Private Equity Passion
It may not be a secret, but I’m a huge fan of private equity. We built our firm, Snowline Capital, around a pure private equity focus. Not too exotic, right? That’s ok. When it comes to generating investment returns, I’ll take easily understood and tested over exotic any day.
Our investment focus and strategy is straightforward and transparent – we indirectly own a diversified portfolio of private companies, using great private equity fund managers. At any point in time, we may own companies that manufacture chocolate, ambulances, automotive parts, data centre cables, medical recliners or craft brewing equipment – or companies that service telcos, sell home appliances, or deliver an innovative online pharmacy solution.
Avoid volatility of public market emotions
The nice thing about owning private companies is that you can harness the power of equity ownership and the compelling returns it can generate, without being subject to the volatility of public market emotions. In private equity, we thoughtfully and conservatively re-price our assets once a quarter, not every instance of every day. A nice side benefit to less emotion and less volatility, is less stress!
Inefficiency is actually a good thing
So why is equity ownership of private companies and the associated investment returns compelling? Three reasons: you can buy low; you can significantly grow and improve already great companies over a typical 3-6 year hold period; and if the former worked, you can typically sell high (multiple expansion). The private markets are very inefficient compared to the public markets, and that is a good thing. Because of these inefficiencies, we see many private companies being bought for 4-7x EBITDA and then sold for higher multiples after achieving growth and business improvements (i.e. governance, product or customer diversification, margins, etc.). The above entry multiples compare nicely to the 8-14x that you must pay for entry into many public companies. And the reason that significant growth and business improvement can be achieved in a short 3-6 year hold period is as a result of alignment and resources. A private company’s management and the private equity fund that is investing in it are typically aligned and have incentives to achieve the common goal of a successful and profitable exit.
In addition, company and fund management provide both collaborative and experienced human resources, and capital resources to assist in achieving the above noted goal. Having the necessary capital and expertise, and a longer-term view, is key to creating value.
The myth of high risk
But isn’t private equity high risk? Not really. Within our portfolio we own 37 (currently) North American companies that operate in a variety of industries. Most generate $5-50M in annual EBITDA, and some have been in business for 50+ years. Diversification is the key mitigant to risk!
With private equity, don’t you need to assume a certain degree of illiquidity? Yes, but that is a good thing. It means that you’re taking a longer-term view on the asset and giving it time to grow and perform. Plus, no investor needs 100% of their portfolio to be liquid. In every portfolio, there is a little bit of room for private equity and its compelling performance. I’ve become a huge fan of private equity over the last 10 years, and I’m certain that you too will share that passion if you open a portion of your portfolio to explore the power of private equity.