 years? I'm here to hit a number and them I'm out. I'd like to keep my hair and waistline, please

Just use prophylactic finasteride and avoid overeating 

 

I think my greatest fear as someone looking at this industry over the next 20 years is that people seem to think that fee compression and more rigorous benchmarking won't come for this industry like it did for hedge funds. Most of the money to be made will always be in opening up previously illiquid or misunderstood markets (e.g. PE as a category in the 80s and even software/growth PE as a category in the 2000s) and as these markets mature returns and fees will drop. 

Having said that I'm not sure where I see similar levels of misunderstanding and illiquidity in the markets today so would love to hear thoughts from others. 

 

This may be a gross comparison, but how far will PE fund fees really compress in this age if IB fees have remained similar post-GFC? I feel like they’d have somewhat of a similar relationship

 

PE has a major advantage over hedge funds - it allows allocators to take levered equity positions without mark to market. That’s an incredibly attractive structural feature, so even if PE firms get benchmarked relative to the industry, there’s still I think a strong logic for allocators to put more capital into PE.

In some ways I think the extraordinary performance of large public companies has actually masked the value proposition of PE. If public market unlevered return converges towards small cap unlevered return PE will look great.

 

When PE was new in the 80s and 90s, returns were high because it was novel, and the first wave of founders were cowboys.

Now it's full of risk adverse cucks. Capital is a commodity and funds with a bland thesis are going to keep seeing returns compress.

You need a truly novel thesis to succeed quickly IMO, or be top 1% at execution which is very very hard and requires more luck.

 

Any idea of industries with more interesting dynamics where you can actually build something? Not interested in making hundreds of millions, I just want to do something dynamic where I can actually contribute to build something.
Ideally not tech because that’s not something I’m that interested in.

 

This question raises an important point. As the financial engineering processes of PE become increasingly commoditized, funds will need to focus on new capabilities to generate returns. With an abundance of capital available, and likely to grow, the competition among funds will continue to intensify, leading to reduced fees for those that are less defensible. Obviously, launching a new fund remains challenging, but the market is saturated with funds that lack a distinct investment thesis. To stand out, funds must invest in unique deal sourcing methods (maybe ds teams?) or build strong operational improvement teams.

A similar trend is observable in the software. The surge in available talent, libraries, and even generative AI has significantly lowered the barriers to entry for creating an enterprise SaaS/CRUD product. Tasks that required substantial investment and a team of skilled developers two decades ago can now be accomplished by a small team in a matter of weeks.

Yes, opportunities still exist in both sectors, but at the periphery.

Regarding emerging industries that could offer a great career, I believe deep technology (super broadly) represents a sector where massive businesses can build a competitive edge. Go find PhDs working on breakthroughs in bio/defense/med/industrial and build a new industry

 

I’m writing a book, more aligned with a digestible thesis, somewhat tangential to this discussion. Industry has a strong secular tailwind, unbeknownst to the majority and unquantifiable to the few current participants (<5). Historically occurred many times in different asset classes. Immaterial and not priced in currently, but the trajectory within two standard deviations indicate next 7~12 will exceed noted moderately pessimistic views.

Will likely forget about this tread, but please bump in month or so. Happy to follow up with some data.

 

Are you referring to tailwinds for PE / private asset classes or are you referring to a different industry presenting as a better alternative to PE? Interested in hearing more

 

I think the future of investing belongs to three groups:

1) Scale economies. The biggest firms will win the race to the bottom on fees for vanilla strategies (KKR, BX, Fidelity, BlackRock).

2) Specialists. Firms that are the smartest in the room but have the discipline to never leave that room. Especially if the asset class/sector is complex, a firm with deep expertise that doesn't overextend itself has a real moat.

3) Pattern matchers. Firms that port a battle-tested strategy developed in a competitive market to a less efficient market. So like taking the large-cap LBO playbook and applying it to mom and pop funeral homes. That one is already played out, but international emerging markets, tech hardware, crypto, and weird assets like wine or forestry could be interesting. 

 

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