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"The ultimate gauge of success for any private-equity firm, however, is the price at which it cashes out of its investments." Is this correct? That sounds like

"The ultimate gauge of success for any private-equity firm, however, is the price at which it cashes out of its investments." Is this correct? That sounds like the measure of success for a VC, I thought PE was about a consistent return better than the public markets, I didn't think that had to mean "cashing out".

notyourwork 8y ago
Isn't a return on your investment a slow cash out? Over time you receive money in return for your up front investment. Either way, you don't invest money to lose money.
harryh 8y ago
It both VC and PE firms try to value their investments while still holding equity in companies. This can be a challenge though as these investments are often illiquid and there is a lot of uncertainty about the future. Ultimately investors in both kinds of operations want to eventually sell their holdings for cash. It is only at that point that one can truly judge the success or failure of an investment. That's all this is really saying. Vista owns a bunch of stock that will probably be valuable but they won't really know for sure until they turn it into cash.
Nasrudith 8y ago
Well in addition to reflection of the problems of rampant short-termism, bubble-surfing, and crash-and-burn corporate raiding as opposed to creating something of lasting value there is a more charitable and sensible explanation for that mentality: risk and returns tend to correlation for many reasons that all add up to the same thing. As a company becomes big the risk goes down but the growth goes down as well by necessity as it saturates its niche. Look at say Cellphone manufacturers - when everyone has a phone already growth potential is limited vs selling everyone a phone. On the other hand it becomes far harder t be wiped out when a behemoth. Corporations that were pretty much dead and everyone else knew it zombied along for decades. Even if they closed operations tomorrow they would still have a large amount of capital and collateral and thus investments are more protected and less risky. You can turn a restaurant into a franchise chain or have it go bankrupt or but short of managing to get the entire chain seized as a front for illegal activity or similar extremes you can't lose all of the value of an entire franchise. They technically can hold onto their early successes as the start-up became google but then they aren't really venture capitalists anymore and have shifted into being company stockholders. In order to see those types of exponential returns again you need to fund new businesses. However there is also the growing expense of all of the failures making it not a free lunch. If their total returns between all of their failures and successes are less than just holding their existing ones it is clear in retrospect that they should shift their funding to just the safer investments and they should have quit while they were ahead.
PakG1 8y ago
Can't different PE groups have different strategies? A note from Buffett on PE: Unlike LBO operators and private equity firms, we have no “exit” strategy — we buy to keep. That’s one reason why Berkshire is usually the first — and sometimes the only — choice for sellers and their managers. Some years back our competitors were known as “leveraged-buyout operators.” But LBO became a bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage. Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70 ¢ on the dollar, and the public debt has taken a far greater beating. The private-equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead, they’re keeping their remaining funds very private. https://www.quora.com/Is-Berkshire-Hathaway-a-private-equity-firm-If-not-what-would-you-call-it-and-what-are-da-differences-between-its-way-and-PE-firms https://www.quora.com/Is-Berkshire-Hathaway-a-private-equity...

notyourwork 8y ago

Isn't a return on your investment a slow cash out? Over time you receive money in return for your up front investment. Either way, you don't invest money to lose money.

harryh 8y ago

It both VC and PE firms try to value their investments while still holding equity in companies. This can be a challenge though as these investments are often illiquid and there is a lot of uncertainty about the future. Ultimately investors in both kinds of operations want to eventually sell their holdings for cash. It is only at that point that one can truly judge the success or failure of an investment. That's all this is really saying. Vista owns a bunch of stock that will probably be valuable but they won't really know for sure until they turn it into cash.

Nasrudith 8y ago

Well in addition to reflection of the problems of rampant short-termism, bubble-surfing, and crash-and-burn corporate raiding as opposed to creating something of lasting value there is a more charitable and sensible explanation for that mentality: risk and returns tend to correlation for many reasons that all add up to the same thing. As a company becomes big the risk goes down but the growth goes down as well by necessity as it saturates its niche. Look at say Cellphone manufacturers - when everyone has a phone already growth potential is limited vs selling everyone a phone. On the other hand it becomes far harder t be wiped out when a behemoth. Corporations that were pretty much dead and everyone else knew it zombied along for decades. Even if they closed operations tomorrow they would still have a large amount of capital and collateral and thus investments are more protected and less risky. You can turn a restaurant into a franchise chain or have it go bankrupt or but short of managing to get the entire chain seized as a front for illegal activity or similar extremes you can't lose all of the value of an entire franchise. They technically can hold onto their early successes as the start-up became google but then they aren't really venture capitalists anymore and have shifted into being company stockholders. In order to see those types of exponential returns again you need to fund new businesses. However there is also the growing expense of all of the failures making it not a free lunch. If their total returns between all of their failures and successes are less than just holding their existing ones it is clear in retrospect that they should shift their funding to just the safer investments and they should have quit while they were ahead.

PakG1 8y ago

Can't different PE groups have different strategies? A note from Buffett on PE: Unlike LBO operators and private equity firms, we have no “exit” strategy — we buy to keep. That’s one reason why Berkshire is usually the first — and sometimes the only — choice for sellers and their managers. Some years back our competitors were known as “leveraged-buyout operators.” But LBO became a bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage. Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70 ¢ on the dollar, and the public debt has taken a far greater beating. The private-equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead, they’re keeping their remaining funds very private. https://www.quora.com/Is-Berkshire-Hathaway-a-private-equity-firm-If-not-what-would-you-call-it-and-what-are-da-differences-between-its-way-and-PE-firms https://www.quora.com/Is-Berkshire-Hathaway-a-private-equity...