Private Equity — Know us by our pitch
If you are not familiar with Private Equity, the concept is very simple. Some years ago, people figured out they could make more money investing in private companies, and keeping them private, rather than investing in public companies.
The reasons are straightforward; private companies are generally run by people — entrepreneurs — who have worked hard building a business, so there can be a lot of unrealized value to be leveraged.
As good the unrealized value is, the lack of governance or scrutiny from any source is also extremely handy. If you buy private businesses and keep them private, essentially you can do whatever you want. Buy them, slice them up, optimize their profits at the expense of the customers, the workers, the environment.
And if it is discovered that the company is paying people in Bangladesh $5 a week, then it’s the company that takes the hit, not the private equity firm that came up with the scheme to optimize their profits, and certainly not the people that put the money into the Private Equity firm. Three to five years later, sell the company on to another private equity firm. Once the company has been flipped a few times it’s all wrung out and worthless.
And where does the money come from to fuel these adventures in capitalism? It comes from big pension funds, university funds and maybe family offices (a euphemism for the adventurous super rich) and other upright institutions. The pension funds are the most hypocritical, regular people just wanting a solid pension for their old age and happy to have a lot of distance between themselves and the folks in Bangladesh, nicely buffered by private equity firms.
I’m familiar with the “acquisition” end of this model as I get at least two emails a day from private equity firms wanting to buy or invest in our company. It’s from that perspective I started to examine the whole phenomenon.
In reviewing these emails, gives one a sense as to how these entities like to pitch to entrepreneurs. Unlike the huge veneer of respectability on their websites, they like to let their guard down when talking to entrepreneurs as they feel we will respond well to some old school bad ass, huckster euphemistic, macho baloney.
The problem is that all the emails follow this exact same three paragraph format. Paragraph #1; we will impress you with our wealth, knowledge and superior lifestyles, paragraph #2; we will express an interest in your company (even though we may know nothing about your company), paragraph #3; the euphemistically laden pitch about cashing out and setting up a meeting. Here is the standard email; the text in italics only needs to be changed.
I’m {insert name: generally, a young white guy whose engagement was announced in the society pages of the NYT}, an associate at {insert firm name} located in {chose one: Silicon Valley, New York, Boston, somewhere else, but impressive}. We’re an investment firm with {chose one: 500 million, a billion, many billion, a trillion, more money that G_d ever imagined} available and we are looking to make a couple of choice investments in high growth, high profit companies. (who isn’t?)
We have been following your company with great interest for some time now (lie) and, as we have recently made an investment in {name of other company — generally completely unrelated to what the recipient’s company does) we immediately thought we should reach out to you and see where you are, in terms of capital needs. We write checks in the {some number of millions} to {some other number of millions} range and we can look at a variety of equity positions.
Maybe you don’t need any money at the moment but perhaps some dry powder for your balance sheet or perhaps you just want to take some chips off table. Can we hop on a call next week? I have {insert date and time) or {insert date and time) available.
And all the emails follow this exact same three paragraph format. The writing is hilarious with the “dry powder”, “chips off the table”, and the “check writing” shtick– nothing like mixing your bad ass metaphors.
By the way, I was confused about the “dry powder” reference for a long time but then I realized it was based on “keeping your powder dry” and not cocaine, though people tell me that is also a pretty popular dry powder in the private equity business. “Chips off the table”, yep, that’s what business is all about — gambling, and then taking chips off the table. And “write checks” has a nice gritty old world feel to it, real money, “I’ll write you a check”.
But none of this will matter pretty soon, as the more wealth gets concentrated, the less it is worth. At scale it becomes practically worthless. The private firms charge their clients 2% just to look after the money. Sometimes they charge more than 2%, if they have the right pitch. “Everyone here got their MBA at Harvard”, that kind of pitch.
More money, chasing fewer higher returns, everyone looking for the next “unicorn”. I guess that’s why I get all these emails with their increasing degree of desperation. But they do continue to have the power to destroy entrepreneurship and long-term strategic planning for enterprises.
