Going Private

50-, 100-, 200-million-dollar companies and said, ‘Hey, it makes better sense to be private. We’re going to be more profitable, we’re not reliant on the equity market.’ There’s a big play out there for these mid-level businesses, manufacturing companies in particular. In my opinion, there’s not enough companies for the assets that are ready to buy them.

{Q} That suggests that this market might overpay for assets. How big a risk is that?

If you look at any time in the financial world’s history, when you start overpaying for assets—the late 1990s come to mind in the equity market for technology companies—there’s a risk, because when there’s so much demand from the private-equity market to find private companies to purchase, obviously the privately held company has the upper hand. That being said, there are still many opportunities out there that an experienced firm can seek out.

{Q} Where does private equity fit in someone’s portfolio?

Most of our people who have private equity in their portfolio are qualified purchasers with $5 million and up in investable net worth. We usually look at anywhere from 10 percent to 15 percent of a person’s portfolio. It’s definitely an alternative investment. The toughest part is time frame. Usually there’s anywhere from a 6- to a 10-year lockup. So someone in their 60s, who may have to begin drawing on cash, may not be the ideal client.

{Q} How does private equity interact with venture capital in a portfolio?

Venture capital is often more focused on start-ups, so there could be more inherent risk. But there are private-equity firms that look at venture-type investments.

{Q} So how do you get your money back?

Often, the private-equity fund distributes its assets when a private investment is realized. ‘Realized’ is defined as being paid out as both principal and profit. It depends a great deal on the firm and the investments the fund makes.

{Q} Is private equity a volatile investment?

Sometimes. But the volatility occurs during the life of the fund, when you’re really not looking at returns on a daily basis. And that’s probably one of the good things about private equity. I’m not going to look day to day, like I might look at a stock—‘My private-equity fund is down 10 percent, or up 10 percent.’ I’m going to see it at the end period. And frankly, if people would view investing that way—always—it would probably be a better world.