Given where we are in the private equity cycle, family office investors need to take a hard look at their private equity portfolios, both funds and direct investments. With the illiquid nature of this high-risk and high-return asset class, major decisions made in today’s still healthy, mature environment will drive success and minimize challenges that will inevitably unfold over the coming years. This session used real-world case studies to help identify key challenges in a portfolio, including capital structure risk mitigation, management team assessment, and co-investor terms.
- Key investment principles to remember—cash is king, be careful with leverage, and always stay focused on liquidity. The key driver of value is management.
- Globally, there is over $1.6 trillion of “dry powder” among private equity GPs. There is robust M&A activity with U.S. private equity-backed companies at 2x-5x historic highs, with the last four years above 10x EV/EBITDA. This is the very definition of investing late in the cycle—be cautious.
- Great investors do great work. Performing funds generated real value despite the ’08 crises and they generated liquidity, so investors could participate in the “up” vintages. For non-performing funds, the damage is double: not only are returns weak (IRR and TVPI), but investors missed the “up” years, stuck in investments for 5, 10, or more years.
- Your private investment plan should prepare for the headwinds. Focus on and invest your resources in current and legacy investments (increase discipline for Deal Flow and Acquisitions). Have a 100-day portfolio plan that assesses the 12 key issues in each investment. Prioritize your plan based on value drivers for the portfolio, time to completion, and establishing clear gates. The plan should be supported by investor-management governance, transparency, alignment, and accountability.
- The best investors are top-to-bottom (boardroom to shop floor), ahead of the game (stress tests and scenario analyses), and active throughout (execute, execute, execute). The management team is the best driver and protector of value, so provide the best structure for governance, transparency, alignment, and accountability. A private investor is not a passive investor, ever.
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