Jason Sobol & Ira Wolfson Evercore Private Capital Markets Overview
Private Capital Markets Perspectives
Introduction
The presenters are affiliated with Evercore and have substantial experience in private capital markets.
Overview of their backgrounds:
Larry: 21 years at Evercore, focusing on data, media, and technology companies.
Deborah Gordon: Collaborated with Larry for nine years; has experience in venture capital, growth equity, private equity, and buyouts.
Purpose of the session: Present a "banker's perspective" on private capital markets, with a focus on private equity and buyouts.
Agenda Overview
Banker's Perspective
Discussion on the investment process and what private equity firms consider.
Basics of Private Equity (PE) 101
Key definitions and concepts related to private equity.
Drivers of Private Equity Value
Exploration of factors that can lead to value creation or destruction.
Case Studies
Application of the theoretical concepts to real-world examples from the presenters' experiences.
Industry Changes
Discussion on current changes in the industry and implications for future entrants.
Performance Overview
Assessment of how private equity as an asset class has historically performed.
Importance of Private Capital Markets
Trend analysis over the last 20 years shows:
Flat to declining number of public companies.
Increase in private equity-backed companies, more than doubled over the same time period.
Significance: Growth in private equity is indicative of shifts in capital markets, with more firms operating outside of the public market.
Investment Process in Private Equity
Early Stages of Company Funding
Investor Types:
Founders and friends/family in early-stage funding, typically through venture capital.
Growth equity funds: an intermediary step before buyouts, focusing on scaling companies.
Focus on Buyouts:
Buyouts are the main focus of this presentation, particularly on mature private equity players like Blackstone, KKR, and Carlyle.
Key Terminology in Private Equity
General Partners (GPs): Fund managers who manage the investment strategy and make decisions for the fund.
Limited Partners (LPs): Investors putting capital into the fund, such as university endowments and pension funds.
Closed-End Funds: Typical structure for private equity funds where a fixed amount is raised and the fund is closed to further investments.
Management Fees and Carried Interest:
Typically a 2% management fee and 20% carried interest from profits. Current trends reflect fee pressure shaping these structures into 1.5% and 15%.
Gimmicks and Differentiation
Private equity firms often have gimmicks based on:
Size: Larger versus smaller funds and their capacity to manage investments.
Sector Specialization: Focus on specific industries (Tech, Media, Telecom, Government, Defense) to build expertise.
Growth Strategies: Some firms specialize in distressed assets, turnarounds, or high-growth companies.
Geographical Focus: Specific geographic markets (e.g., Nordic countries).
Drivers of Private Equity Value
Fundamental Metrics in PE
IRR vs. MOIC
Internal Rate of Return (IRR): Reflects the time value of money.
Multiple of Invested Capital (MOIC): Ratio of total capital returned to the initial capital invested, not factoring in time.
Typical target returns for buyouts are around 20% to 25% IRR, with corresponding targets for MOIC typically between 2.5 to 3 times invested capital over five years.
Additional Performance Metrics
Distributed to Paid-In Capital (DPI): Focuses on cash distributions returned to LPs relative to what they invested. Key metric in uncertain market conditions.
Total Value to Paid-In (TVPI): Reflects value including both realized gains and unrealized gains.
Understanding the PE Business Model
Management Fee Structure: Funds charge fees for operating expenses; profit-sharing from bonuses is tied to performance.
Hurdle Rate: Specified minimum return before GPs earn carried interest; traditionally set at 8%.
Profit Distribution Mechanics: After hitting hurdles, profits are then split according to the agreed model (e.g., 80-20 split).
Real-world Case Study Examples
Green Street Case
Private equity firm's success stemmed from timing and slight operational improvements, leading to significant share value appreciation.
Entry and exit multiples reflected overall market conditions.
WESCO Aircraft Hardware Case
The long-term holding period and operational pressures led to eventual financial disaster despite earlier successes.
EMI Music Case
The challenges of buying distressed assets in a changing industry were amplified by over-leverage and poor management decisions.
Changes in the Industry
Shifts towards holding companies longer and innovative financing mechanisms such as Continuation Funds allow private equity firms to keep winning investments longer and tap ongoing value potential.
Role of AI in PE
AI is reshaping the investment landscape, enhancing diligence, value assessment, and market strategies, but also creating operational challenges in terms of resource needs.
Future Considerations
Retail access to private equity investments is growing, broadening the base and altering the capital flows into private equity markets. This change could lead to both opportunities and challenges for traditionally institutional-focused funds.
Conclusion & Reflections
Ultimate success in private equity will depend on understanding complex valuation processes, ongoing market dynamics, and the integration of improving technologies, alongside traditional methods and experienced judgments.
Students entering Wall Street finance should find what motivates them and explore various avenues available in private capital markets to align their careers with their interests.
Introduction
The presenters are affiliated with Evercore and have substantial experience in private capital markets.
Overview of their backgrounds:
Larry: 21 years at Evercore, focusing on data, media, and technology companies.
Deborah Gordon: Collaborated with Larry for nine years; has experience in venture capital, growth equity, private equity, and buyouts.
Purpose of the session: Present a "banker's perspective" on private capital markets, with a focus on private equity and buyouts.
Agenda Overview
Banker's Perspective
Discussion on the investment process and what private equity firms consider.
Basics of Private Equity (PE) 101
Key definitions and concepts related to private equity.
Drivers of Private Equity Value
Exploration of factors that can lead to value creation or destruction.
Case Studies
Application of the theoretical concepts to real-world examples from the presenters' experiences.
Industry Changes
Discussion on current changes in the industry and implications for future entrants.
Performance Overview
Assessment of how private equity as an asset class has historically performed.
Importance of Private Capital Markets
Trend analysis over the last 20 years shows:
Flat to declining number of public companies.
Increase in private equity-backed companies, more than doubled over the same time period.
Significance: Growth in private equity is indicative of shifts in capital markets, with more firms operating outside of the public market.
Investment Process in Private Equity
Early Stages of Company Funding
Investor Types:
Founders and friends/family in early-stage funding, typically through venture capital.
Growth equity funds: an intermediary step before buyouts, focusing on scaling companies.
Focus on Buyouts:
Buyouts are the main focus of this presentation, particularly on mature private equity players like Blackstone, KKR, and Carlyle.
Key Terminology in Private Equity
General Partners (GPs): Fund managers who manage the investment strategy and make decisions for the fund.
Limited Partners (LPs): Investors putting capital into the fund, such as university endowments and pension funds.
Closed-End Funds: Typical structure for private equity funds where a fixed amount is raised and the fund is closed to further investments.
Management Fees and Carried Interest:
Typically a 2% management fee and 20% carried interest from profits. Current trends reflect fee pressure shaping these structures into 1.5% and 15%.
Gimmicks and Differentiation
Private equity firms often have gimmicks based on:
Size: Larger versus smaller funds and their capacity to manage investments.
Sector Specialization: Focus on specific industries (Tech, Media, Telecom, Government, Defense) to build expertise.
Growth Strategies: Some firms specialize in distressed assets, turnarounds, or high-growth companies.
Geographical Focus: Specific geographic markets (e.g., Nordic countries).
Drivers of Private Equity Value
Fundamental Metrics in PE
IRR vs. MOIC:
Internal Rate of Return (IRR): Reflects the time value of money.
Multiple of Invested Capital (MOIC): Ratio of total capital returned to the initial capital invested, not factoring in time.
Typical target returns for buyouts are around 20% to 25% IRR, with corresponding targets for MOIC typically between 2.5 to 3 times invested capital over five years.
Additional Performance Metrics
Distributed to Paid-In Capital (DPI): Focuses on cash distributions returned to LPs relative to what they invested. Key metric in uncertain market conditions.
Total Value to Paid-In (TVPI): Reflects value including both realized gains and unrealized gains.
Understanding the PE Business Model
Management Fee Structure: Funds charge fees for operating expenses; profit-sharing from bonuses is tied to performance.
Hurdle Rate: Specified minimum return before GPs earn carried interest; traditionally set at 8%.
Profit Distribution Mechanics: After hitting hurdles, profits are then split according to the agreed model (e.g., 80-20 split).
Real-world Case Study Examples
Green Street Case
Private equity firm's success stemmed from timing and slight operational improvements, leading to significant share value appreciation.
Entry and exit multiples reflected overall market conditions.
WESCO Aircraft Hardware Case
The long-term holding period and operational pressures led to eventual financial disaster despite earlier successes.
EMI Music Case
The challenges of buying distressed assets in a changing industry were amplified by over-leverage and poor management decisions.
Changes in the Industry
Shifts towards holding companies longer and innovative financing mechanisms such as Continuation Funds allow private equity firms to keep winning investments longer and tap ongoing value potential.
Role of AI in PE
AI is reshaping the investment landscape, enhancing diligence, value assessment, and market strategies, but also creating operational challenges in terms of resource needs.
Future Considerations
Retail access to private equity investments is growing, broadening the base and altering the capital flows into private equity markets. This change could lead to both opportunities and challenges for traditionally institutional-focused funds.
Conclusion & Reflections
Ultimate success in private equity will depend on understanding complex valuation processes, ongoing market dynamics, and the integration of improving technologies, alongside traditional methods and experienced judgments.
Students entering Wall Street finance should find what motivates them and explore various avenues available in private capital markets to align their careers with their interests.
Conclusion & Reflections
Ultimate success in private equity will depend on understanding complex valuation processes, ongoing market dynamics, and the integration of improving technologies, alongside traditional methods and experienced judgments.
Students entering Wall Street finance should find what motivates them and explore various avenues available in private capital markets to align their careers with their interests.
Private Capital Markets Perspectives
Importance of Private Capital Markets
Trend analysis over the last 20 years shows:
Flat to declining number of public companies.
Increase in private equity-backed companies, more than doubled over the same time period.
Significance: Growth in private equity is indicative of shifts in capital markets, with more firms operating outside of the public market.
Changes in the Industry
Shifts towards holding companies longer and innovative financing mechanisms such as Continuation Funds allow private equity firms to keep winning investments longer and tap ongoing value potential.
Role of AI in PE
AI is reshaping the investment landscape, enhancing diligence, value assessment, and market strategies, but also creating operational challenges in terms of resource needs.
Future Considerations
Retail access to private equity investments is growing, broadening the base and altering the capital flows into private equity markets. This change could lead to both opportunities and challenges for traditionally institutional-focused funds.
Conclusion & Reflections
Ultimate success in private equity will depend on understanding complex valuation processes, ongoing market dynamics, and the integration of improving technologies, alongside traditional methods and experienced judgments.
Students entering Wall Street finance should find what motivates them and explore various avenues available in private capital markets to align their careers with
The private equity (PE) market is currently experiencing significant shifts and navigating a complex economic landscape. Over the last two decades, there has been a notable trend of public companies declining in number while private equity-backed companies have more than doubled. This indicates a broader migration of capital and business activity into private markets.
Current Dynamics and Trends
Longer Holding Periods and Innovative Financing: PE firms are increasingly holding onto their portfolio companies for longer durations. This strategy is facilitated by innovative financing mechanisms such as Continuation Funds, which allow firms to transfer successful assets from an expiring fund to a new one, thereby extending their ownership and continuing to tap into value creation potential. This also helps in addressing liquidity needs for LPs who might want to exit the initial fund.
Impact of Artificial Intelligence (AI): AI is rapidly reshaping the PE investment landscape. It's enhancing various stages of the investment process, from initial due diligence and market analysis to value assessment and portfolio company optimization strategies. However, its adoption also presents operational challenges, primarily in terms of the significant resources (talent, data infrastructure, technology) required for effective implementation and management.
Growing Retail Access: Historically, PE has been the domain of institutional investors like university endowments and pension funds. However, there's a growing trend towards broadening access for retail investors. This influx of capital from a wider base could alter capital flows and bring both opportunities for fundraising and challenges related to investor relations and regulatory compliance for traditionally institution-focused funds.
Dangers and Challenges in the Current Market
While lower interest rates, as you mentioned, traditionally benefit private equity by making debt cheaper and enhancing returns through leverage, the current environment is characterized by significantly higher interest rates than what PE firms enjoyed for over a decade. This shift introduces several dangers:
Higher Cost of Debt: Rising interest rates make it more expensive for PE firms to finance new acquisitions or refinance existing debt. Since PE often relies heavily on leverage (borrowed money) to amplify returns, higher debt costs compress profit margins and make it harder to achieve aggressive target Internal Rates of Return (IRR) of to .
Valuation Compression: Higher interest rates tend to reduce overall asset valuations. This means PE firms might buy companies at lower valuations, but it also means their existing portfolio companies could be worth less, impacting potential exit multiples (MOIC).
Difficulty in Exits and Refinancing: A higher interest rate environment can cool the M&A market, making it more challenging for PE firms to sell their portfolio companies at attractive valuations or to perform successful IPOs. Portfolio companies with significant debt may also struggle to refinance their borrowings at favorable terms, leading to increased financial strain.
Increased Scrutiny on Operational Improvements: With financial engineering from cheap debt becoming less potent, there's greater pressure on PE firms to generate returns through true operational improvements, revenue growth, and cost efficiencies within their portfolio companies. This demands more hands-on management and specialized expertise.
Market Competition and 'Dry Powder': Despite the challenges, a substantial amount of 'dry powder' (uninvested capital) resides in PE funds, leading to intense competition for attractive assets. This can sometimes drive up entry valuations, making it harder to secure deals that meet stringent return hurdles.
Implications for Firms like Blackstone
For major players like Blackstone, these dynamics are magnified. While their scale, diversified strategies (across private equity, real estate, credit), and access to vast capital provide resilience, they are not immune. They must adapt by:
Focusing on Value Creation: Emphasizing deep operational engagement and strategic improvements within portfolio companies.
Prudent Capital Deployment: Being highly selective in new investments, given the higher cost of capital and valuation pressures.
Innovative Financing: Leveraging their expertise in private credit and continuation funds to navigate debt markets and create bespoke solutions for their assets.
Strategic Use of AI: Investing heavily in AI and data analytics to gain an edge in diligence, deal sourcing, and portfolio management.