I have been struggling for a while to define what this business is. Where I fit in it. How it plays against and with my quirks. At some point half a dozen loose pieces slip together with a loud "click." Like some kind of complex, three dimensional, mechanical puzzle. Clicking from configuration to configuration with a muted, soft -thack- -thack- until all the pieces align with a tight, metallic snap of perfection. -click-
Buyouts are hard.
Obtaining "superior returns" is a tough business. Everyone in the market is out to beat you to it. Everyone has an idea how to do it. Almost all of these ideas are premised on doing it at the expense of someone else. Because they are unable, unwilling or unaware of the value you, uniquely, can extract. It is a dog eat dog world out there. No one is, after all, in the market for inferior returns. Well, almost no one.
I am not sure I would say that obtaining superior returns via buyouts is "harder" than via equity hedge funds, mezzanine or venture capital. But within private equity buyouts are a particular kind of hard. There is that particular thrill of the chase. Finding the deal. Chasing the deal. Losing the deal. Or catching the deal. For every 20 opportunities we look at perhaps one actually grabs our attention and earns out real sprinting effort.
The jockeying for position starts. Our angling for an advantage. Deciding if we should pull out all the stops, or hold back, quietly trailing the pack and spring at the last moment. There is the crafty temptation to coax intelligence about the other bidders. The long run up to the auction itself.
Then there are those last minutes of panic. The moments before the call comes. Won. Lost. The unsealing of the bids. How can I explain that feeling? The last moments of an eBay auction that lasts for 4 months and costs thousands even hundreds of thousands of dollars even to the loser? The culmination or final frustration of expectations? Knowing you must not "get emotional about stock," but failing miserably as your investment in time, diligence, even love, vests. I'm not sure there is a parallel feeling outside of the deal world.
The loss. It is difficult, but critical to shake and move on. Or the win. It is precious and sweet.
But it only begins there, the hard part. A slow, grinding agony hard. After the close the lawyers are off the hook for the most part. The investment bankers pack up and go on to the next deal. The leverage folks, they check their mailbox every quarter for the seven figure check we send them. The accountants... do whatever accountants do in their off hours. The seller takes the cash and (one hopes) deploys it to more efficient ends. We... we are now stuck with a wounded animal. Poked and prodded and backed into a corner. Run around frantically, unsure of its fate. Its leaders defecting. Its employees struggling with new benefits forms. Its morale low. Its cash strapped. Its balance sheet burdened now with debt. A sword over its head should a payment be late.
Our capital is frozen. Illiquid. We will be the very first to lose if things go more than a just little awry. Our ongoing participation is expensive. In every way.
This is where the challenge is. Not in finding the deals. Not in chasing the deals. Not even in winning the deals. Well, not only that. But seeing the deals on which you can execute after the victory. Buy nothing you cannot run better than it is already being run.
Making money elsewhere is a different story.
I don't think I would be suited for a life in the trading world of hedge funds. Too intense too often. Too much volatility compressed into too little time. But in a way it might be easier emotionally. Or not.
The market has no face. You cannot look the market in the eye. You do not have to look the party on the other end of your trade in the eye. There is no body language in crowds theory. There are no intentions to read. No tone of voice to hear. A trade is an idea, a position is taken, and closed and it is done. 3 months is a long position for most hedge funds. 3 years is a short run for an LBO. With the market there are no interpersonal politics. Traders read impersonal markets. True, they live, they breathe, they grow, they die. They do all these things impersonally. "A stock doesn't know you own it." A company does.
There is a lot of talk about hedge funds getting into the buyout world. Or the reverse. I don't think hedge funds would make good buyout investors. That could be my ego talking. I certainly wouldn't be the first to make the argument. The short attention spans. The rapid fire decisions. All you have to do is read Barton Biggs' "Hedgehogging," which is less a book than a collection of anecdotes that all seem to follow the same plot: Investor has different style. Style is compared to investor's personality. Path of investor to gather great riches is outlined. Investor embarks on the hedge fund journey. Investor succeeds spectacularly in the face of crippling near-failures. Or investor fails spectacularly in the face of enlightening near-victories. Return percentages are tossed about. The word "billion" is overused. In 15 paragraphs it is all over. But then, this is the book we expect from a hedge fund manager. A 7 year position? Learn to manage cash flow, distribution networks? How could they cope?
Venture capital is closer, perhaps. But at least the venture gods can remake their world from near-scratch. The downside is they have no platform to work from. The upside is they have no platform to work from. They thrive on the new. Though their time frame, their horizon is similar, they themselves are much different animals. There is not bank waiting to take the keys if a startup has three bad months. In fact, a startup is expected to have 48 bad months from the very beginning. Controlled failure (from a cash flow perspective) is planned. We cannot afford it.
Buyouts don't have the advantages of these others. We buy a closet after being afforded only a 10 second flash with the door open, guessing as best we can at the contents. Then we laboriously comb through the closet, sell the old rusted bicycle we cannot use, if anyone will buy it, and try to cobble together what we can from the drawer of old, naked Barbies, socks and shoe stretchers. Sometimes you find a gold pen. Maybe it dropped, forgotten, behind the shoe rack. Other times you find a dead rat. So that's why the socks smelled so badly. Whatever is in there, you own it. And if you want to keep owning it you better make a pretty spiffy looking closet out of it pretty quickly.
Politics are the essence of the first part of an LBO. The Chase. And this, I finally discovered, is why I was brought on board so quickly, elevated with such speed and saddled with such responsibility without, from what I could see, even a second thought.
My mentor, Ron, had sold me pretty hard to Armin. I found this out only later. Perhaps, I think now, to keep me from pestering him for the many months after our dinner. Maybe because my father would have pestered him for not, after all my years of expensive education, finding me somewhere to land. When he sold me, however, he sold me on a political platform. As the answer to the political element in an LBO. And, without indulging too freely in immodesty, I have to say that this was a good guess on his part.
I enjoy nothing more than reading the "other side." Having grown up amongst bankers, lawyers and CEOs anyhow they all seemed transparent to me. I am gawked at, yes, but if I remain quiet, I seem invisible to them once the discussions begin. Perhaps because I am slight of build, too pale, or that my demographic is rare in the deal world. If I am really noticed, perhaps I am taken for a plaything of the senior partners. I don't know exactly what it is that makes me nearly invisible, but being underestimated is a very VERY valuable thing in the LBO world. Unfortunately, most practitioners have egos too substantial to exploit this advantage. I, on the other hand, quite enjoy engaging without warning in a fencing match with an opponent who, Princess Bride like, intends to fight the match with me left handed. The best way to fight an unarmed opponent is to disarm them first.
Before this I had never thought after my ability to size up a room, decipher the relationships of the parties and understand the interlocking of competing interests. It had been a casual annoyance before. Now it was gold. Exploitable. Monetized. Ron saw this. Armin uses it. For my part, I am content to be used in this way. It is my nickname now. "The Empath."
I am teased in the typical team-building way. Victim of crass (but mostly mild) jokes. Babied a little perhaps. But whereas I started off being resented, a pair of big wins, the credit of which was laid (rightly or wrongly) at my feet, made me instead valued. Paraphrasing a favorite film of mine, "No one is more prized than who brings victory in battle." I acquired a pack of big brothers, all protective of me. All eager for my attention. All wanting my view on everything from their girlfriends to their portfolios. I, who know nothing about trading public equities, try to demure, but they are insistent. I am at the point where I just say "Short Google," knowing none of them have the courage to short anything.
But then, and it happens in every deal we are serious about, the option on me is exercised. "What the fuck is that guy thinking," Armin might rave after some inexplicable behavior by a target company's CEO. It takes only one of these before he is intercomming his assistant. "Get The Empath in here. I need my crystal ball." Time for me to go to work.