 Hey, how's it guys? It's MJ the student actuary and in this video. I want to talk about private equity so what I want to do is use this like lattice structure that we've been going through and Yeah, just make some connections around private equity. So Like we did in the last video all I'm gonna be doing in this one is just joining these various concepts With some sort of links. So let's zoom in and chat about each one whoops Bit around there So yeah, one of the things when it comes to private equity is to have a good sort of administrative team You know when you get your Administrative team you have a nice software system to record all your transactions and your deals and all those type of things But specifically if you're a small find you will be doing a lot of outsourcing to say compliance management And and all those different things One of the most important things when it comes to private equity are the actual like investors who Who are going to be managing the funds making the choices what you know company should we invest in and how should we go about the deal? so Expertise we will see is is very important when it comes to to private equity So and then you're like I said same with how some administration could be outsourced You can also outsource some of the expertise. So later on we will be looking at the different styles of private equity and You might not be an expert in all of them. So you will want to then outsource some of those things Very important when setting up a private equity is to have a Is to have a good business plan? You know say how everything's going to be done And all those type of things Also important in your business plan is you'll say where you guys are going to be Located where's the office going to be? Specifically like if you're a tech private equity fund, then you want to be located in say Silicon Valley Reason being you want to be situated close to your clients Sometimes you get your clients in private equity by relying on your you know your own personal network or your work relationships things like that so I mean, this is the one thing about private equity is that we think oh, it's all about who can you know do the best Valuation who can do the best research and analyst analytics, but a lot of the time it comes down to Relationships, you know, if you know a lot of people who have lots of money Then it's much easier for you to set up a private equity fund then for someone who might save all the expertise and A brilliant track record, but doesn't have the same network. Look you do develop a network by By getting a good Track record, you know, you get a good track record. It will turn into into a network People will start talking about you saying hey, there's this guy is getting like 50% annual returns You know, that's a great track record and people want to get to know you although In order to keep those networks, you need to sometimes be a little bit confidential You know, some people don't like to tell people that they have lots of money They want the investments to be discreet so as well as being having good track record and Management ability you also need to have these personal skills and know how to manage your relationships and Sometimes with relationships, it could affect the fees. You might reduce fees for certain people You know certain clients might you might charge a little bit less to keep that relationships fees are important in Private equity because remember overall it is a business I mean these things are you don't set them up because it's a hobby you set them up because you want to make money so profits is a very Important aspect of the whole private equity game So, yeah important to that your fees are high enough to cover all your expenses. I should maybe actually I had that as one is that these private equity guys do have Expenses Just include that one there So your fees will want to Cover the expenses and then if your fees are more than that you do get a get a profit So they will be Connected and then it's important to see how you structure your fund You know what's the the vehicle that it's going to be under? How are you you know going around registering it because this will have an impact on your tax? You also profit more profit you get more tax you're gonna get another thing to realize is your office location We'll put you under certain jurisdiction which might also have a different tax Tax rules in the sense that some people might set up their hedge fund or private equity fund and say Bermuda or the British Virgin Isles And the reason they do this is to get a better tax position Because one of the big things with private equity is to reduce this cost of capital and you can reduce the cost of capital If you can get favorable tax treatments So this is one of the main Things worth private equity is that they get cost of capital really low and by doing that They can take a fee get some profit, you know, there's a little bit of business in it Let's look at some other things I mean like the usual thing with most of these funds is Reporting is important Having a good governance structure is important Governance then also leads into reporting Reporting leads into value eight valuation, you know, how much is your fund worth? How do you go about evaluating it that might even be saying that you specify in the business plan and this will be one of the ongoing operations that you do also Very common ongoing operation like I said is to get that cost of capital to be as low as possible Interesting thing with private equity is that when it comes to say reporting if your company does really badly some people just close up shop They don't report it and we get this thing called survivorship bias Which means we only reporting on the winners, which means private equity looks way better than it does It was like wow private equity on average gets you know 30% returns No, it's because all the losers just don't report and I mean that's kind of a little bit of like a governance issue You know, maybe as governance you want to comply with regular Regulatory compliance, and I think they are making rules that say even if your fund fails You do need to report so we can reduce that survivorship bias Also, yeah, if you get less on the benchmark you might also choose not to report it Which can further reduce the whole survivorship bias Let's see what else there is. I mean your private equity and regulation it's it's something that's getting regulated more and more because Which private equity wants regulation? I mean we kind of always think of it as like a bad thing But it can be a good thing if we get regulated and then apply some restrictions and they make sure Our corporate governance is very good then what happens is that we can then open up our funds to pension funds and other big-boy Institutional investors which can then you know give us much more capital to play with So regulation is a good thing. It can improve governance Although regulation does become a little bit of an administrative burden, so you know you have to file up more reports and all those type of things um Regulation might might put in some restrictions around this thing known as financial gearing So what could happen? specifically depending on you know what vehicle you Set your fund up as what you could do is that you get someone as an investor to put in say ten million dollars And then you gear it so you take a loan for ten million dollars from the bank and you use that to You know buy bigger deals and do all these type of things So this is one of the the financial options that you have Regulation depending if you say your pension funds or something like that They may have something to say about your financing options and gearing and saying oh actually guys we think that there should be a Restriction on that so you can't gear you know too much So you can't like take ten million and then borrow two hundred million You know that might be too much of the gearing They might also regulation might also give you say limits So say you can't invest in say tobacco companies or Or you know companies that aren't socially responsible Then the limits that you have imposed they need to be reflected in your benchmark Just so that you can do a proper valuation to see if you have done any value at I think maybe let me add that as a as another little token here is value Add because that's after all what you wanting to do Like I said you're setting up a business You want to reduce the cost of capital? That's your value add to society and that's why you are going to be earning that Handsome fee which will be turned into a profit So benchmark value add Just on a more general thing people do like Pension I mean pension funds private equity because they do offer correlate They're not correlated to all the other asset classes, which means that there are some nice diversification benefits So if the whole stock market tanks your private equity is not going to be as correlated to to that Another thing with limits is you might want to limit the withdrawals And the reason for that is because withdrawals will hurt your liquidity That's the one thing why some people actually don't like accepting pension fine money is because They call it lumpy. They say the money is lumpy So it comes in in one big go and then you're like, okay Well, how do we deploy this hundred billion? But then when it gets removed they withdraw a hundred billion and that can throw you into some serious liquidity problems so one of the things with financial gearing is We do do it in order to say maybe increase our liquidity, but liquidity is an important thing specifically You don't have the stock exchange where you can just sell your shares the next day if you buy a 10% in a company then the only way you're gonna set it is if you can go into Trump find a secondary market which are very I Mean the market capacity of the secretary markets is quite small I do see there are these sites online that offer these things known as alternative exchanges But they're very small and they You are they do kind of liquidity is still a big problem with with private equity It is something that these alternative exchanges and secondary markets are trying to to change the problem being is that You'll see these guys will take quite heavy Transaction costs, I think they'll take like a 5% fee or or something like that Which is much higher than if you were buying it on like say a stock exchange so transaction costs are important and Yeah, they they link up liquidity transaction costs. I Guess in a way, I mean it's the the cash flows and if you can't afford the liquidity and all those type of things But let's see have we kind of done the whole I Think we've done the whole administrative side of it Now let's look into the more exciting part so private equity One of the other important things is to know your investment process, you know, so how are we going to go about? Buying these various companies The one thing to ask is what style are we going to be deploying? You know, you get the fun sexy one, which is the venture capital You give money to these young startups and hope that they make you millions feasting in say Facebook or Snapchat or something like that Then there's like say development capital where a company is doing really well and But they just they their organic growth is too small So you think hey guys we can boost them up Let's give them like a little shot in the arm of some capital to make them go bigger Management buyout is when the managers are like we actually really like this company We don't like our shareholders. Let's buy the company out and take control, but we need money in order to do that Then you get stuff like leverage buyouts where It's kind of like oh, let's help out an acquisition. We want to buy out a competitor. You get restructuring capital This is when the company is doing really badly bad management But you feel like you can come in give them some more money shake things up and you can potentially stop making more More money make it a more profitable enterprise so These are the various private equity styles that you can do Also part of the investment process is to have a good due diligence also, I guess is to understand your Financing options that you have available Another good thing part of the due diligence is to do good research and analysis Because I mean you want to make sure that whatever company you invest in Specifically with private equity that they have some sort of comparative advantage You want to pick that up in your research and analysis you want a company that has got, you know That's special special edge when it comes to their their product or their service or something like that I mean what you could even do is You could try and you can come in and actually say as private equity guys We're gonna take an active role in this company We feel that we have the expertise to you know bring in innovation We can bring in more strategies and resources and we can you know open the doors with other synergies with other companies We own and this can all feed back and give the company a competitive advantage I've got funds of funds there Maybe that one's just gonna come back to that one So yeah, we might have also part of our due diligence. We might have various Investment criteria Investment criteria might say okay. We need a certain Market penetration or the product has to be a certain thing Like technology we are investing in apps and then that would be you know the certain sector that we're in And yeah, we want to make sure that we've got good market penetration in that sector so we can bring this one Down here I mean because you know when part of the market Criteria or I guess now this is coming with the restructuring capital is We can add better leadership capacity Better management and one of the reasons for doing so will be to you know increase market penetration and Yeah, I think even with average buyouts you want that that leadership capacity so sometimes a pension a Private equity fund will buy out a company and they will restructure the management they will change the management they'll put in their own team that they think is we'll be able to do the job and Hopefully they believe that this will you know contribute towards good growth Although maybe let's put let's put growth over there Management can help growth over there and then you know Because once you have good market penetration you can get growth and then you can also get growth in that sector I see you I didn't connect funds or funds so what you can sometimes happen. I think we should maybe Should we put this one is You can either invest directly in companies or you can be a private equity fund that invest in other private equity funds So I guess that could actually be part of the The research and analysis is you know, maybe be a fund-of-fund Then that would be like almost the opposite of taking an active role is Yeah going funds or funds, but funds or funds do increase your transaction costs. You do have double fees and And all those type of things But there are some synergies. I guess in Having funds or funds in that you are getting more diversification So, I mean look this this lattice structure is it's not perfect I mean, there's many different ways we can restructure it and you know play around with it But the idea is to just see that When we come to these these big questions and you know, they say talk about private equity or What you would consider in setting a private equity for 20 mocks, you know, this shows us that we do have Enough points to talk about because we can talk about each point and we can talk about each points Relationship with all the other points. So there's a lot to discuss. Yeah, I mean we could write a We could write a book on this lattice structure, but like I said, it's not perfect Like I said diversification and funds or funds should maybe be connected value add and fees should also maybe be connected You know growth and valuation, you know, so there's Just because something's on this side of the lattice doesn't mean it can't be connected with that side So this is just to show some of the connections But I mean that's the beautiful thing about finances everything is intertwined more and more But there we go. That is the the lattice structure For private equity. I hope you guys enjoyed this this video I'll see you next time and we'll I don't know if you guys enjoyed will do another one. Cheers