Private equity has been one of the best-performing asset classes over the last five 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 portfolios moving up and down all day long can wear on even the most prolific investor, and many 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 — the three Ps — of private equity investing, factors to consider when considering investments.
1. People. 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 blend culture and mission, it becomes contagious and can be very powerful.
Do they act like owners because they have a significant amount of net worth in their own funds and companies they invest in? Do they have an alignment of interests and incredible focus? Does the team work together in various economic cycles? Are they collaborative, cooperative, collegial and congenial?
2. Process. They not only know how to buy businesses right, in the right asset classes, hey 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 their competitive advantage/niche? 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 versus their peers.
3. Performance. 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 peak performers, and why?
How do you find these these funds? Adding private equity to your portfolio is more challenging than investing in the stock market because 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 reason I partnered with AdCap Management to create our private equity platform is the integrity, experience, contacts, relationships, sources and access of our team. Someone with a vast network of trustworthy relationships can open doors to funds that are inaccessible to the public. Chaya Slain and her team have extensive knowledge and an incredible network.
Ultimately, if you are interested in investing in private equity, I encourage you to find someone who’s passionate and committed, with a 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 — while building a deep network of strong relationships with fund managers — could help build a road to success. ●
Umberto P. Fedeli is CEO of The Fedeli Group