Our Discourse on Private Equity

And so it begins....

Howdy from Texas (today) my beloved Discoursers. This month we will Discourse on Private Equity (PE). As always, please do reach out if you have specific questions or comments on the articles presented. Please comment. I <3 to hear your wisdom.

Let’s Dive in - Private Equity

What is it:

First we must define what is meant by Private Equity (PE). Private Equity firms employ capital on behalf of limited partners. Vague much? Yes. Well, turns out PE is incredibly broad. You can have PE Funds such as “Kinkaid Capital iii” or Firms (collection of Funds) such as Kinkaid Capital that choose different strategies within the firm for each of its different funds. Strategies at the Fund level may vary by industry focus (industrials versus entertainment), company lifecycle stage or by capital use. A PE fund focuses on providing capital to to companies that are not trading publicly. Some of these companies are private because they have always been private: family companies. Some of these companies are not or are no longer Investment Grade (meaning they cannot issue debt in the public aka traded market): American Airlines.

Second, let’s put some parameters around the norms of how PE operates. Common investment strategies in PE include leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. VC - while a popular cocktail party conversation topic is really just the higher risk side of PE, a subset of PE.

Third, you may have noticed that I snuck in “not trading publicly,” up above. Yes. So … PE can provide capital to public companies through a variety of vehicles and can take public companies private. There is a ton of flexibility in the Asset Class. PE is one asset class among many in the Financial toolbox.

Fourth, why does it matter? PE accounts for 5% of US GDP according EY’s report for the American Investment Council.

Who champions PE?

The AIC is the voice of the PE industry. And though no one seems to watch their videos, they are the advocacy arm of the industry. The study with EY touts the benefits below. Please note, you will see a mix of numbers regarding employment. Some of these numbers are DIRECT employment. PE firm buys Company G. Company G employs 516 people. Those 516 are counted as direct employ. Company G also works with Vendors K, L, M who employ 282 people among them. The 282 are counted within the (516+282) 798 industry supported jobs.

What are some supposed benefits:

The Washington Post reported that private equity, “supports 26 million American jobs and 5 percent of U.S. economic activitywhile paying $174 billion in federal, state and local taxes last year."

The Wall Street Journal reports that “private-equity sector directly employed 8.8 million workers who earned $600 billion in wages and benefits, and generated about 5% of the nation’s estimated $20.5 trillion gross domestic product.”

POLITICO’s Massachusetts Playbook reports that “[t]he private equity industry supports 741,000 jobs in Massachusetts and around $1.8 billion in state and local taxes, according to a new report from Ernst & Young and the American Investment Council.  The industry employs 243,000 workers in Massachusetts, who earn on average $74,000 a year in wages and benefits."  “….private equity supports 5 percent of the nation’s gross domestic product, with a total economic impact of $43 billion in Illinois and $1.1 trillion nationally.”

Regarding New York, “including how the state pension fund has an in-state private equity investment program, which has led to a $863 million return on $583 million invested.”

Inside Indiana Business reports on EY’s findings that “the private equity industry supports employment of 179,000 workers in Indiana, who earn $73,000 per year in wages and benefits on average and a total economic impact of nearly $14 billion in Indiana and $1.1 trillion nationally from the industry.”

A new American Investment Council video series highlights successful private equity partnerships in the Lone Star State. 

What are some supposed harms:

PE firms have gotten in trouble over the years because they have a reputation for layering a monster-sized debt onto the acquisition target (Company G) in order to pay for the acquisition itself. It’s akin to you asking someone to dinner, choosing the steak, lobster and champagne and then telling the other party to pay for it.

They also have a bit of a bad rap when it comes to downsizing workforce.

"Private Equity: Overvalued and Overrated?"  Does an eloquent job of summing up the challenges from the vantage point of someone deeply within the industry. Good, quick read.

What’s the scoop:

If you do enough digging among the PE industry professionals who are very pro and those who are suggesting caution, you’ll see that the really don’t disagree on the positive mechanisms of PE. They do differ on concerns of quality of investments. Part of this is due to the Dry Powder - aka the Capital ready and waiting to be deployed. The powder keg is $700 billion of the $2 trillion currently invested, a massive disparity. If you were an investment professional or a CFO, that would be 25% of the cash available to you just sitting on the sidelines. Every company needs cash reserves, but this may be closer to unsustainable financial hoarding. These are important to read to be conversant:

PE History and basics at Wikipedia

Private Equity Industry Overview covers history and structures in an easy way to review with more charts than the Wiki.

The Discourse Debate at the end of the month will either focus on the PE industry - how it operates, how much it should be regulated, or how PE firms operate - more into the nitty gritty of transactions, tax advantages, etc. That will be determined by you dear Discourser. So let me know which way you want to go!

I’ll send along the starter toolset on Tuesday.

-Kate

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Here’s a reminder of what we’re up to with this Discourse this month:

I will send three emails each week during the four week cycle starting the first week of the month: Sundays, Tuesdays, and Fridays.

First week is dedicated to introducing the topic of the month - from basic overview to data analysis methods to Big Important Reads. WE ARE HERE!

Second week is dedicated to what others have said about the topic. This is when you can petition to debate.

Third week is focused on additional research that has come to light because you dear member have shared something I had not already seen or made a better case for something I had previously dismissed.

Fourth week is the debate week. You’ll hear about the live debaters and the official debate resolution. Once we’re up to full steam the debate will be live streamed and open to Q&A at the end. My hope is to have it live streaming with audience participation by May 2020. Debates will be shared (audio only, video and transcript) in the Friday email of the 4th week.

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