Tuesday, June 5, 2007

Private Equity Wisdom

I was listening to the AG Edwards High Yield Conference webcast from May and heard some interesting comments on the Private Equity boom from Joseph Massoud, the CEO of an outfit called Compass Diversified Trust Inc. (CODI). CODI is an investment vehicle that invests in middle market companies. We should all pay attention to his thoughts because they came from someone who has been involved with the industry for years. They are not exact quotes but they capture the spirit of what he was trying to say.

“We think the entire private equity model right now is broken. The whole notion that you would raise half a billion dollars or a billion dollars with a promise that I will invest this money in three years is absurd because you have no idea what yields you’re gonna see or whether they will be attractive or not.”

"We liken it to if you said to my 8 year old son – here is a $100 – go buy good things with it and he came back and said dad I could only find $60 worth of stuff the last thing I would do is send him to his room, but that is specifically where the Private Equity market is now which is LP’s (limited partners) don’t reward GP’s (General Partners) for discipline. LP’s say if you can’t invest it I will find someone who can. It’s a broken model.”

“The only thing more broken than that is the notion that once you buy a company you have to turn around and sell it in three to four years so you can post IRR’s so you can raise your next larger fund, this even more problematic.”

CODI is an interesting company as well and one to keep your eye on. The website is here:

Compass Diversified Trust Inc. (CODI)

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