What replaces Private Equity? What's the next popular exit opportunity?

The LBO gave way to the rise of private equity in the 1980s. Today, the PE space is becoming crowded and returns are shrinking.

  1. Do you think there will be another thing like the popularization of the LBO to give way to a new type of alternative investor?
  2. Is there anything you see right now that is on the rise and can see more people jump ship from IB to join in the future? 

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Dec 4, 2020 - 2:47pm

No lol - too many shady serial 'entrepreneurs' in that sector who are only good at rattling off buzzwords to raise capital (which they will then incinerate at a breakneck pace and look for financing again in 6 months). 
 

Good way to lose your faith in the green energy sector and be out of a job quickly unless you hitch your wagon to one of the handful of legitimate operators.
 

Dec 4, 2020 - 4:18pm

I'm saying working in some sort of alternative energy financing, whether that is investing or working at an alternative finance/solar ABS group at a bank over the long-term (next 20 years). Could be the next MBS if the gov gets involved. Thoughts?

Controversial
  • Intern in IB-M&A
Dec 3, 2020 - 8:20pm

Just an intern, but staying in IB is way overlooked on this site, especially if culture is good and mentorship / room to grow is there. Spent a lot of time recruiting throughout UG and found a team that's a really good cool culture that I really fit well with (even when it meant sacrificing "prestige"). I have 0 intention of exiting which means I can just focus on work and when I'm not working I can chill, hang with friends, do whatever I want cause I won't be tweaking about buy-side recruiting. Banking is banking and won't be glamorous or "cool" anywhere you go as an analyst. I get the impression analysts in IB adopt the "grass is greener" on the buy-side or any other exit mentality while grinding through the bullpen, then leave and realize they actually didn't have it that bad and PE isn't a magical place where all their former problems would disappear. Culture / fit of the group is so much more important than it seems which is why I think if you find that group for you in IB, why not ride it out and reap the benefits?

Funniest
  • Prospect in IB-M&A
Dec 3, 2020 - 8:36pm

Cool story bro but that's not what this thread is about. OP is asking which industry/sub-sector is gonna produce the billionaires of tomorrow

Dec 3, 2020 - 8:51pm

If anyone had the actual answer to that, they wouldn't be working in banking unless banking is the only/main way to stumble upon it. Those future-billionaires, if the future has billionaires, would just instead be doing that. Regardless, they're certainly not shitposting on WSO. In any case, by the time the hot new thing is well-known and being discussed on WSO, it'll already be so deeply entrenched that you'll either already be in the first-movers' pool or left behind. And, if you're asking people for get-rich-schemes, you're probably going to be in that second group.

Even when it comes to PE, we can count the number of PE billionaires on basically one hand, and they're mostly all products of the initial LBO/PE boom anyway. At this point, the IB -> PE pipeline is just a long line of chasing after the last few seats onto the gravy train. 

Pull your head out of your ass and breathe the air outside of the circlejerk. The other poster made a really important point and contribution to the conversation: the focus on 'exiting' is misguided, and there's no sense in perpetuating an 'exit for its own sake' kind of culture.

  • Incoming Analyst in IB-M&A
Dec 3, 2020 - 9:32pm

Based on my bank and the banks my friends work at, it's still quite uncommon to stay a2a. In this year's class at my bank no one stayed for a2a and from talking with my friends, it's typically 0-1 kid from their group stays for a2a. If you like your group and the lifestyle is manageable for you that's great, but I think that the reason exit opps are so emphasized is that most, but obviously not all, banking experiences are not sustainable/worth it for the 6 or so years you'll be a junior banker.

Dec 4, 2020 - 7:59am

The problem with your thinking is that because, by committing to IB as a career, you won't have transferable skills. You'll be addicted and beholden to a lavish paycheck you know deep down you'll struggle to replicate at another employer, which will kill the WLB you seem to think you'll have. 

And the thread is about what's next now that the LBO world is fairly commoditized and carry doesn't produce billionaires like it used to. 

The truth is you're the weak. And I'm the tyranny of evil men. But I'm tryin', Ringo. I'm tryin' real hard to be the shepherd.
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Dec 4, 2020 - 10:21am

Usually I don't comment on threads like these, but having been in your shoes recently enough as the excited undergrad heading to a "prestigious" career, I'd like to offer a well intentioned, point of view:

Don't expect your trading of prestige for culture to be the silver bullet that solves the age old churn rate issues these places have.. Not a single one of my friends out of undergrad is happy in IB, despite all of them going in drinking the kool-aid to various extents. This isn't a knock on you so much as a reminder that these types of careers are the equivalent of a blunt axe to your psyche, especially when paired with the extreme shift from an environment like college where you get all the freedoms of an adult without most of the stressors.

Now, I will caveat this with the fact that I am at a "prestigious" firm, and therefore may be subject to more BS because my firm knows it can dangle the name brand as a carrot, but from my conversations with friends at all "levels" of all places (Big Tech, Corporate Strat, Boutique IB & CO, Big 4), a feeling of post undergrad blues is universal feeling. Your first few years out of undergrad will jar you because of the life expectations shift, a job like Banking exacerbates that more than most other roles. Make sure you go in with eyes wide open.

I can guarantee you that your visions of all the things you expect in the next few years will be very, VERY different than what you expect going in.

Dec 5, 2020 - 1:50pm

IB is also shrinking. Will it go anywhere? absolutely not, the world always needs bankers and a medium to move money from point A to B. But does it need the vast amount of people currently employed in the industry? Absolutely not and government regulations as well as technological advancements and alternative sources of financing are slowly but surely causing banking to shrink.

Dec 3, 2020 - 9:36pm

Who cares. You can make plenty of money doing just about anything you like. Just ensure you like it enough to work 80+ hours a week at it and be somewhat creative.

Yes traditional LBO returns are shrinking but that's what happens when you have the same strategy and approach to investing as others without any creativity. It's funny seeing investors (especially VCs but buyout too) talk about differentiated businesses when their own is heavily commoditized in 99% of cases. Of course returns will suck when the "investment criteria" section of your site looks just like everyone else.

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Dec 4, 2020 - 9:08am

This. An ex-boss of mine was launching one of these and this is exactly how he explained it to me. 

The truth is you're the weak. And I'm the tyranny of evil men. But I'm tryin', Ringo. I'm tryin' real hard to be the shepherd.
  • Analyst 1 in IB - Cov
Dec 3, 2020 - 11:36pm

Private space explorers/engineers/execs? 

Imagine landing a mining satellite on a planet or asteroid rich in a rare material, being financed by the government to create weapons in space, or being contracted to colonize another planet. Obviously some of this is a little further out into the future, but that's what this is about, right?

  • Associate 2 in Consulting
Dec 4, 2020 - 2:39pm

I remember reading such an interesting economic analysis on this a year / few years ago but can't remember where. I think the premises was all about getting the transportation cost of materials up and raw materials back down. Think it might have been the guy who wrote about economic assassin's or something. 

Dec 4, 2020 - 8:09pm

I'm in metals and I just don't get how this would work. People get all worked up about the amounts of some of these metals but if you brought that all down to earth you would destroy those markets. You would have to control everything in DeBeers like fashion. And while the barriers to entry are extremely high, I don't see why people would just let one company/country take all the cake from it. It would have to be some sort of cartel and with the amounts of money we are talking about, the prisoners' dilemma will lead to people losing their shirts real quick.

  • Analyst 1 in IB - Cov
Dec 4, 2020 - 9:24pm

Agreed that this would lead to a DeBeers like cartel, but I don't think that's necessarily a bad thing. If we were able to control that value, through different companies and contracts, then I don't really think other countries are exactly going to get a say in that matter. Granted, I agree that there a number of issues and red tape which is why I think this is further out into the future than most presume. It's not exactly a bad thing for the world if raw materials become cheaper and more efficient. Of course people working in those fields will disagree, but hey just "learn to code!".

Mar 14, 2021 - 11:53pm

The point wouldn't be to bring (all) these metals back to Earth -- it's so we wouldn't have to transport metals *from* Earth.

When colonizing Europa or Mars in the near-distant future, or just creating other facilities in space (think: H3 farms on the moon, sattelites) it will be much more economically viable to mine and assemble shuttles/technology in space, as opposed to on Earth and then wasting a ton of energy and fuel to lift it off Earth.

Dec 5, 2020 - 1:53pm

Very difficult and would require tons of CapEx in order to make reality. I do agree that asteroid mining is the next most logical step in space exploration prior to mars colonization, since it doesn't require human life. It's a supply chain nightmare tho lol. Try shipping minerals from a moving rock moving at a velocity similar to the Moon's. There are also some start ups working in this space, currently working with mining companies making robots that would first work on Earth, king of like a proof of work and concept.

  • Analyst 1 in IB - Cov
Dec 5, 2020 - 3:18pm

Yeah I think the costs and tech requirements will make asteroid the step AFTER Mars colonization, however. At least, for actual profit.

Dec 5, 2020 - 3:57am

I agree by and large. I dont think crypto will go mainstream/replace fiat currencies (which seems to be what the techbois keep raving on about) but rather transform into some kind of alternative asset

after all there's still too many negative connotations associated with crypto e.g. money laundering, dark web, questionable price swings, cybersecurity just to name a few

also would probably help if crypto soyboys weren't so insufferable with their "changing the world" bullshit. lol

"They say money can't buy happiness? Look at the fuckin' smile on my face. Ear to ear, baby!" - Boiler Room

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Dec 5, 2020 - 1:58pm

Nah, way too volatile. I think it's only being kept alive by fanboys and it will never see full societal integration because the actual technology is too complex for your average Joe to understand or handle. Ie while it's technically safe from cyber attacks, it's not safe from naive and foolish people who would easily give their key's to scammers because they don't understand the technology behind it.

Also it's still wild west and there's control whatsoever in the crypto market. Historically high ROI industries/investments had some form of control. IE a PE Fund in the 80s could actually control the company it bought. The sales and trading firms literally controlled the securities and bond markets. Solomon brothers was the gate keeper for MBS. In crypto, because there's no central authority, there is no logic in investment, you're just gambling and speculating that the price will go up.

Dec 5, 2020 - 3:48am

don't forget Mr. Holiday - at least one of his kids is an all-star

also...Rich Paul anyone?

"They say money can't buy happiness? Look at the fuckin' smile on my face. Ear to ear, baby!" - Boiler Room

  • Intern in HF - Other
Dec 4, 2020 - 9:05am

This. Check out Income Sharing Agreements. Really interesting concept for schools in my opinion.

  • Associate 1 in PE - LBOs
Dec 5, 2020 - 11:41am

I've written essay after essay about income share agreements as a hobby. I could PM you my articles if you're interested. Probably the single most compelling idea I've come across in recent years.

Most Helpful
Dec 4, 2020 - 5:14am

Another poster talked about private credit, and I think that's a solid bet. A lot of credit (especially personal credit) is antiquated. Even firms like LendingClub and Prosper have credit algos based largely on FICO. They have disintermediated the banks to some degree, but they've really only scratched the surface. The total pool of addressable loans is in the $trillions and they do a few tens of billions. And frankly, they're not that good at it. They miss originating a LOT of good loans because a lot of their tech is derived from FICO scores. There are hundreds of other data points available on most consumers which are simply not part of the credit algos at places like Prosper.

As a result, firms like Theorem LP are the firms of the future. They hire PhD computer science/physics/math people to 'build a better mousetrap' and pick off the higher-yielding, lower default-risk loans based on a substantially more sophisticated algo. Their AI is simply better than the big marketplace lenders and they're faster too. Just to be clear, the marketplace lenders are better and faster than the banks used to be, but their tech is still based on an old way of looking at credit. 

There is only so much value that private equity can pull from the market. Everyone looks at the same metrics and evaluates deals very similarly. That's true in VC as well. In many ways, it's probably even more true in VC. There is a SHIT TON of trend following in venture especially among the second tier funds who are simply hoping to savor of the top tier's returns. If all of the people in the industry went to the same schools, were taught be the same professors, and then worked in the same banks/consultancies/companies before becoming investors, how much novel thinking do you think they're really capable of? It's unlikely to be different en masse precisely because the mass of people in the space are carbon copies of one another. Obviously, that leads to some groupthink which is only cured by diversity of thought. 

In the case of firms like Theorem, 'diverse' ideas come from people with backgrounds outside of traditional finance/consulting. That's why they're likely to be a winner in the long-run. Credit is an extraordinary asset class precisely because it's so poorly understood (even by people on this site). And in case you haven't noticed, the world is absolutely flooded with debt these days. It seems to me that the best paid investors of the next couple decades are likely to be in private credit, though I think the skills required to participate in that movement are more Caltech PhD than Harvard MBA.

Dec 4, 2020 - 10:20am

All good info, but the reason so much personal credit is based on FICO is because using other criteria runs the risk of violating the Equal Credit Opportunity Act, which bans using certain demographic data in underwriting decisions. Obviously race and gender are not allowed to be used, but the act also bans age, marital status and acceptance of public housing assistance. 

So the risk is one of these algorithms use or appears to use something that's a stand in for one of the banned criteria. 

Array
  • 3
Dec 4, 2020 - 2:29pm

Its more than just that. Even if you're not looking explicitly at gender, age, race, etc., if it turns out that whatever you are looking at is highly correlated with gender, age, race, etc. you can be found in violation equal credit opportunity act as well.

I've seen companies using some pretty cool/novel data in credit algos. There's one shop that studied data on whether potential borrowers typically pay for gas at the pump or go inside at the gas station. They found that people who go inside to pay are more likely to be cigarette smokers (i.e., going into the the gas station convenience store to buy cigarettes and paying for the gas while in there) and they use being a smoker as a proxy for making bad life decisions and its a factor in their underwriting algorithm.

Pretty crazy/interesting stuff. No idea if it actually works though

Dec 4, 2020 - 10:07am

Search funds are an interesting growing area from what I understand. Essentially IB/PE skills traveling all the way downstream to the entrepreneurial role that we mostly mooch off. Owning operating is a much more fulfilling role too

  • Prospect in IB - Gen
Dec 4, 2020 - 10:29pm

When I interned at a search fund my searcher knew a bunch of other searchers and they all routinely ended up scraping the same companies. Did not feel like there was much room in that space even just a couple years ago.

Mar 14, 2021 - 1:57pm

SPAC's are slowly becoming like the PE space, overcrowded.  Yes there will be SPAC's that merge with great companies but the most will be forced to return money back to investors after 2 years or have to merge with shitty companies.  

On a side note, SPAC's are great to buy at NAV and flip at DA announcement :) (Personally I don't do this but ik people who have done well this year)

Dec 4, 2020 - 2:56pm

FinTech, InsurTech, Healthcare IT, EdTech are all good places to be right now esp. if getting into a high-growth private company. Lots of interesting privates that will probably be IPO candidates in 2-3 years.

Ongoing volatility will see more capital flow back to actively managed equity.

Dec 4, 2020 - 3:07pm

I recall (quite Bradly, tbh) a colleague saying, the Big 4 guy envies the IBanker. The IBanker  envies the PE guy, who in turn envies the entrepreneur. While not answering your question, my point is that there will always be another pond to yearn, if you are not satisfied with what you are doing. A different question is why. Perhaps $, status or content, independence, decision making power... To each...

Dec 4, 2020 - 3:21pm

Don't really matter in the long run because it is those companies with products that provide social value to customers as well as economic value to investors that can generate returns and push the economics further. PE/HF/Private credit or whatever are just ways to finance those companies. 

  • Analyst 1 in Risk Mnmgt
Dec 5, 2020 - 12:24pm

You're probably looking for something that pensions and large endowments can throw their money in without being scrutinized. Like yeah, a lot of PE isn't returning spectacular returns. But no one's going to criticize you for throwing money at Leon Black or Henry Kravis. My guess would be something that's a combination of higher ROI, attractive to the investment officers at pensions, and with a well-known reputation behind them. So not now, in 10-20 years when PE is petered out and there's a lot more developing countries that have more stable economies/laws that incentivize investment-I could see a lot of foreign investments behind well-established foreign investment firms.

Dec 12, 2020 - 7:35am

I might be biased since I will be starting in the space shortly, but I think venture debt will see yuuuuge growth over the next 5-10+ years. Plenty of venture debt funds have been popping up recently and a handful of BBs are building out their operations in Technology-focused lending (Wells, JPM specifically) in addition to Silicon Valley Bank leading the charge.

Companies are staying private for longer than they ever have before, and the need for bridge loans is growing in tandem which makes it clearly a favorable environment imo. Most venture debt deals are structured with equity warrants attached to them so the opportunity for upside is there along with downside protection of being more senior in the cap structure to traditional equity.

Array

  • 1
  • Prospect in IB - Gen
Dec 13, 2020 - 12:48pm

The idea of venture debt is non-existent. Bank is pushing to move into middle market and "venture debt" is essentially middle market lending to tech / venture. The underwriting criteria and loan structuring is essentially the same. I interviewed for a few of the "venture debt" teams, nothing they do is surprising different from the existing lending model. However, I think private credit / direct lending mainly bridge lending may be a interesting space, I don't think there's any of that yet.

Dec 17, 2020 - 3:15am

Rev based financing is wiping venture debt pretty hard. Loads of well priced debt available quickly and relatively inexpensively now, especially for SaaS companies. 

  • Principal in PE - LBOs
Dec 13, 2020 - 11:30am

At my EB the most recent couple analyst classes have had a growing proportion of folks going to growth equity. Whereas before ~80% went to PE, 5% HF, 5% growth, 10% other, Id say it's now ~60% PE, 5% HF, 20% growth and 15% other. 

  • Analyst 1 in Consulting
Aug 4, 2021 - 10:43pm

HuskySized

What's the comp structure like? 

APM out of college offer from Google (and most other APM offers, while less prestigious, offer same TC) is 120k base, ~25k equity per year, and ~20k bonus, so total of ~160kTC excluding stock appreeciation. After 2 years promotion to PM which is about ~225k TC if home-grown. Note that external hires generally have higher TC in tech companies, so most people jump ship, usually for ~250-300k TC at the ~3YOE mark. 

  • Analyst 1 in Consulting
Aug 4, 2021 - 10:44pm

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  • Prospect in IB-M&A
Jan 2, 2021 - 3:51pm

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  • Intern in IB - Cov
Oct 12, 2021 - 11:14am

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Oct 13, 2021 - 1:35am

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