In VC, you work alongside a multifarious set of backgrounds. Career VC's, former investment bankers, former management consultants, startup tech guys, corporate tech guys, and even journalism/media types are all found in VC.
However, in PE, it seems that it's mostly former bankers, a few former consultants, and very, very few 'other'.
One would think that it would be highly advantageous in PE to have operational experience in the sorts of companies your firm is investing in. Why don't more operators go into PE?
They do? Operating partners...
plskystks comment is true. Beyond that, it's because PE is largely financial engineering rather than operational improvements. Ideally in PE, you buy a business that's already generating tons of cash and in a steady state so you generate returns by tacking on various layers of debt that you eventually pay off with the business's cash flows. On a day to day basis, you're largely figuring out what the ideal capital structure is to maximize returns on a business or doing deals
Most VC's work with money losing operations that are still building out a TON of infrastructure and staff so operational expertise and diversity of viewpoints are highly valued.
This is a highly generic view that I don't really agree with. The main difference in PE is that you're more responsible for setting strategic direction and targeted cost/revenue programs, not managing day-to-day operations. Operators from industry who will be most helpful to do that are senior folks, which you see many floating around in PE world either as in-house advisers or consultants.
I'm an operator that does smaller buyouts and investments in companies.
It's easy money for me because no PE funds are bidding on those deals and they can't win the operators of companies I want over like I can.
Im genuinely curious...how do you come across the deals that you do? Is it in the course of your own business or are you actively sourcing deals on the side?
In the course of my own business & via actively reaching out to companies. For example, the latest deal I'm looking at is the result of speaking at my old school (for free because I'm a good boi) and it turned out the prof had a business he was looking to sell.
I'd like to connect with you :P
Hey M-1, what's your revenue range? Seems like even the smallest PE shops I know don't go below $10M in revenue.
PE funds don't go below $10M because they're managing a fund and using money that isn't theirs. Also, finance guys add next to no value for companies that are smaller purely because their skill set isn't useful in that range (not enough layers between management/frontline essentially).
I use my own money so I don't need large deals. I'll look at anything with EBITDA between $300k to $2M. eComm & direct-to-consumer brands are my bread & butter. Obviously I'm also able to pick up amazing deals compared to what PE funds are used to paying because I can speak to operators/owners in a way they can't.
Sounds like a great life. This sounds a little like Marcus Lamonis type stuff. Small businesses doing quasi pe stuff on a small bank roll. Compared to real pe it would seem more fulfilling.
How did you get your first fortune to start buying?
I thought I had typed this in yesterday, my direct answer to the question;
I think many Operators dream of being in PE but the barriers to entry are too high and PE has made itself seem overly mysterious and complicated to outsiders. That's why few operators try to get in. Meanwhile PE guys are young and super smart and can't imagine they have anything to learn from an operator (especially if the operator went to a non-target school and has dirt under his fingernails). Too often, PE folks look for clones of themselves - smart, well educated Excel pros, and not people how know how to squeeze value out of operations.
The final barrier is a mythology around leveraged commercial finance. Outsiders think it must be so super complicated that they are intimidated away. Insiders believe it's super complicated so they perpetuate the myth and also think that only super elite people like them can understand it. Reality is that it's not that complicated. I'm okay with supporting the myth to keep the the riffraff out but I can think of plenty of professions that are equally hard to master and don't pay nearly as well
Excellent observation. I would agree with this based on the entrepreneurs I now as well as the PE guys.
To be fair, from what I've heard, it seems like PE has become more receptive to operators over the last few years, as a lot of firms are really about adding value by doing things other than restructuring/financial alchemy.
To kind of further push the point home you're talking about, I've been treated poorly by a few finance/PE guys before even though I'm much younger than them and making 4x - 10x more than them. Oh well.
I think there's also the added issue of people having mixed experiences with operators. At some funds the operating partners are guys who operate at 10000 ft and were ex CEOs of major f500-esque corporations but add 0 value on the ops side. Some of my current co-workers worked with operating partners like that and just see it as a marketing gimmick for fundraising. This article hits on that: https://www.pehub.com/2015/07/private-equitys-dirty-little-secret-why-o…
On the other hand, having entrepreneurs/operators on your team who can identify ways to streamline ops and other things an investment professional wouldn't be able to do is what can push you into a top quartile track record imo.
But yes 100% agree with your pedigree/perception comment.
Generally speaking, the transition from a one-company focused role to a portfolio role is one that many operators aren't able to make.
While operators have a "roll-up the sleeves" mentality from their past life in the trenches, this thinking often leads them to over invest in a single portfolio company and develop too much of an emotional attachment, to the detriment of other portfolio companies. Being a PE investment professional, on the other hand, requires an ability to efficiently parachute in and out of companies in the portfolio without getting too attached. The latter mentality is a much larger contributor to PE success than the former.
Hah, that's exactly what I ended up doing with my first 1 - 2 deals. You nailed it! Some of my ops heavy partners are guilty of the same thing as well.
One:
Too many people in this industry have a hard-on for prestige. If you didn't go to HYPSW, weren't also in the Lantern Society or the Spee or whatever, and didn't do banking at Morgan Stanley or Evercore, how could you possibly keep up!?
Two:
As humans we have a bias to think that merit is an awfully close match for what we look like. This means that everyone in a gating capacity deciding who gets a seat and who doesn't, even at the partner level, thinks that the way they got there is the best and rewards candidates who followed that same path.
This is why certain shops are consultant-friendly, by the way. One or more of the senior guys spent time at McKinsey or Bain and tells the ladies at Glocap or Henkel running the associate search to have half the resume book be consultants.
Three:
Most funds are still stuck on a financial engineering strategy. If 25-50% of the expected return is attributable to capital structure, people who have the deepest skill-set relevant to that work are going to comprise the bulk of the team.
Four:
The industry is highly opaque, even to smart people with great degrees from great schools who've done great work so far in their career.
Just look at these forums. Every couple weeks there's some guy with a medical degree and three unreal research fellowships in oncology asking how he can get into healthcare private equity, a nuclear engineer from the Navy asking how to transition to industrials private equity straight of business school, or some other guy with loftier IQ and deeper topical knowledge in a domain way harder than ours asking for 101-level pointers on how to join our ranks.
Five:
Most people, even smart and high-performing executives, lack the self-awareness on how to successfully draw on their prior experience to meet the challenges of a private market investing role.
For instance, as an SVP at a F50 company, you're responsible top-to-bottom for one thing. You're used to having dedicated deputies (VPs) for specific products or geographies or functions within your realm, all of whom are focused solely on you and how they can give you what you're looking for.
In private equity, however, you're responsible (a) only at a high level and (b) for many different things at (c) numerous different companies.
Few people are great about that transition, and even fewer are great at assuming the support role rather than the execute role. In private equity your job is to make sure the portfolio executives have what they need to meet the goals you've set for them. This means you don't actually swing the pickaxe, you hand the team of guys doing the swinging cold beer and cigarettes to keep them going.
Minus officiis nihil omnis et. Itaque natus omnis debitis eligendi. Voluptate quae maxime placeat nemo. Sed dignissimos quaerat dolore illum. Eveniet quam possimus dicta alias blanditiis laborum reiciendis. Ut sed ipsum voluptas suscipit accusamus aut minus quisquam. Voluptatem numquam possimus cumque quidem nisi ullam rem porro.
Voluptas dolor quo quia dolorem. Voluptate ratione deserunt rerum quibusdam.
Qui nemo expedita reprehenderit nulla et dicta sed. Blanditiis blanditiis officia quam veritatis officiis dignissimos facere et.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...