With record amounts of money pouring into private equity in 2006, most private
investors now have some exposure to this potentially lucrative market. But many
experts warn that the LBO sector is overextended, and headed for an eventual
correction. How can you evaluate your exposure to inflated funds? Fund managers
and individual investors offer these tips. If you have not considered all of
these issues, you may be overexposed.
Ask questions: Investors sometimes hesitate to ask questions of their
fund managers in what they see as “this mysterious world of private equity and
hedge funds,” according to Martin Sass of M.D. Sass Group. Sass calls this a
terrible mistake, and cautions investors to avoid letting star fund managers
handle their money with impunity. “It’s kind of like you’re going to invest
millions of dollars blindly and just assume that because they’ve got a big name,
you’re going to throw the money in there, and it’s going to do magic for you,”
he says. Perhaps most importantly, know the valuations buyout firms place on
target companies. “Are these deals being done at sensible valuations that you as
a businessman would use to buy a company? Do you want to buy a company paying 20
times EBITDA?” Sass adds.
Focus on people: When it comes to Fund Managers and Private Equity firm
executives, employ background checks, check references and confirm past
performance with former limited partners.
Diversify and take caution: Avoid chasing past returns; consider
out-of-favor strategies and approaches.
Test deal-making skills: Ask fund executives questions about a firm’s
record of deal origination versus auction. “If you’re in an auction, you’re
going to definitely be paying the top EBITDA multiple,” investor Garen Staglin
warns.
Think long term: You may even consider making your Private Equity
investments through your family foundation or trust to avoid the temptation to
seek quick returns. “For an individual who’s obviously facing a limited life
span . . . you have to look at this as long term,” says Nick Vidnovic of Mellon
Private Wealth Management.
Trust your gut: Seek situations in which you as an investor feel
comfortable locking up liquidity for an extended period of time—and do not
eschew escape clauses. Many investors today avoid private equity deals in which
they have little or no operational control. Others insist on the right to change
the direction of a fund or terminate it altogether if a firm changes fund
managers. “The best mistake you can make is not putting your money into the deal
you don’t feel great about,” says Brian Cobb of CobbCorp.
Do your homework: Perform your own financial analysis to accurately
determine the returns being generated by your private equity funds. Never take
the numbers in an offering statement at face value. Talk with other limited
partners involved in your deals, and confirm that acquisition and sale prices
match those in published reports.
Look overseas: European and Asian businesses and their boards of
directors are more open to restructuring today, which creates additional
opportunities for private equity funds, according to Marc Stern of Bessemer
Trust. Boudewijn Jansen, head of private equity with HSBC Alternative
Investments in London, is creating new global products for individual investors
to tap HSBC’s private equity investments focusing on Asia and Europe, which were
formerly offered only to institutional clients. “A lot of the U.S. traditional
managers are increasingly seeking opportunities outside of North America,”
Jansen says.
 Back to Main Article: Riding the Rise in Private Equity
|
