The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

Chapter 16

Investing in Private Equity

Whereas public equity refers to securities we can buy on the open market, private equity (PE) refers to interests in businesses that are privately held.¹ In other words, these are businesses that are culturally similar to the businesses that made most wealthy families wealthy.

Families invest in such businesses by buying limited partnership interests in ventures managed by individuals who are skilled in acquiring, improving, and growing such businesses. If the business being acquired is a mature enterprise, probably a spinout from a larger company, we are investing in a buyout. If the business is quite new and untested, we are investing in a venture capital deal. We can also invest in mezzanine deals (loans to middle-market companies) or distressed deals (companies in need of a turnaround).

PE is very much a skills-based business, and the skills required for success are not broadly available. One important result of this fact is that only a small percentage of the PE deals being marketed are worthwhile. And as true as this is in buyouts, it's even more true in venture. Thus, if you are interested in investing in PE, keep these three words firmly in mind: access, access, access.

The reason we want to invest only in the best partnerships is that the average PE partnership produces returns that are roughly in line with those of long-only equity managers. This dramatically undercompensates investors for the leverage, risk of loss, and illiquidity ...