I am never investing in a PE deal again out of my personal portfolio. Ever. Not VC, not angel investing, not growth.
Background: I'm a PE professional, and I went down the path of personal investment in PE because it was what I felt I understood. Plus my former shop was printing high IRRs which made public equities seem silly.
I mean, why settle for a historical average 8-12% return, when you can generate >30% IRRs plus influence the outcome thru activist investment in PE, right? Bad idea. So I co-founded a hospital chain, and put my own money in that as a partner in the opco, and also separately invested in a number of smaller illliquid PE positions. I regret that, and offer this as a cautionary tale.
- Negative Selection Bias: Unless you're Peter Theil or Warren Buffett, or at a major PE shop which is 24/7 immersed in an industry, no one is showing you great private deals. That means there's an inherent negative selection bias. PE funds screen several hundred deals a year, and do only a small handful. My old shop had a >98% rejection rate. But getting that kind of deal flow, and running that thorough a screening process means having a brand to attract dealflow, and running a team to sift through the volume. As an individual, you just can't do either. Simply put, if you're seeing a private deal - it's likely a bad deal.
- Illiquidity: PE funds and their LPs can stomach illiquidity. I thought I could but turns out I can't. It takes institutional time horizons to be in PE. If you're an individual investing out of your PA, how will you manage it if the investment doesn't exit for 5 years? Or 10? Want to buy a house to put your family in? Too bad, your money is stuck in a PE deal. Want to participate in the stock market rally? Too bad, the money's locked up.
- Never an exit / You might fund someone else's lifestyle: a variant on the above is the scenario in which the company does well, your investment thesis is validated, but the company can't/won't exit. Making the leap from private to public company is something that most companies will never do - and mostly likely you'll invest in a company with no exit. I invested in one tech company that became the leader in its niche, revenues are too small to IPO. Example 2 - 5 years in I'm still trying to sell the hospital platform I helped build. It's grown a lot, but finding a buyer is difficult. Most PE deals won't find an exit.
- PE is lumpy: The nice thing about public equity is it's easy to take a few thousands dollars and invest. It scales nicely. PE? Not at all. Minimums on PE deals even as a co-founder are hundreds of thousands. It's lumpy, and that concentrates the risk in your PA.
- You're a fuckable midget: In most deals - whether you're investing alongside a fund or going in as an equity participant in a business you start - you're a small player participating alongside giants. That means you can be crammed down, squeezed out, and in general just bullied and abused. Even if the company is a success, you can still find yourself on the losing end of the deal.