Is PE commoditized?

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All PE firms are looking to make 3x their cash in 5 yrs, but…

How do you differentiate in different environments?

Today, we cover:

  • What are PE firms looking for?

  • How does capital differentiate itself?


What are PE firms looking for?

A PE firm has raised capital. What now? They need:

  1. An industry focus

  2. A typical investment size

  3. An investment timeline

  4. A return hurdle on an LBO

This is a quick test to understand if the opportunity is worth looking at.

If it is, we dive deeper:

Understand what levers move the business the most (visualize the business)

Does the valuation multiple reflect the risk? (Run comparables)

Is growth overstated due to the COVID business bump?

What is the competitive advantage that allows margins to sustain?

What is customer concentration like?

Always overstate assumptions on the model for a margin of safety. Then, just sit on it and think.

A question I like asking is: If this were the last investment I could make, would I do it?

If you’re still comfortable with it, you get:

An understanding of who’s going to run the business (and if they're coachable)

People matter most. Do the values fit?

However, everyone knows this. To what extent do they practice it? I don’t know.


How does capital differentiate itself?

1. Patient Capital

Doing nothing is still doing something.

Have a longer investment timeline. I’m not saying to compromise on returns, but if the business is a cash cow, just hold and support the operators until an exit opportunity arises.

A good example: Family Offices. Strict industry focus. Have a ton of capital and can afford to keep longer timelines. Operators prefer the calmness to be able to grow sustainably.

2. Preferred Equity

Rates are likely to be higher for longer.

Companies don’t want debt @ 10-12% in their capital structure.

Preferred equity aligns operators with investors that are long term with stable and predictable payments off the topline (usually 1-3%). Payments can be flexible based on timing.

3. Values

People don’t like being told what to do. Support them. Tell them where you want to go and let them surprise you with the results.

You have to be a good judge of character for this, and it’s hard.

Spending more time thinking, is my conclusion to win more (in life and deals).

See you next week.