Monkeys,
I feel like there's a lot of talk on this forum about recruiting for PE, hypothetical scenarios and technical questions. But one thing that isn't talked about enough is failed investments.
For those who have been in private equity for a bit, not every deal isn't a home run for various controllable and uncontrollable reasons.
Figured it might be good to have a discussion on investments you / your fund has made historically and what hindered the success. Looking to have some insight into the following (at a high level, for obvious reasons):
- industry
- investment thesis
- biggest reason for failure
- key learning points to take away
Thanks,
Nessy
This theme is more applicable for VC and Growth but a lot of the failed investments I have seen are due to lack of diligence rigor stemming from suspension of disbelief. Eg you really like a management team and you really like the product, but when your associate runs the numbers, you see the market size is only $500m, maybe $1B fully juiced. You dive in anyway because you’ve convinced yourself it’s actually a home run and there’s a mechanism to capturing most of the market quickly, but the reality is you’ve deluded yourself. When you are looking for reasons why something should work and not looking for holes, you are green, and likely still at the stage where you are just trying to do deals that you can put on your personal deal sheet. That is a terrible spot to be in! You want to constantly question your assumptions and have the sort of second order thinking that preempts very predictable failures. You can’t always be right, but if you’re wrong, it should be for something you knew and accepted as a risk, not something you deluded yourself into thinking isn’t true/relevant.
Thanks for this - very valuable insight.
I think it makes a lot of sense that young investment professionals might be thinking of investments incorrectly, as mentioned (i.e. by looking for reasons why something should work).
Do you think that shift in mindset comes from experience?
I think based on a lot of reading that industry is one of the key determinants of success/failure. And I'd say retail has been the worst performing sector for PE in the last decade.
Key learning point has been stick very closely to core competencies from a sector perspective (avoid strategy drift) and invest only in those sectors that have both high economic profits and barriers to entry. There's some interesting mckinsey studies showing average companies in "good" sectors outperform the best companies in "bad" sectors (good and bad being economic profits + barriers to entry).
https://www.mckinsey.com/business-functions/strategy-and-corporate-fina…
To be honest, I'm not surprised that there would be a high correlation with performance of a company and industry.
It makes sense that if an industry / market is growing, assuming no new entrants and consistent market share, the company's growth would be directly correlated to the industry growth.
One of the things (I can't remember the exact words - but seemed like an overarching theme) that came from reading the King of Capital, was that a good number of Blackstone's high performing investments were based on timing the market and riding the economic boom. Found they made a ton on cyclical companies which were invested in at the beginning of a market upturn.
I would say number one reason behind failed investments is overpaying at entry. If you buy a truly cheap asset in a challenging industry, you can still make money. The industry, however, needs to have at least 10 years of runway - and not be in permanent decline. But it does not necessarily need to be a hot sector.
Perspiciatis ut sint et sed asperiores qui. Esse ut voluptatibus at consequatur explicabo veritatis harum voluptatum. Sit corporis et maiores eligendi repellendus ipsam 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...