Comments on: The Rise and Rise of Private Equity http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/ Meandering Musings on Globalization Tue, 07 Feb 2012 21:29:39 +0000 hourly 1 http://wordpress.org/?v=3.1.1 By: Sam http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/comment-page-1/#comment-6065 Sam Wed, 02 May 2007 22:01:54 +0000 http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/#comment-6065 Good article. At the end of the day, private equity firm returns should be measured once a firm completely exits an investment. For current PE activity, and the expensive multiples being paid, it will be several years to see just how well these firms performed. Good article. At the end of the day, private equity firm returns should be measured once a firm completely exits an investment. For current PE activity, and the expensive multiples being paid, it will be several years to see just how well these firms performed.

]]> By: Krish http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/comment-page-1/#comment-4830 Krish Mon, 01 Jan 2007 12:37:48 +0000 http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/#comment-4830 That was an interesting query by RR ( comment dt.12/5/06 ). In the market parlance, when they say an index returns 6.6%, it usually refers to the composite EPS growth of the index constituents. If a comparison is drawn to the 22% growth returned by PE portfolio companies, then it has to be the composite EPS growth of the portfolio constituents during the corresponding period. As such, I think it's just an effort to benchmark against an index to assess the relative efficiencies of Public and Private management styles. Given that scenario, would it be correct to relate to the absolute returns in the hands of PE investors as you seem to explain, especially since the Pension Funds normally invest in a fund which would be redeemed after a lock-in of a ranged period ( say 5-7 years or more ). It could be possible that the investor's funds could be used to buy more than one company. Or am I missing something here...? That was an interesting query by RR ( comment dt.12/5/06 ).

In the market parlance, when they say an index returns 6.6%, it usually refers to the composite EPS growth of the index constituents. If a comparison is drawn to the 22% growth returned by PE portfolio companies, then it has to be the composite EPS growth of the portfolio constituents during the corresponding period.

As such, I think it’s just an effort to benchmark against an index to assess the relative efficiencies of Public and Private management styles. Given that scenario, would it be correct to relate to the absolute returns in the hands of PE investors as you seem to explain, especially since the Pension Funds normally invest in a fund which would be redeemed after a lock-in of a ranged period ( say 5-7 years or more ). It could be possible that the investor’s funds could be used to buy more than one company.

Or am I missing something here…?

]]> By: Giri http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/comment-page-1/#comment-377 Giri Wed, 06 Dec 2006 04:08:42 +0000 http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/#comment-377 Public companies are all too often restricted by the quarterly, half-yearly and annual expectations. It is not really surprising that managers don't take risky paths in such companies. (quite like Mutual funds you mentioned). Think private equity firms are quite like first generation family run businesses in their hunger to perform. I say first generation here because, the second generation typically brings in silver-spoon-mouthed, spoilt by riches brats - that are focussed more on splurgin than creating wealth. What say? and i know there might be exceptions to this. Public companies are all too often restricted by the quarterly, half-yearly and annual expectations. It is not really surprising that managers don’t take risky paths in such companies. (quite like Mutual funds you mentioned).

Think private equity firms are quite like first generation family run businesses in their hunger to perform.

I say first generation here because, the second generation typically brings in silver-spoon-mouthed, spoilt by riches brats – that are focussed more on splurgin than creating wealth. What say? and i know there might be exceptions to this.

]]> By: Nirav http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/comment-page-1/#comment-374 Nirav Tue, 05 Dec 2006 22:29:01 +0000 http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/#comment-374 Basab, Good piece of information… Keep them coming.. PE has been very active in India last few years. They don’t do full buyouts as we have in US. But they come in and invest long term. As you suggested, the PEs have patience for the management to grow the firms. Few quick points .. The one more important part of management going to PE is cost of capital is usually lower than going for new equity offering or a debt. New equity offering has it's own issues such as time etc. while debt changes company valuations. surprising but the money that comes to PE mainly through the US pension funds who have patience to weather the market turns. The common type of PES are LBOS and other ofcourse equity based. Thanks Nirav Basab,

Good piece of information… Keep them coming..

PE has been very active in India last few years. They don’t do full buyouts as we have in US. But they come in and invest long term. As you suggested, the PEs have patience for the management to grow the firms.

Few quick points ..
The one more important part of management going to PE is cost of capital is usually lower than going for new equity offering or a debt. New equity offering has it’s own issues such as time etc. while debt changes company valuations.

surprising but the money that comes to PE mainly through the US pension funds who have patience to weather the market turns.

The common type of PES are LBOS and other ofcourse equity based.

Thanks
Nirav

]]> By: Basab http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/comment-page-1/#comment-372 Basab Tue, 05 Dec 2006 15:41:13 +0000 http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/#comment-372 RR, good question. The correct comparison against the S&P500 index, in my mind, would be the return in the hands of the pension fund (or other investor) that invests in the private equity fund. Raising a private equity fund actually does not mean that all the money comes in at the beginning. It means that the fund now has the right to call for funds from its investors when it buys company A. When company A is sold, the money from the sale is then returned to its investors. RR, good question. The correct comparison against the S&P500 index, in my mind, would be the return in the hands of the pension fund (or other investor) that invests in the private equity fund. Raising a private equity fund actually does not mean that all the money comes in at the beginning. It means that the fund now has the right to call for funds from its investors when it buys company A. When company A is sold, the money from the sale is then returned to its investors.

]]> By: RR http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/comment-page-1/#comment-371 RR Tue, 05 Dec 2006 09:06:33 +0000 http://6ampacific.com/2006/12/04/the-rise-and-rise-of-private-equity/#comment-371 Hi Basab, Nice blog... I have perhaps a naive question,How does one compare returns in private equity on an apples to apples basis with the S&P 500? Your quote: "Not surprising since private equity funds in the 12 months ending this June returned 22.5% as against 6.6% for the S&P 500." Does this mean for the universe of private equity companies their earnings grew 22%?Or is it simply return on equity (in which case the 6.6% would not be the right comparison) ? Or simply return on purchase price,you would ofcourse need to use some multiple to come with a final valuation. Earnings (EBITDA) seems like an objective measure for comparison.When you bring in the subjective element of an earnings multiple,its not quite the same thing as the market. Hi Basab,
Nice blog…

I have perhaps a naive question,How does one compare returns in private equity on an apples to apples basis with the S&P 500?

Your quote:
“Not surprising since private equity funds in the 12 months ending this June returned 22.5% as against 6.6% for the S&P 500.”

Does this mean for the universe of private equity companies their earnings grew 22%?Or is it simply return on equity (in which case the 6.6% would not be the right comparison) ? Or simply return on purchase price,you would ofcourse need to use some multiple to come with a final valuation.

Earnings (EBITDA) seems like an objective measure for comparison.When you bring in the subjective element of an earnings multiple,its not quite the same thing as the market.

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