"Private Equity Approach to Public Markets" --- This Overused Line
"Here at X Capital Management, we take a Private Equity Approach to Public Markets" - I've started seeing this buzz phrase pop up a lot (almost verbatim) in many hedge fund managers' websites, pitch decks and LP presentations. Latest I've seen it used and abused heavily is with Sixth Street's FSG team.
What the hell does this phrase mean? (besides obviously giving an excuse for the fund to be concentrated, long-only, heavy volatility, with slow process + minimal churn and in the portfolio). As someone who has been in PE and doing "deals" where there's a process and "full" access to private information in the data rooms of targets (yes yes I know it's not perfect info and the target will hide shit that could be a red flag), I don't get how any of this really translates into the public markets where trying to get access to that same info will (maybe) land you in jail. Obviously having GLG/Alphasense expert/channel check calls galore + speaking with management would be an area of overlap to the extent feasible, but are Public markets investors really paying McKinsey and Bain to do PE DD decks on public equities? What else are they really doing here that a normal "faster moving" L/S equity fund isn't doing.
I know I'm coming off as skeptical and maybe I'm just very ignorant so would love the insight.
I've seen it used by small funds that acquire majority/near majority stakes in small publicly listed companies and put people on the board of directors, especially in the mining sector. But yeah pretty ridiculous when it's a regular HF whose investment doesn't even represent 0.1% of the market cap.
Highly overused phrase. Most funds do not hire Bain or McKinsey. Many investors don’t even get to meet with management.
"We are a public market with private equity approach. We have a 5 year time horizon that focuses on buying things that are trading at a significant discount to intrinsic value with a rigorous focus on risk management. We are concentrated and focus on business moat, management quality and incentive alignment while focusing on building mosaic around the stakeholders, including but not limited to suppliers, customers, regulators, competitors."
Then you go on Whalewisdom, average holding period of top positions: Time held top 20 positions: 1 quarter; Top 10 holdings is 30% of the portfolio; Turnover of 90%.
Typically it means (i) buying a big enough stake so as to either put someone on the board or at least have access to management, and (ii) "guiding" management to act in a way that unlocks value for shareholders. I would say a lot of activist funds are really public markets investors acting with a PE mindset, think Elliott and the like. Most shareholders in public market companies have little to no say in how the company is run and just hope that management acts in a way that doesn't destroy value.
Yeah I can see if you build up a really big stake and try to be an activist and actively attempt to influence strategy and outcomes. That makes sense to me for sure. But besides Elliott, Aurelius, Pershing, Third Point, ValueAct or any other activist prone public equity/credit shops, I'm just not sure how the "private equity approach" translates. As dickthesellsider aptly put, if you look at a lot of these places, their actual holdings and turnover belies their key selling point. Plus you're not getting great access to management before you start piling in some serious cash into an investment, so I'm not sure what is special or different about the diligence these hedge funds claim to do in the pre-investment / investment committee stage.
I know for Sixth Street at least, their fundamental strategies fund which does public credit and equities is a PE drawdown vehicle and so they can't trade in and out + hold for multiple-years (or at least so they say officially), and buy into only a handful of names a year. But there are a plethora of liquid evergreen equity hedge fund vehicles which are fully invested that also say they take this Private Equity approach
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