10 ms·

Private equity is commonly how the rich got rich. Theres all sorts of asset classes not available to the common public that keep them from reaping rewards. Anot

Private equity is commonly how the rich got rich. Theres all sorts of asset classes not available to the common public that keep them from reaping rewards. Another being investing in catastrophe bonds and insurance. Tons of fortunes made off all sorts of financial assets, that really arent that esoteric, they are just in the shadows.

rabidrat 6y ago
"how the rich got rich" is survivorship bias. Private equity is also how many people lost some or all of their life savings. I myself have "invested" tens of thousands of dollars in a few startups that have actually gone on to be moderately successful. But my equity has been so diluted that I will be lucky if I get back half of my original investment. The game is heavily biased towards the last shark in the pool, and I am not a shark.
- seibelj 6y ago
  Right! Absolutely no way you can lose your shirt in the public markets, right? Tell that to Wirecard investors...
- logicslave 6y ago
  Private Equity doesnt work like that, vc investing is a completely different game. If you want to stay middle class, continue investing like the middle class, i.e. etfs. If you want to move up, invest like those in the class above you do. I think the common knowledge about what kinds of risk the common man should be taking on are in some ways constructed to keep the "prestige" of finance. Its an industry built upon the appearance of competence
  - jrs235 6y ago
    By "invest like those in the class above you do" do you mean "manage the funds and siphon off a guaranteed percentage of the funds managed per year regardless of absolute or relative performance"?
- charlesdm 6y ago
  Startup investing isn't private equity. Private equity is acquiring a profitable company with limited equity and a pile of debt, paying it down, and selling it at a profit.
  - bosswipe 6y ago
    Or acquiring a company that has little debt and then piling debt on it to pay your acquisition costs back to the point where it goes bankrupt.
  - wtvanhest 6y ago
    Startup investing is a subset of private equity investing. Pe includes many illiquid subcategories including real estate, LBOs, startup investing, even niche stuff like infrastructure investing
    - JumpCrisscross 6y ago
      > Startup investing is a subset of private equity investing Not as the term is used in finance. Venture and PE are separate asset classes. Venture-like assets can become PE-like, in the same way private equity can become public equity. But PE is based on cash flows and leverage; VC is based on growth.
      - Grimm1 6y ago
        No one said VC, PE most certainly does invest in startups with exactly that focus on cash flows and leverage. The ones I have experience with tend to look at "older startups" think something like a 7-year-old company that don't really have a hope of a large cash payout but is still viable as a business. It seems to be one transition path for a traditionally VC backed company to resemble a regular small business. I have personal experience with at least two startups that had undergone that experience and are still around right now.
      - wtvanhest 6y ago
        Not according to the CFA Institute, or any number of other sources. LPs may incorrectly label PE and VC as separate subsets, but most large, institutional LPs will have PE, then separated by type. CFA is the best source, but there are so many others, including my professional experience at a major asset manager. https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/2020/private-equity-valuation https://www.cfainstitute.org/en/membership/professional-deve... > Definitions of private equity differ, but in this reading we include the entire asset class of equity investments that are not quoted on stock markets. The private equity class stretches from venture capital (VC)—working with early stage companies that in many cases have no revenues but have potentially good ideas or technology—all the way through to large buyouts (leveraged buyout, or LBO) in which the private equity firm buys the entire company. In some cases, these companies might themselves be quoted on the stock market, and the private equity fund performs a public-to-private transaction thereby removing the entire company from the stock market.
jw887c 6y ago
Depends on which part of the ladder you are on. If you're the fund manager of a big fund, you got rich. If you're the LP of growth seed rounds, you probably got rich. If you're the LP of later stage rounds, you probably didn't get rich.
loldot 6y ago
Yes, but the ones who get rich from PE funds are the PE fund managers. Investors not so much: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623820 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623820
JustSomeNobody 6y ago
Anything I would have made will get eaten up (and then some) by large fees.
occamrazor 6y ago
Catastrophe bonds don’t offer very high yields. Usually between 2 and 5 percent above treasuries, if no catastrophes happen. They have a similar return as high yield bonds, with the advantage that the losses are generally uncorrelated with the returns of other financial assets. Cat bond investors usually have large portfolios of other bonds, and are mostly insurance companies and pension funds who want to marginally improve their results without increasing volatility. There are however situations where a cat bond investor can make a lot of money: live catastrophes. For example, if a hurricane is on its way to Florida, cat bonds covering Florida insurers will trade at a deep discount. If the hurricane changes its course and doesn’t make a landfall, their price goes back to par. A skilled (or lucky) investor could double their capital in a few days.
- logicslave 6y ago
  I call out cat bond investors because I used to work at a bond fund. Never seen so much money made so discreetly and often reliably. Highly leveraged reinsurance bets that often have constant payouts.

rabidrat 6y ago

"how the rich got rich" is survivorship bias. Private equity is also how many people lost some or all of their life savings. I myself have "invested" tens of thousands of dollars in a few startups that have actually gone on to be moderately successful. But my equity has been so diluted that I will be lucky if I get back half of my original investment. The game is heavily biased towards the last shark in the pool, and I am not a shark.

seibelj 6y ago
Right! Absolutely no way you can lose your shirt in the public markets, right? Tell that to Wirecard investors...
logicslave 6y ago
Private Equity doesnt work like that, vc investing is a completely different game. If you want to stay middle class, continue investing like the middle class, i.e. etfs. If you want to move up, invest like those in the class above you do. I think the common knowledge about what kinds of risk the common man should be taking on are in some ways constructed to keep the "prestige" of finance. Its an industry built upon the appearance of competence
- jrs235 6y ago
  By "invest like those in the class above you do" do you mean "manage the funds and siphon off a guaranteed percentage of the funds managed per year regardless of absolute or relative performance"?
charlesdm 6y ago
Startup investing isn't private equity. Private equity is acquiring a profitable company with limited equity and a pile of debt, paying it down, and selling it at a profit.
- bosswipe 6y ago
  Or acquiring a company that has little debt and then piling debt on it to pay your acquisition costs back to the point where it goes bankrupt.
- wtvanhest 6y ago
  Startup investing is a subset of private equity investing. Pe includes many illiquid subcategories including real estate, LBOs, startup investing, even niche stuff like infrastructure investing
  - JumpCrisscross 6y ago
    > Startup investing is a subset of private equity investing Not as the term is used in finance. Venture and PE are separate asset classes. Venture-like assets can become PE-like, in the same way private equity can become public equity. But PE is based on cash flows and leverage; VC is based on growth.
    - Grimm1 6y ago
      No one said VC, PE most certainly does invest in startups with exactly that focus on cash flows and leverage. The ones I have experience with tend to look at "older startups" think something like a 7-year-old company that don't really have a hope of a large cash payout but is still viable as a business. It seems to be one transition path for a traditionally VC backed company to resemble a regular small business. I have personal experience with at least two startups that had undergone that experience and are still around right now.
    - wtvanhest 6y ago
      Not according to the CFA Institute, or any number of other sources. LPs may incorrectly label PE and VC as separate subsets, but most large, institutional LPs will have PE, then separated by type. CFA is the best source, but there are so many others, including my professional experience at a major asset manager. https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/2020/private-equity-valuation https://www.cfainstitute.org/en/membership/professional-deve... > Definitions of private equity differ, but in this reading we include the entire asset class of equity investments that are not quoted on stock markets. The private equity class stretches from venture capital (VC)—working with early stage companies that in many cases have no revenues but have potentially good ideas or technology—all the way through to large buyouts (leveraged buyout, or LBO) in which the private equity firm buys the entire company. In some cases, these companies might themselves be quoted on the stock market, and the private equity fund performs a public-to-private transaction thereby removing the entire company from the stock market.

jw887c 6y ago

Depends on which part of the ladder you are on. If you're the fund manager of a big fund, you got rich. If you're the LP of growth seed rounds, you probably got rich. If you're the LP of later stage rounds, you probably didn't get rich.

loldot 6y ago

Yes, but the ones who get rich from PE funds are the PE fund managers. Investors not so much: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623820 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623820

JustSomeNobody 6y ago

Anything I would have made will get eaten up (and then some) by large fees.

occamrazor 6y ago

Catastrophe bonds don’t offer very high yields. Usually between 2 and 5 percent above treasuries, if no catastrophes happen. They have a similar return as high yield bonds, with the advantage that the losses are generally uncorrelated with the returns of other financial assets. Cat bond investors usually have large portfolios of other bonds, and are mostly insurance companies and pension funds who want to marginally improve their results without increasing volatility. There are however situations where a cat bond investor can make a lot of money: live catastrophes. For example, if a hurricane is on its way to Florida, cat bonds covering Florida insurers will trade at a deep discount. If the hurricane changes its course and doesn’t make a landfall, their price goes back to par. A skilled (or lucky) investor could double their capital in a few days.

logicslave 6y ago
I call out cat bond investors because I used to work at a bond fund. Never seen so much money made so discreetly and often reliably. Highly leveraged reinsurance bets that often have constant payouts.