However as a private equity investor in smaller deals (<$100M deal sizes) without a committed fund (note I have my own funds and relationships with high networth individuals and family offices), I take a different approach, one that I like better.
I have more flexibility to find good businesses to buy. I don’t feel pressured to invest money simply because I have “dry powder” sitting on the sidelines from investors who have expectations for me to start deploying it. What I do have are strong relationships with family offices and high networth individuals ready to invest when they see a good opportunity. I also set the expectations that as long as the business is generating good returns on capital and distributing cash dividends, we’ll hold the business indefinitely.
Reduced re-investment risk
Traditional PE funds need to sell their companies to a) give money back to their investors, hopefully with a return, b) get the outsized return for themselves (the carry) and c) show they’re generating returns in preparation for their next fund raise. The problem here for the investors is mainly a). Once investors get this money back, they then need to re-invest into something generating comparable yields. Its really hard to find a business that generates good return on capital, so why put yourself in this position? This isn’t a big problem for me or my investors – we’re in it for the long run with the businesses we buy.
The traditional PE model has a lot of friction costs for the investor. Management fees on capital raised, monitoring fees on the companies they bought with the money they’re already charging management fees on, transaction fees for follow-on deals, and finally the carry…that’s a lot of fees. Some legitimate, some questionable (if you disagree, read the article below). I believe in two fees: 1) a management fee which is capped at a reasonable rate, enough so I can pay my bills and 2) performance driven incentive fee, that’s it.
I’m not trying to beat up the PE fund industry, as I said before, it’s a model that works to an extent. However at some point, the “fundless sponsor” / “independent sponsor” / “search fund” model becomes a more efficient and investor friendly way to buy private companies.
(1) Heightened Regulatory Scrutiny Makes Blackstone Halt Some Transaction Fees, NY Times October 8, 2014 article by Gretchen Morgenson