Private Equity 101

At times it feels like the investing world randomly creates terms like “proprietary transaction,” “broken auction,” and “control leveraged buyout” simply to watch those not so well-versed in the language of finance flounder in a haze of confusion. But never fear! On April 21, Princeton graduates Steve Brownlie ’97 and Greg Ruiz ’05, from the private equity firm Altamont Capital Partners, flew in from San Francisco to speak about the basics of private equity as well as their experiences working in investing. Here, explained plainly, are some of the basic concepts of private equity that were addressed during the talk so that you will never again succumb to the onslaught of financial verbiage, as well as some tips for those interested in working in private equity after graduation.

The basics

To put it into context, private equity is a type of alternative investment (which also includes hedge funds). Other classes of investments include public equity investments (which includes mutual funds), and fixed income investments (such as bonds). Private equity firms use invested capital to acquire a company and shape it over several years in order to generate income. Employees at private equity firms typically spend 3-4 months researching and evaluating whether a company is worth investing in. Investors then build the business up by working with managers there, before selling it again to generate profit.

A good company versus a good deal

“This is one of the points that is most important to grasp,”said Ruiz. A good company has growth prospects, is well-managed, and has a defensible market position. The characteristics of a good deal on the other hand, include the possibility of returns for the investor and a high degree of certainty about the company’s worst case scenario. In conclusion, a private equity firm likes a good deal, not necessarily a good company.

Private equity strategies

There are two types of strategies to finding and building up a good deal: transaction types and process types. Transaction types include a control leveraged buyout (the most common of the transaction strategies). This is financed with debt, and the private equity firm gains returns from generating cash flow at business “as is” (normal business). Process types include a broken auction, where because of several possible reasons, investors become skittish and few are willing to spend money to try and rebuild a company. The process to acquire it then becomes greatly streamlined. A proprietary transaction is a process type strategy where a private equity firm negotiates a private deal directly with the company.

A little about Altamont

“We target high quality companies in bad situations,” said Ruiz. Altamont then works with the company so that it can recover and begin generating profit again. They typically target mid-size companies (profit 50-300 million per year), where markets are less efficient and where Altamont can have the largest impact. Altamont’s employees might look at hundreds of possible investment opportunities in a year but only invest in 3-5.

Advice about a career in private equity or investing

According to Ruiz, while a M.B.A. certainly does not hurt, it no longer is a requirement in the world of investing, and analysts are often hired straight out of college and spend 2-3 years working in the position.“If you want to get involved in private equity,” said Brownlie, “the most common paths are to go into consulting, especially industry consulting, which will give you a good broad idea of what that area is like, or go into investment banking.” The work is tough, they both admitted. “You might miss some important dinners [with your family or friends],” confessed Ruiz, “but I enjoy meeting different people and doing new things all the time.”

Lillian Wu is a freshman writer from Missouri. She joined The Financier this fall. Please reach out to lillianw@princeton.edu for any questions, comments, or concerns.

Written by thefinancier

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