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GUEST COMMENT: Only a sucker would work in private equity nowadays

Private Equity as we know it is finished. I can see this first-hand since I work in a private equity fund myself.

Like any business model in finance, it has had its humble beginnings, its vintage years and it is now experiencing a slow come-down. As a result you can forget getting hired into PE if you are hoping that it’ll become your way out of a tedious banking or accounting role.

PE is no longer an industry where the only exit strategy is an MBA or early retirement. Juniors at various funds have been paid little or no bonus for one or even two years in a row. For the first time ever they fear for their jobs.

I was told an interesting story last week over a pint with a lawyer who has spent most of his career working for financial sponsor clients. Unusually, he’s seen no associates at any of the corporate hospitality events this summer – since there are so few deals around, senior dealmakers are taking up all the box seats at the opera, cricket and the races.

PE has never been rocket science. You need three things to make your returns work; growth in cashflows, high leverage and multiple expansion. None of those three factors have been much in evidence since 2008 at the very latest. Furthermore, no-one really knows when they are coming back, regardless of what greyhairs like David Rubinstein (Carlyle), Henry Kravis (KKR) or Ronald Cohen (Apax) say publicly.

High profile casualties have already included Terra Firma, Candover and 3i. And even those funds whose portfolios are still rumoured to be in good shape are quietly taking the principals responsible for the weaklings on their books outside and shooting them. Interestingly, since most of their assets are by definition private and unlisted we are now seeing funds which co-invested in companies reporting sharply different valuations for those same investments.

Quite apart from individual deal chemistry, the asset class is falling off a cliff. The fundraising cycle has slowed, investors are less willing to commit new capital than ever before and are asking for some of their original funds back first. Exits are increasingly hard since public markets are sceptical of buying shares in firms PE has already ripped all the costs savings out of. The ‘asset-stripping’ label, coined in the 1980’s, has stuck.

And even if you manage to make money, bonuses paid out as carry are likely to be subject to a newly higher capital gains tax and may need to be further deferred (as if waiting for carry to vest wasn’t already a deferral).

Conventional wisdom has it that success nowadays in PE requires a niche angle – emerging markets, operational tune-ups etc. I hope that’s the case, or a return to investment banking beckons.

The author is a former M&A associate now working in a private equity fund

Comments (16)

  1. ..Thanks for your honesty, not very common in Finance…

  2. Agree with most of it but
    1) would put an emphasis on the attractivity of certain niche places. Look at the returns that some funds in “frontier” markets are making like Africa, South America, CEE etc…
    2) not sure that going back to investment banking might bring more in terms of salaries + bonus given all the new limitation, payment in shares etc….
    3) beig again someone else b*** and working to give so-called “advice” as an M&A banker.. thanks but no thanks…

    emerging market PE Reply
  3. Do you not see this as simply a transitioning of the traditional PE model, though?

    Although traditional PE deals have disappeared, opportunity still does exist. As a VC, the deals we have made have been augmented by forming strategic relationships with PE shops. For example, we go in at inception on the premise that, should certain conditions be met, PE firms will arrive with an injection of development capital at the second round.

    This ‘exclusive’ relationship allows PEs or latter stage VCs the opportunity to enter an established business that still has massive growth potential. Mutually, it also drives up the value of my initial equity without me having to inject further capital, which is ideal.

    What we will see is the continued ‘coming-together’ of stages and the establishment of a prominent value chain as long as nice PE deals remainfew and far between.

    Alternatively, investors still fancy turnaround funds – I know he has a fantastic track record, but Jon Moulton and Better Capital had a nice IPO.

  4. 2 problems with PE…..u make a deal…then u wait 5 yrs or so before u can list it back…..till then u do ur cost cutting etc……5 yrs of ur life invested…..5 yrs down the line…market tanks or goes nowhere….u end up listing it at a 30% discount to what u paid…..5 yrs of ur life down the toilet…..there is nothing special abt pe…statistically most pe funds underperform the broader benchmarks…in an enviroment of rising equity benchmarks pe has a chance……in an environment like what the west has seen for the last decade and will see for at least another decade…pe is a nice sounding waste of time….as for vc…don’t even get me started!!!!!

  5. I think one has to be just a bit smart about PE, there are still funds out there that are making a lot of money (8-10x within 2-3yrs). Find a specialist/focused fund that is about to go for a round of fund raising – get your carry for free in the new fund – hope that the partners are marginally smart (but you will have to wait a while_which has always been the case). BUT yes, you can still make money in PE!

  6. @Uunet –

    It is precisely the reasons you list that make the industry so exciting. What else out there affords you the opportunity to simultaneously implement your strategic, operational, financial and intellectual acumen?

    True, alternative roles may allow you to use these skills for a short period of time, but the sense of achievement you recieve after testing them out over 5-7 years is unrivalled.

    Plus, you have taken an incredibly myopic and over-simplified view of PE. It simply does not work the way you describe.

  7. Haw haw.

    Nelson from the Simpsons Reply
  8. pe – the modern day robber barons.

  9. Nick…as a public market investor…I have seen so many deals where companies have been taken private…I have waited years to see them relist…..I have often seen them relist at significant discounts….and I have seen PE firms overpay in bidding wars for a whole lot of Dog businesses…makes u a bit cynical…what u are saying almost amounts to saying vc is a great industry (despite the heartbreaking wreckage of vc funds we see around us) bcos if u give it ur whole life u have a chance of investing in the next google somewhere in the next 30 years!…..

  10. Nothing lasts forever. Stop complaining, find your new niche in life.

  11. …Of course they overpaid, they always priced of leveraged rather than total project IRRs.

    Rather than it being so hard now in PE, I think its more a case of it looking so hard in the current market relative to just how easy it was pre-credit crunch.

    There’s still a lot of life in real estate and infra, the latter in particular performing very well throughout the crunch

  12. pe, u mights as well just take a leverage punt on the index, lets not pretend its anything sophisticated or glam

  13. ‘There’s still a lot of life in real estate and infra, the latter in particular performing very well throughout the crunch’

    CVC, KKR and Blackstone have all struggled to get their Infra funds into 1st gear. No easier than anything else at the moment.

  14. Nothing is easy at the moment, but they have performed far better than the average buy out, and have more of a future, IMO, than levered, expensive, punts on equties.

    Its remarkable that MSREF have been able to raise a new real estate fund

  15. word is MSREF offer people who invested in the new fund that they wouldnt have to complete investment in the first fund?? Arent they also promising bigger returns in the second fund??

  16. It can’t come as a surprise to you guys that PE is becoming increasingly competitive and that this is having an effect on fund returns. PE has made fantastic returns in the past, and as it has been stated here it is not really rocket science so why wouldn’t more funds come into the market and make auction processes more competitive? Think about it, should it be this easy to generate 25+% annually? Still, PE as a business model is great and will continue to thrive. PE still makes organisations more lean and optimised financially, but it will obviously not be as easy to become rich through it as it was earlier… But why should it?

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