I know innovation is a stretch of a word for this industry, but I guess what I'm asking is what is a new SPAC-like trend that is now picking up and you see folks in PE leaving to do, if any? To be clear, I'm not referring to new ways of structuring transactions. More curious about things that may be opening up new paths for PE folks.
(note: industry outsider asking here, so apologies for the unusual question)
Would say structured equity has gotten huge, especially in this climate (and in tech).
It’s kind of a win win for everyone, the buyer gets a ~10% preferred with downside protection and buys 20% of an asset. Can also stretch on valuation given the preferred equity.
The seller gets to mark-up the asset on paper and take some chips off the table at a good valuation, and typically don’t need to refinance debt (i.e. keep good debt terms from 2 years ago).
Have seen way more of this recently and makes total sense, it’s a cool deal structure for everyone involved (except employee shareholders who are getting crammed down with no benefit typically)
Nothing like screwing over employees! No big deal
There is no way to achieve “win win” thru structure lol
Best innovation is raising infra / "core" PE funds to buy assets that have traditional PE risk profiles. Great way to win deals by underwriting to a lower IRR and opens up a new adjacency which helps to increase AuM and management fees. PE returns have been trending down for decades and tossing mediocre assets into a so-called ‘core-plus infra’ fund helps lower returns look like a success rather than a failure.
Continuation vehicles - enables longer holds while providing liquidity to some LPs that want earlier distributions.
This is a serious question: how is a continuation vehicle not a ponzi scheme? From my understanding, sponsors sell the company at a profitable valuation back to themselves or a new set of LPs thereby allowing the initial cohort of LPs to cash out at a profit potentially at the expense of the new LPs.
In other words, if I'm a sponsor, what's stopping me from selling an asset to myself at higher and higher valuations, creating great returns for LPs, and as long as I can keep on raising more money, I'll be able to inflate the value of this asset as high as I want and create massive paper returns (a la ponzi scheme)
Continuation vehicles, by definition, are very similar to the process of "painting the tape" which is illegal.
Besides, textbook finance would suggest that an asset's valuation is determined by the PV of its future FCF, so theoretically there wouldn't be a difference between selling or holding the asset. In this sense, if I'm a sponsor, the only reason I would use a continuation fund would be if the asset I own is not worth its "paper" valuation on the open market...otherwise, why not ipo or sell to a new sponsor/corporate?
It gets better - for single asset continuation vehicles, LPs pay fees and carry to invest in just one company...
The sponsor can’t just make up value - someone has to set the valuation in these transactions. That can be another pe firm, a secondary lead investor, or another fund managed by the sponsor. Additionally, if the valuation is unrealistic, it will be difficult to attract new LPs to back the continuation fund.
These have been around for many years though?
All of these innovations already happened..
Going to be real hard to mention an innovation that has not yet happened in some form, by the very definition of the word...
Portable capital structures and continuation vehicles
On the smaller end of things, it is HoldCos. I put together a team for mine that's beginning work on select tech and tech-enabled service targets. I'll move in full-time once I exit my current role in 12-18 months.
The idea is to essentially be the final home for businesses that may be too small or too niche to ever be much more a $10M rev business throwing off $3-5M in cash. Growth is marginal but they are highly stable, owner often wants out to retire, and we never plan to "exit." For the operators, it becomes interesting when you can put together 10-20 of those assets that are fairly disparate. Lots of admin synergies but very few to 0 R&D and S&M synergies.
I'd rather be a HoldCo owner with 60-80% profit share ownership in a business throwing off $30-50M in cash a year than a partner at my former MF.
is 60-80% profit share realistic? Genuinely curious because obv you prob have a better grasp of the math and the finances
but yeah that actually sounds pretty genius. I think it would work better for certain industries than others tho. Seems like it would work great for consumer brands because a lot of those are all super tiny and if they're part of a conglomerate they could have better access to capital and distribution channels (ie. relationships with supermarkets and ecommerce logistics) along with synergies in admin/marketing
However, I feel like you would need more overlap/synergies (ie. same target end users) in order to really benefit from that conglomerate structure esp if you're aiming for 10-20 somewhat unrelated businesses
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