July 20, 2022
Private Equity has been one of the best performing asset classes over the last 5 and 10 years and, in fact, for decades. Private equity investors do not have to endure the volatility roller coaster ride suffered by public equity investors. Watching the value of our portfolios moving up and down all day long can wear on even the most prolific investor, and many investors end up selling at exactly the wrong time.
Over the years as a private equity investor and student of investing, we have identified three major principles of private equity investing. We refer to this as the 3 Ps of private equity investing:
In life, it’s all about ‘The Who’. If the who isn’t right, the what doesn’t matter. Do they have a great culture, exceptional talent and a clear mission? Does their culture inspire honesty, accountability and continuous learning, and are they open-minded? Are they passionate about what they do? Are they committed to creating and unlocking value? When you can blend culture and mission it becomes contagious and can potentially be a very powerful combination.
Do they act like owners because they have a significant amount of net worth in their own funds and the companies they invest in? Do they have an alignment of interests and incredible focus? In addition to identifying and accessing opportunities, does the team work together in various economic cycles? Are they collaborative, cooperative, collegial and congenial with each other?
They not only know how to buy businesses right, in the right asset classes, but they also clearly know how to operate and manage well to leverage resources to create and unlock value.
Do they have a disciplined process? Can we clearly identify what their competitive advantage/niche is? Do we know why they outperform? Do they know how to scale, and do they have a proven strategy? Do they have a consistent flow/pipeline of opportunities that allow them enough opportunity to be very selective? Do they have lower risk and higher performance?
Their due diligence process should include carefully reviewing the process and culture at the firms, how they make decisions and what makes them stand out from their peers.
Have they demonstrated the ability to execute? What is their track record? How do their teams and their results compare to other funds in their category? What do they do to outperform consistently and significantly? Are they peek performers, and why? How do you find these categories or niches?
How do you find these funds? How do you source? Adding private equity to your portfolio is slightly more challenging than investing in the stock market. This is because, unlike public equities, there is no accessible low-cost index fund in which to invest. Moreover, there is a wide dispersion of returns across private equity funds, so finding the right manager, is important to achieving strong returns.
One of the major reasons I decided to partner with Chaya and her team and create our own private equity platform is their integrity, experience, contacts, relationships, sources and access. Someone with a vast network of trustworthy relationships can open doors to funds that are often inaccessible to the general public. I’ve found that Chaya Slain and her team have extensive knowledge and an incredible network.
Ultimately, if investing in private equity is something you’re interested in, I encourage you to consider the three principles. Finding someone that’s passionate and committed with a clearly documented investment process and a strong track record of success. Someone with a strong reputation due to their diligence in sourcing, evaluating and reviewing the strategies, teams and structures of funds—all while building a deep network of strong relationships with fund managers, could help build a road to success.
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