Anyone in private equity (not funds)

[corn18]

Didn't expect to go this route but an opportunity presented itself and I couldn't pass it up. Invested $100k in a series B investment. Can't give any details due to NDA. Fascinating world. Just curious if anyone else is doing private equity investing.

 

[COcheesehead]

My FIL did it. Lost $100k.

 

[luckydude]

Didn't expect to go this route but an opportunity presented itself and I couldn't pass it up. Invested $100k in a series B investment. Can't give any details due to NDA. Fascinating world. Just curious if anyone else is doing private equity investing.

DW used to work in the IB/PE space long time ago and still has some contacts there. We had a couple of opportunities back when we weren't FI and passed (required initial investment was way more than we felt comfortable risking).

Last year I was approached by an old friend to provide some seed $ for his tech start-up. He wanted $x million in exchange for x% of equity and I passed because I didn't think he had a compelling product after sitting thru an 1-hr product demo/presentation.

Question---how did you do your due diligence to determine that you would be comfortable risking $100k?

 

[corn18]

DW used to work in the IB/PE space long time ago and still has some contacts there. We had a couple of opportunities back when we weren't FI and passed (required initial investment was way more than we felt comfortable risking).

Last year I was approached by an old friend to provide some seed $ for his tech start-up. He wanted $x million in exchange for x% of equity and I passed because I didn't think he had a compelling product after sitting thru an 1-hr product demo/presentation.

Question---how did you do your due diligence to determine that you would be comfortable risking $100k?

I got the full B series deck from the VC partner. And the deal came my way via a long time friend and colleague. We did a lot of M&A together.

This is a weird position for me. It feels like the days before I switched to index funds.

 

[ERD50]

I think it was member clifp who talked about some "angel investing" that he did (I think that is similar?). He doesn't post much here anymore, but I think he does a search for his name once in a while, as he seems to pop in if his name is mentioned (I think?).

You could also PM him if he doesn't see this.

-ERD50

 

[corn18]

I think it was member clifp who talked about some "angel investing" that he did (I think that is similar?). He doesn't post much here anymore, but I think he does a search for his name once in a while, as he seems to pop in if his name is mentioned (I think?).

You could also PM him if he doesn't see this.

-ERD50

Thanks! Angel investing is private equity. Just an earlier stage.

 

[ncbill]

I got suckered into buying some private investments from a broker.

I describe them as "high risk, low reward."

Might never have to pay LTCG taxes again, though.

Here's the latest update on one I got sold back in 2014:

"July 29, 2022

The partnership continues to apply all free cash flow to pay down the <Partnership's name> Note per the terms of the loan...

Management continues to work to sell the partnership’s assets but can make no assurance that a sale will occur, or if a buyer is found, will be sold profitability."

Wonder how much longer I have to wait so I can take a LTC loss on the full amount of my investment.

 

[Markola]

I haven’t done private equity or angel investing but 3% of my portfolio is in a high risk, high reward investment that I can’t speak about either. I can afford to lose it all, but don’t think I will. If so, I’ll chalk it up to tuition. No big woop. On the other hand, indications are that it might go to 50% of my portfolio or more. In which case, Big Woop!

If you see something compelling and entertaining and are sure you can afford to lose your investment, I don’t have a problem with having a bit of high risk capital to complement one’s diversified traditional assets.

Good luck to you. And to me!

 

[corn18]

I got suckered into buying some private investments from a broker.

I describe them as "high risk, low reward."

This one looks to be high risk, high reward. Series A funding was $50M. Series B is $75M. Payout will either be $0 (lose all my money) or 40x+. The last company they brought public was 80x for series B investors. Track record for this VC firm is good. The only reason I even considered it was the recommendation from my friend. I figure I can step out of my comfort zone with 5% of my portfolio. I was surprised my wife was pretty ok with it. She did say I would have to get a job if this impacted her life style.

 

[corn18]

I haven’t done private equity or angel investing but 3% of my portfolio is in a high risk, high reward investment that I can’t speak about either. I can afford to lose it all, but don’t think I will. If so, I’ll chalk it up to tuition. No big woop. On the other hand, indications are that it might go to 50% of my portfolio or more. In which case, Big Woop!

If you see something compelling and entertaining to watch and are sure you can afford to lose your investment, I don’t have a problem with having a bit of high risk capital to complement one’s diversified traditional assets.

Good luck to you. And to me!

Yes, good luck! If this plays out like it is supposed to, the return will be 2x my current portfolio, after taxes. That's life changing money. Seems like a good way to invest 5% of my current portfolio.

 

[HarveyS]

Yep. Been there, done that.
$0 or 40+x.
Unfortunately, I ended up with $0.

Not sure I'll ever go down that road again......

 

[corn18]

Yep. Been there, done that.
$0 or 40+x.
Unfortunately, I ended up with $0.

Not sure I'll ever go down that road again......

Are you willing to share details?

 

[HarveyS]

Private equity investment. Very keen technology that I was very aware of. Great potential - first products were placed in a very large discount retailer in limited stores. High profile customers endorsed the product (think MLB or NBA teams, though not exactly). All looked great. One of the management team was less than ethical and took the company for most of the cash they had. Ended up Bankrupt. Lawsuits followed that. Maybe some of the larger investors got something back, but I took my lumps and moved on. In my experience it only took one bad apple and a small firm that could not recover from it. But, I took a chance on a moonshot or launchpad explosion. Not sorry I did it, but I'll likely never do it again. In hindsight, my due diligence was lacking and I put too much faith in the members of management that I personally knew without scrutinizing those I did not. All my fault.

 

[corn18]

Private equity investment. Very keen technology that I was very aware of. Great potential - first products were placed in a very large discount retailer in limited stores. High profile customers endorsed the product (think MLB or NBA teams, though not exactly). All looked great. One of the management team was less than ethical and took the company for most of the cash they had. Ended up Bankrupt. Lawsuits followed that. Maybe some of the larger investors got something back, but I took my lumps and moved on. In my experience it only took one bad apple and a small firm that could not recover from it. But, I took a chance on a moonshot or launchpad explosion. Not sorry I did it, but I'll likely never do it again. In hindsight, my due diligence was lacking and I put too much faith in the members of management that I personally knew without scrutinizing those I did not. All my fault.

Thanks for sharing. I'm sure the lawsuits cost more than the cash the company had left over. Were you a shareholder?

 

[Magus]

I've been on the other side - worked at a company that either sold to PE or went through the process with a bunch more that never amounted to anything (not early stage companies - mostly already public companies). I've also been the head of IR for companies majority owned still by PE firms.

 

[luckydude]

I got the full B series deck from the VC partner. And the deal came my way via a long time friend and colleague. We did a lot of M&A together.

This is a weird position for me. It feels like the days before I switched to index funds.

On the deal I passed last year, the guy seeking seed money told me that his BIL is a well-known VC guy in SF and that the BIL passed on the deal. That was a red flag for me. Also, the guy arbitrarily came up with a high 8-figure valuation for his product even though he had no customer or revenue (apart from very optimistic projections); it was like pulling a number of thin air.

Sounds like you have a good referral from a trusted friend and colleague. Hope you hit a home run and please keep us updated!

 

[livingalmostlarge]

Yes it's an interesting space to be in

 

[clifp]

I think it was member clifp who talked about some "angel investing" that he did (I think that is similar?). He doesn't post much here anymore, but I think he does a search for his name once in a while, as he seems to pop in if his name is mentioned (I think?).

You could also PM him if he doesn't see this.

-ERD50

Actually, I don't search for my name, but the topic got my eye.

Most of my investing is earlier typically seed, which is after friends, and families and the founder put in money, but before the venture capitalist put in money.

I've done a number of A rounds investment but no B rounds. Because typical the minimum at the level is $250K although 100K is not uncommon.

Overall Covid has really slowed my Angel investing.
That said it is worth knowing that the Yale endowment has 23.5% of its assets invested in Venture Capital funds vs only 2.25% in domestic equities and 7.5% in domestic bonds.

A couple of comments about the OPs situation.
A 40x return would mean $3 billion valuation which makes the startup a unicorn (market cap > $1 billion). There are lots of acquisitions in the 100 million-$1 billion range, which would mean 2-10x return. Not bad in this market. Although, the mode is probably still zero tax right off.

What I've learned after doing this for a dozen years is that it is a numbers game you really want 100 investments in early stage companies, perhaps 1/3 to 1/2 at the later stage to have a realistic shot of getting a unicorn that will make up for all of your loses. This requires over a $1 million in private equity which is not practical for most FIRE people. VC funds are an option but have their own issues.

I was fortunate that my 3rd investment has paid out high regular dividends, with occasional big bonus distributions. Still, I would have been better putting my Angel money inVTI, although that may not be true depending on how long the bear market goes on.

 

[kyzymurgist]

15% of portfolio in 'Alternatives' or 25% including real estate here. I've considered and rejected several PE opportunities. Too much risk with no opportunity for diversification at my portfolio level. Still looking for the right PE or Search fund with $50k minimum where there is less concentrated risk.

The last big opportunity was several years ago with a close relative seeking investment in her startup. Extensive experience in the business for all the principals, great business plan, etc. She and her husband were so confident that they put in their life savings. In their minds, this was a slam dunk opportunity to achieve early retirement. It was difficult to say no.

The pandemic supply chain issues and a couple poor management decisions sunk the company. Hoping they can find a buyer to salvage some of their retirement savings. Definitely not for the risk averse. I won't invest any sum that would be painful to lose.

 

[target2019]

I invest in BX Blackstone and let them worry about the mysterious things like PE.

 

[Closet_Gamer]

Didn't expect to go this route but an opportunity presented itself and I couldn't pass it up. Invested $100k in a series B investment. Can't give any details due to NDA. Fascinating world. Just curious if anyone else is doing private equity investing.

I worked at a PE firm for a while. Not knowing anything about the specific investment, I won't comment on that but I will offer this:

PE funds can make annuity structures look like they were written in crayon by amatuers. Make sure you understand the structure and vehicle you are buying into.

A few thoughts/questions:

What is the "pre-money" valuation of the company?
Is it reasonable? Under what assumptions? (The pre-money valuation of the company is the value without this new round of financing. For example, if you were putting in $10 to get 10% of the company, then the pre-money value is $90.)

Is this the last round of financing before the company is viable?
What is the plan for the company?
Will they need more money in the future before they are self-sustaining or sold?
Under what assumptions?

What is the current capitalization table?
Who owns what?

What rights come with your shares versus other existing and new shareholders?
Who gets to vote?
What % of the vote do they get versus their equity ownership?

In a future financing round, do you have right of first refusal to buy shares and keep from being diluted?
How would those shares be priced in that scenario and why?

Do other shareholders have a preferred exit?
Is anyone guaranteed to get their money back before other shareholders participate in the sale?
Will your shares carry that provision?

Anyone picking up cash or accrued dividends that convert to shares at the sale of the company?
At what price would those dividends convert into equity and what would that do to the capitalization structure?
What series of shares are those and what rights accrue to those shares?

Is there any convertible debt on the company?
Convertible debt usually gives the owner of the debt the right to be first in line if a sale of the company occurs under duress but the option to convert the debt into shares and dilute other shareholders if the company sells for a gain. Like accrued dividends, the debt may accrue interest that can be paid in cash or converted into shares that dilutes other shareholders.

What options are outstanding on the company, particularly with management?
Is management getting new options during this round of financing? Ensure you understand the fully diluted equity of the company at sale under different scenarios.

Do other shareholders have a preferred ability to block or force a sale of the company?

Do all shares in the company have "drag along" and "tag along" provisions?
Both of these terms are critical to protecting you. Any reputable PE firm (and previous PE firms in the investment) will have these terms in the shares, but ensure you understand them.

"Drag along" means that if a majority of the votes chooses to sell the compnay, then all shareholders are forced to sell their positions to the buyer.

"Tag along" is the opposite. It means that if a majority of the company is sold, you can force the buyer to buy your shares as well.

Are you being asked to buy directly into the company or are you being asked to invest in the PE fund that is investing in the company?

If in the fund, what are their terms?
Its common for funds to charge a 2%/year management fee on fund. Will you be required to pay this fee on your investment?

What is the fund's "carried interest?"
Almost all funds are entitled to 20% of the gains on investments after clearing a nominal hurdle for the investors. So if you put in $100 and it turns into $150, the fund may well capture $10 of your $50 gain.

How much of their own cash do the operators of the fund have on the wheel?
What are their obligations and rights to make investments?
What are they doing with regard to this particular investment?

Are you liable for future capital calls on this or other fund investments?

Do you have same rights as other members of the fund?

Regardless of the answers to the above, make sure you have very good attorneys and tax people look at everything before you invest. The terms in these things can dramatically impact the actual benefit of the investment even under upside scenarios.

Good luck!

 

[aja8888]

^^^^^^ A lot to think about if looking at these types of opportunities. Thanks for posting this.

 

[Magus]

Fundrise has a PE fund coming fairly soon, later stage investments I believe though, with much more minimal contribution requirements. Been impressed on the real estate funds so I may dabble, but PE is not to my taste in general.

 

[luckydude]

I worked at a PE firm for a while. Not knowing anything about the specific investment, I won't comment on that but I will offer this:

PE funds can make annuity structures look like they were written in crayon by amatuers. Make sure you understand the structure and vehicle you are buying into.

A few thoughts/questions:

What is the "pre-money" valuation of the company?
Is it reasonable? Under what assumptions? (The pre-money valuation of the company is the value without this new round of financing. For example, if you were putting in $10 to get 10% of the company, then the pre-money value is $90.)

Is this the last round of financing before the company is viable?
What is the plan for the company?
Will they need more money in the future before they are self-sustaining or sold?
Under what assumptions?

What is the current capitalization table?
Who owns what?

What rights come with your shares versus other existing and new shareholders?
Who gets to vote?
What % of the vote do they get versus their equity ownership?

In a future financing round, do you have right of first refusal to buy shares and keep from being diluted?
How would those shares be priced in that scenario and why?

Do other shareholders have a preferred exit?
Is anyone guaranteed to get their money back before other shareholders participate in the sale?
Will your shares carry that provision?

Anyone picking up cash or accrued dividends that convert to shares at the sale of the company?
At what price would those dividends convert into equity and what would that do to the capitalization structure?
What series of shares are those and what rights accrue to those shares?

Is there any convertible debt on the company?
Convertible debt usually gives the owner of the debt the right to be first in line if a sale of the company occurs under duress but the option to convert the debt into shares and dilute other shareholders if the company sells for a gain. Like accrued dividends, the debt may accrue interest that can be paid in cash or converted into shares that dilutes other shareholders.

What options are outstanding on the company, particularly with management?
Is management getting new options during this round of financing? Ensure you understand the fully diluted equity of the company at sale under different scenarios.

Do other shareholders have a preferred ability to block or force a sale of the company?

Do all shares in the company have "drag along" and "tag along" provisions?
Both of these terms are critical to protecting you. Any reputable PE firm (and previous PE firms in the investment) will have these terms in the shares, but ensure you understand them.

"Drag along" means that if a majority of the votes chooses to sell the compnay, then all shareholders are forced to sell their positions to the buyer.

"Tag along" is the opposite. It means that if a majority of the company is sold, you can force the buyer to buy your shares as well.

Are you being asked to buy directly into the company or are you being asked to invest in the PE fund that is investing in the company?

If in the fund, what are their terms?
Its common for funds to charge a 2%/year management fee on fund. Will you be required to pay this fee on your investment?

What is the fund's "carried interest?"
Almost all funds are entitled to 20% of the gains on investments after clearing a nominal hurdle for the investors. So if you put in $100 and it turns into $150, the fund may well capture $10 of your $50 gain.

How much of their own cash do the operators of the fund have on the wheel?
What are their obligations and rights to make investments?
What are they doing with regard to this particular investment?

Are you liable for future capital calls on this or other fund investments?

Do you have same rights as other members of the fund?

Regardless of the answers to the above, make sure you have very good attorneys and tax people look at everything before you invest. The terms in these things can dramatically impact the actual benefit of the investment even under upside scenarios.

Good luck!

Great list. Thanks for putting this together.

 

[corn18]

I worked at a PE firm for a while. Not knowing anything about the specific investment, I won't comment on that but I will offer this:

PE funds can make annuity structures look like they were written in crayon by amatuers. Make sure you understand the structure and vehicle you are buying into.

A few thoughts/questions:

What is the "pre-money" valuation of the company?
Is it reasonable? Under what assumptions? (The pre-money valuation of the company is the value without this new round of financing. For example, if you were putting in $10 to get 10% of the company, then the pre-money value is $90.)

Is this the last round of financing before the company is viable?
What is the plan for the company?
Will they need more money in the future before they are self-sustaining or sold?
Under what assumptions?

What is the current capitalization table?
Who owns what?

What rights come with your shares versus other existing and new shareholders?
Who gets to vote?
What % of the vote do they get versus their equity ownership?

In a future financing round, do you have right of first refusal to buy shares and keep from being diluted?
How would those shares be priced in that scenario and why?

Do other shareholders have a preferred exit?
Is anyone guaranteed to get their money back before other shareholders participate in the sale?
Will your shares carry that provision?

Anyone picking up cash or accrued dividends that convert to shares at the sale of the company?
At what price would those dividends convert into equity and what would that do to the capitalization structure?
What series of shares are those and what rights accrue to those shares?

Is there any convertible debt on the company?
Convertible debt usually gives the owner of the debt the right to be first in line if a sale of the company occurs under duress but the option to convert the debt into shares and dilute other shareholders if the company sells for a gain. Like accrued dividends, the debt may accrue interest that can be paid in cash or converted into shares that dilutes other shareholders.

What options are outstanding on the company, particularly with management?
Is management getting new options during this round of financing? Ensure you understand the fully diluted equity of the company at sale under different scenarios.

Do other shareholders have a preferred ability to block or force a sale of the company?

Do all shares in the company have "drag along" and "tag along" provisions?
Both of these terms are critical to protecting you. Any reputable PE firm (and previous PE firms in the investment) will have these terms in the shares, but ensure you understand them.

"Drag along" means that if a majority of the votes chooses to sell the compnay, then all shareholders are forced to sell their positions to the buyer.

"Tag along" is the opposite. It means that if a majority of the company is sold, you can force the buyer to buy your shares as well.

Are you being asked to buy directly into the company or are you being asked to invest in the PE fund that is investing in the company?

If in the fund, what are their terms?
Its common for funds to charge a 2%/year management fee on fund. Will you be required to pay this fee on your investment?

What is the fund's "carried interest?"
Almost all funds are entitled to 20% of the gains on investments after clearing a nominal hurdle for the investors. So if you put in $100 and it turns into $150, the fund may well capture $10 of your $50 gain.

How much of their own cash do the operators of the fund have on the wheel?
What are their obligations and rights to make investments?
What are they doing with regard to this particular investment?

Are you liable for future capital calls on this or other fund investments?

Do you have same rights as other members of the fund?

Regardless of the answers to the above, make sure you have very good attorneys and tax people look at everything before you invest. The terms in these things can dramatically impact the actual benefit of the investment even under upside scenarios.

Good luck!

Thanks for the detailed reply. I wish I could send you the series II deck and the agreement I signed, but I am under an NDA. Not much I can say other than I don't have a lot of the answers to the questions you listed. This contact came from a close friend, so I put a lot of trust in his due diligence. We did a lot of M&A together when we worked for megacorp but that was with someone else's money.