Observations of a PE Analyst

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Edit: The following pertain to my personal experience in private equity in a region outside of the US. Continue reading only if you are interesting in knowing about something that does not conform to generally accepted norms in PE.

During my relatively short time working as an investment analyst for a private equity fund, I have witnessed a number of incidents that have made me question the phrase "outside the realm of possibility". A sheer lack of time, money or authority is never a concern for making decisions – as long as it solves the problems of the overlords, it shall be done.

This post lists the best of the golden nuggets gleaned from my time in private equity till now – observations that no one ever points out to an outsider or a newcomer.

1. Laws don't matter, solutions do:
When money is at stake, laws are taken more in the context of hurdles, not roadblocks. They're only minor inconveniences which need to be jumped over without disturbing the balance of the hurdle. That is to say, a solution can always be found without breaking or even stretching the law; intent of enacting the law be damned. Never underestimate the extents to which businessmen can go to get their way without breaking a single law.

Those who have studied even a little bit of law may sometimes believe that there is legal precedent for every possible circumstance under the sun. Well, suffice to say that in during a span of 12 months, I've discussed multiple theoretical solutions so convoluted that there were no relevant precedents whatsoever. What makes it worth mentioning is that we dreamt up these solutions for incredibly common and mundane problems.

2. What time difference?
You know that thing when it's midnight in the US and noon in India and we call it "time difference"? Yeah, that doesn't apply to finance. I suppose this applies to most service industries, but none more so than investment banking. And when a former investment banking MD is running a private equity fund, the whole world is his playground, since his own money might be at stake. International citizens that they are, current (and former as in this case) MD's of bulge bracket banks roam around the world so much that they probably don't have a biological clock anymore (hence, no jet lag – and I'm only half kidding).

The flip side? If the MD is landing in New York at 6:00 pm NY time, and wants an entirely new set of analysis done before he lands, it means that you¸ the unfortunate analyst at the other end of the world, will end up having a midnight date with MS Excel.

3. What personal life?
Anyone who has done an entry level job for more than a week, will agree that bosses rule their minions' lives. But when you're in finance, bosses rule not just your lives, but your health, wealth, relationships, sanity and sometimes even your hygiene. I once answered an impromptu internal conference call at 7:00 am, dripping wet and draped in a towel, having been in the shower at the moment. The call was to inform my colleague and I that we need to add another set of analysis to a deal which we are going to reject. Nevertheless, when you're at the lowest rung of the ladder, you cannot let your Blackberry go unanswered.

Oh, the Blackberry… I take that name with a mixture of horror and revulsion. When you join as a new investment analyst, the very first day you get handed a shiny new block of plastic called the Blackberry, which you're supposed to have on your person at all times. When you're young and naïve, getting a free phone feels like a matter of pride and vanity. A year later, it takes all of your self-control to not throw it against the wall when it beeps for the 9th time between midnight and 2:00 am. And yet, if I'm getting a call on my personal phone from my girlfriend and my blackberry is ringing at the same time, guess which one will I answer first?

4. Q. How much money does a business need? Ans. MORE.
PE funds evaluate dozens of deals in a year and take up only a very small proportion of them. But the benefit of evaluating such a large number of deals is that after a while, recognizable patterns start emerging.

Entrepreneurs, by definition, are extremely passionate about their business. Old family businesses may have out-dated business models, may be overburdened by debt, or may be facing a crippling cash crunch due to unchecked expansion. But the entrepreneur will always see his business as a potential golden goose just waiting to be utilized - if they can just get some more money. Every time, the answer seems to be more money.

The simple concept of refinancing has been convoluted into a number of fancy words – debt restructuring, capital restructuring, capital structure optimization; and by extension, securitization, buyouts, risk capital infusion… All that such strategies do is delay the day when the borrower has to cough up the cash. It doesn't matter whether the business can genuinely pay back the restructured debt or not. As long as the entrepreneur can convince a lender in the here and now, it's all sunshine and roses. To quote a lender who was proposing a 30 year bond whose principal will fall due only in the last two years, "when the due date for payment comes, another refinancing can always be considered. In any case, by then it'll be my successor's problem." Gives a whole new meaning to the phrase, "long term greedy".

Comments (22)

 
Best Response
May 20, 2014 - 10:56pm

This post doesn't make any sense. Private equity is nothing like this.

#1 laws don't matter? Who writes that? In PE you tend to hire great lawyers and as a PE professional you help with the business decisions during a deal. I don't know what you mean by no precedents. If you are doing deals and weaving through laws for "common issues" with no precedents then your lawyers must be thoroughly confused, and even worse your business partners likely don't know what they are doing. Creative deal structuring may be what you are trying to get at here but that's giving you the whole benefit of the doubt.

#2 and #3 seem to be driving at the same thing. I know plenty of people in PE that have lives and have bosses that recognize and respect their juniors' time. You'll see in this industry that leveraging junior resources is easier said than done and it frequently helps to get the junior guys who are good on your side.

#4 - you must be buying shitty businesses because all of the companies PE funds try to back tend to make a ton of money. Either just from cash flow, dividends, recaps, Accretive exit, etc. private equity is a huge asset class that wouldn't exist if all companies just needed more money.

I rarely post here but this type of characterization of PE from someone who either wasnt really in private equity or who has obviously been overwhelmed by the industry isn't very fair to the aspiring kids who read this forum.

 
May 21, 2014 - 1:33am

@"wookie102", @"Boston":

A whole lot of vitriol here. The title says "Observations of a PE Analyst", not observations on the PE industry. It goes without saying that these are observations from personal experience and not intended to be the universal truth. Nevertheless, let me address your points.

1) Obviously this pertains to structuring issues, I shouldn't have to clarify this to another PE guy of all people. I'm not in the US and the regulatory scenario for international investments is not very conducive, to say the least, hence the constant need for out of the box thinking.

Regarding lack of precedents, maybe you could consider opening your mind a little bit and accept that there are people who might have come up with entirely new ideas - that's how precedents are created in the first place.

2 and 3) Again, it's a personal observation at MY own fund. You might be working at a preftigious fund that is a household name, but guess what? A vast majority doesn't. You mentioned that you know plenty of people who's bosses respect their juniors. Are you telling me that there the people you know comprise the entire population of the industry and there's no chance that there are other people, other funds, who might be having a different experience? Jeez, you might want to open your mind a little bit there, brother.

4) This point of yours... Damn, mate, you need to develop your reading skills just a little bit more. Whoever talked about buying shitty businesses? As I said, I'm not in the US, and in this region, there is too much money chasing too few good deals. A lot of people approach us for their funding requirements, and as mentioned in the post, we take up a very small proportion of them.

So much for introducing a different line of thought than the usual "12 perks that you get only if you work in high finance". No, I'm not bitter. I'm lucky enough to have landed a PE gig right out of undergrad - a gig where I've worked on venture capital-style funding to PIPE, in a region where PE itself is relatively nascent. Because of this wide range of exposure, I've luckily seen the bright side of PE as well as its underbelly, which, no matter how loudly you deny, exists. And personally, I'd rather be aware of a wide gamut of facts than live in a blissful bubble of preftigous deals.

Move along, nothing to see here.
 
May 21, 2014 - 2:50am

Bateman Begins:

@wookie102, @Boston:

A whole lot of vitriol here. The title says "Observations of a PE Analyst", not observations on the PE industry. It goes without saying that these are observations from personal experience and not intended to be the universal truth. Nevertheless, let me address your points.

1) Obviously this pertains to structuring issues, I shouldn't have to clarify this to another PE guy of all people. I'm not in the US and the regulatory scenario for international investments is not very conducive, to say the least, hence the constant need for out of the box thinking.

Regarding lack of precedents, maybe you could consider opening your mind a little bit and accept that there are people who might have come up with entirely new ideas - that's how precedents are created in the first place.

.

I'm going to back you up on this. I've seen Bain do some questionable things.

For example, and i forget the exact legal construct of this, but they were able to upstream cash outside of the restricted group, then downstream the same cash back into the group to equity cure the covenants they were in breach of. If that isn't creative lawyering....i dunno.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 
May 21, 2014 - 12:28am

Sorry, this is not insightful, just a new finance professional struggling to cope with the responsibilities and stress of the industry.

OP, appreciate the write-up, but I don't think your experience, especially at a

 
May 21, 2014 - 9:59am

". To quote a lender who was proposing a 30 year bond whose principal will fall due only in the last two years, "when the due date for payment comes, another refinancing can always be considered. In any case, by then it'll be my successor's problem." Gives a whole new meaning to the phrase, "long term greedy"."

Or maybe the lender likes the borrower, the yield and predictable cash flows from this bond and prefers to evergreen it so they can continue to receive consistent incomes from it/have the goose continue to lay golden eggs instead of getting all their money back and then risking it on another asset that they are less comfortable with. This does not make the lender irresponsible or necessarily imply that they are kick the can down the road for their successor.

Re circumventing the laws' intents, it is never a good idea to break the law unless you are very politically connected, even then it is probably no the smartest thing to do. OTH "Stretching" the law/coming up with creative deal structures that accomplish deal objectives while still in compliance with the letters of the law is at least 50% of deal making for a distressed credit/special situations shop. This is why the legal counsel is so instrumental and arguably the most important member of the deal team/IC. Contrary to what some on WSO tend to believe, the legal counsels at a good PE firm do much more than drafting NDAs and compliance documents and fighting over some semantic legal languages. They are the ones who help make sure whether/how whatever deal opportunities you source are doable in the first place.

Too late for second-guessing Too late to go back to sleep.
 
May 21, 2014 - 10:20am

brandon st randy:

". To quote a lender who was proposing a 30 year bond whose principal will fall due only in the last two years, "when the due date for payment comes, another refinancing can always be considered. In any case, by then it'll be my successor's problem." Gives a whole new meaning to the phrase, "long term greedy"."

Or maybe the lender likes the borrower, the yield and predictable cash flows from this bond and prefers to evergreen it so they can continue to receive consistent incomes from it/have the goose continue to lay golden eggs instead of getting all their money back and then risking it on another asset that they are less comfortable with. This does not make the lender irresponsible or necessarily imply that they are kick the can down the road for their successor.

This is probably all true and the lender was just making a bad joke. The OP probably didn't understand that it was just a joke because he didn't understand the fundamentals of the loan.

Also, term debt is pretty damn restrictive with regards to positive/negative covenants so I don't even know how OP could think something shady was going on there. The bank doesn't care as long as the company doesn't breach covenant or the other terms of the loan. Who cares how long the bond term is in that instance?

 
May 21, 2014 - 12:16pm

Re Evergreen loans: Agree with all of this, this would typically be the background for such bonds. Unfortunately not so in this case. Too tired to go into details ATM. We didn't proceed with that transaction and the company dropped the bond offering as well.

Never witnessed a deal structure outright in violation of the law. It was some truly creative structuring that would need an amendment in the law itself for it to be declared unlawful. Doesn't mean I liked it - everything stated above comprises of purely objective observations.

Move along, nothing to see here.
 
May 21, 2014 - 10:59am

close friend of mine in PE wouldn't describe his experience like this, but it sounds like you were pretty candid with your experience. just goes to show that outside of IB, it really does depend on the firm (PE, HF, AM). +1

 
May 21, 2014 - 11:12am

thebrofessor:

close friend of mine in PE wouldn't describe his experience like this, but it sounds like you were pretty candid with your experience. just goes to show that outside of IB, it really does depend on the firm (PE, HF, AM). +1

Would've been nice if OP didn't say some of those applied "to the industry in general"

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