“It is never too late to give up” is an underrated new year’s resolution. But GPs are not keen on that. At IP we have a tail-end portfolio bigger than most institutional PE programs. If a company could not be sold in 2021, it probably is not a great company. I would love to see GPs sell off their assets around 1x after a year or two, when they realize that this company will never perform to underwriting.
Peter Juhl Nielsen, the fact is, hundreds (if not thousands) of companies were purchased by primarily larger “blue chip” PE firms in 2018-2021 where they grossly overpaid (14X-22X+ that should sell based on basic math for 8X-10X) for companies in bank auction processes and in order to attempt to make the math work, they funded the deals in the 0% interest rate environment with often 7.00-8.00X+ funded debt at close. Today, there are hundreds of PE owned companies that are going bankrupt, doing out of court restructurings, hoping (as they are staring at negative arb / huge losses) for better interest rates, or doing single or multi asset CVs to mask the damage + buy more time and attempt to create synthetic DPI. Further, these firms were incentivized by the market to do bad things, including deploy their funds as quickly as possible in order to hit the fundraising market again because at that time re ups happened way too fast and GPs became further enchanted by greater fund level management fees and more carry $ even at lower MOICs. Today, the very few PE firms who never overpaid and who didn’t over leverage are doing very well and are generating significant DPI through sales. I am proud of that daily Soundcore Capital Partners. 🚀
If a GP is selling after 1-2 years, 1x is very optimistic. 0.1x is more likely. And that is why they don't do it.
Very true Peter. Other comments touch on the causes of this, but I would add 1) Investment teams have an investment these and, like traders, because of this can end up 'married' to the investment in question, and 2) no downside (as such) to not selling. Partial though not perfect mitigation to this issue is 1) GPs should have (fortunately many do nowadays) have an exit committee in place that regular revisits the investment thesis and can drive an exits 2) LPs in general and LPACs especially need to step up monitoring and accountability, ask tougher questions, and ensure exit committees are in place and that underperformers are sold. And otherwise vote with their money. I have lost count of the times I have raised precisely this issues in an LPAC and it can be a bit of a lonely battle, but it increases awareness among other LPs and does also increase the pressure when it is said out loud.
“Show me the incentive and I'll show you the outcome". They receive carry based on total returns (subject to a manageable hurdle rate) and naturally focus most of their time on assets that contribute the most to this, rather than dedicating their efforts to exiting poor investments :)