Alex Savin is a senior partner at Blackmoor Investment Partners.
Applying private equity (PE) strategies to public markets can generate greater returns than traditional public market investments.
There is ample evidence that PE expertise and strategies create greater value than the inactive long-only approach used by many public market investors.
Some buy-side institutions, including one I recently joined, have successfully implemented PE toolkits that help portfolio companies unlock strategic, financial, and operational benefits and generate superior returns. .
Private equity and private equity data public market
Blackmoore calculations using data from the Cambridge Associates Private Equity Index and Bloomberg show that PE funds have outperformed the average return achieved by blue-chip indexes over the past 10 years, compared to 9% achieved by public markets. Achieved an average annual total return of +15%. Stock products.
That doesn’t mean public market investing doesn’t have its benefits. On the contrary, it provides liquidity and transparency, and has the potential to outperform the high returns of private equity. But what is abundantly clear is that a structured, hands-on approach to PE is critical to driving returns. In my experience, you can get the best of both worlds.
Private Equity Handbook
As high-conviction investors, PE players typically acquire large stakes and provide active strategic oversight of portfolio companies to maximize returns. By investing in high-quality publicly traded companies with significant improvement potential, aggressive value creation strategies pay off and significantly outperform traditional benchmarks.
Traditional public market funds have faced increased competition in recent years. The resulting capital outflows and pressure on fees have often led to the adoption of arm’s-length approaches, often at the expense of lower-conviction, broader exposures or returns. Companies are benefiting by adopting PE practices and developing a more high-conviction, engaged PE approach.
The key pillars for building a successful PE-oriented playbook are:
Target selection
PE investments are handled with great care. Rigorous screening of targets based on top-down themes and bottom-up analysis keeps investment firms focused on companies best suited to take advantage of prevailing macroeconomic trends and industry themes. Masu.
Public market investors can take advantage of this approach by similarly focusing on specific investment themes and building a more concentrated portfolio of high-conviction investments.
due diligence
PE firms often spend months vetting a target, analyzing everything from financials and market positioning to the target’s operational details and team. While retail investors rely heavily on public information, PE-type due diligence involves consulting industry experts, conducting detailed market analysis, interviewing management, and often interacting with other investors. Collaborate to build a comprehensive view of upcoming opportunities. By following a similar approach to due diligence, committed, PE-oriented retail investors can achieve the same great returns and the same level of understanding and confidence as PE transactions.
Creating an improvement plan
A key tenet of PE investing is to actively support management teams in developing comprehensive plans to drive value. This includes advice on refining corporate strategy, reviewing business models, restructuring balance sheets, operational improvements, and mergers and acquisitions (M&A) opportunities. This is a key success factor that allows PE firms to generate significant profits. Active retail investors often take the same approach when working with portfolio companies.
Long-term cooperation and strategic withdrawal
In my experience, PE investments tend to last 4-5 years or more. This fosters long-term engagement with companies to drive change and realize benefits. This committed, long-term mindset contributes to proactive engagement with management teams and other investors, working together to realize change over time. PE firms often initiate changes to their management teams, boards of directors, and compensation structures to enable execution of their strategic plans. Similarly, active retail investors work closely with the boards and management teams of the companies they invest in to drive change.
As with PE firms, a typical investment cycle ends when certain financial and operational results are achieved and significant value is added.
positive results
McKinsey research shows that companies with active and engaged investors often outperform their competitors. The PE Handbook aligns the interests of investees and investors through a rigorous process that creates long-term value creation rather than short-term profits.
Adoption of a rigorous PE strategy by public market investors can have very powerful effects. Such strategies act as a force for good by driving change and increasing benefits for all stakeholders.
The information provided here is not investment, tax, or financial advice. You should consult a qualified professional for advice regarding your specific situation.
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