Private Equity Primer: Part 2

What’s your personal experience with private equity, and what have you learned about listening to pitches?

I started managing money in the fourth quarter of 1993. That means I’ve been managing for over 25 years. I’ve easily seen over 100 deals. And I’ve seen them from all ventures. I’ve seen big banks come in here and pitch, I’ve seen friends and family, and friends and family of clients come in here and pitch. I’ve seen small deals that wanted $25,000 and big deals that wanted $500,000 minimums.

One of the more memorable pitches came from a time when real estate in Florida was going crazy. We had a connection who wanted to create a private equity real estate venture that gave him a blank check. With oceanfront property, in particular, he didn’t have time to go through the whole approval process. He was looking for 4-5 investors to each put in $250,000, so he could have a million to spend at any time. He said he had success buying a property on a Tuesday, selling it on a Thursday, and making 10-15%. Well, I took a hard pass. There was another guy that came in right before the dot com bubble. Tech was all the rage; stocks were sky high, and a lot of people were saying the tech bubble was going to burst. And it did, but there were a lot of guys trying to get in front of the bubble by selling collectible coins and gold. This guy comes in and pitches us on collector coins, mostly gold, but rare ones you would sell at an auction. The gold value for a single coin might be $1000 an ounce, but this gold coin, because it was perfect and one of four in the world, was going for $17,000. He came in and pitched me on his business, and I remember that he had an incredible tan and this gold Rolex he wore like a bracelet with four extra links. As he talked and waved his hands around, the fat part of the Rolex kept on spinning and smacking my desk. He also had some sleazy quotes straight out of a bad 80’s movie. “Let’s be honest, for fellas like you and me, losing a couple grand doesn’t bother us because the future is bright and we’re always going to get it back. I’m not going to waste your time and just ask for $50,000 because I need you way more involved and engaged.” I kept thinking that this guy must assume I would be so dazzled by his gold Rolex that I would immediately say, “I’m in, I want a Rolex like yours.” All that to say, I’ve seen a bunch of deals, and I’ve taken maybe 10 tops. In the deals I’ve taken, over half of them, I go into it with some sort of tangible asset backing the agreement.

What are your tips for listening to pitches?

I’ll tell you a couple of things that I’ve learned throughout all those pitches. Number one is that when you sit down with these pitchmen, you have to remember that this is their life. They live and breathe pitching deals and raising money, so they move quickly. Early on, I learned to make them stop and ask them questions. Don’t be afraid to ask questions that might seem really basic, and don’t be surprised if they start throwing around lingo that you don’t understand. Especially when it comes to financials of the business, ask them to break down terminology in a simple format. The other thing I learned is not to be afraid to walk away, especially if they set a tight deadline. Anytime someone pitches and says, “I need your decision a week from Tuesday,” it’s a strong red flag on the presentation.

How does Narwhal help clients navigate private equity?

Private equity is one area that gets extremely messy when it is relational. I’m referencing the deals where a client brings me an opportunity, and his buddy is in the deal as an investor or even worse, his buddy is actually pitching him the deal. It gets messy because people want to believe in their friends and help them out. Particularly if they ask is relatively small compared to your net worth, it’s tempting to give it a shot without truly doing research. Ultimately the relationship can get in the way of the diligence. In those situations, I strongly advise that you have a third party vet the deal for you. We do this all the time for clients, where we look at a deal through an objective lens and give an honest assessment on the risk profile of the opportunity. Most of the friends and family deals fall in the same category, where you’re probably not going to lose your money, but it’s not going to be the home run you’re hoping for. The bottom line is, if you’re concerned about a decision being made due to a relationship instead of the fundamentals, find a second set of eyes.