1/ @mjmauboussin's recent report on "Public to Private Equity in the United States: A Long-Term Look".
Here's part 1 of the thread if you haven't read that yet (not necessary though):
2/ Public Equities
In the 90s, 15-20% small cap cos became medium/large cos every year. Today, it's half of that.
Median ROA gap between large and small cos was 15% in the 90s while today it has become 30-35%!
3/ Limited profitability prospects for small cos make them more valuable as part of a larger company i.e. more M&A, less IPO, and larger size of remaining companies.
4/ "While there has been a decline in each size category, more than 90 percent of the stocks that have disappeared since 1996 were those of small- and micro-capitalization companies"
5/ Take the next minute to glance through this table. Lots of interesting inferences not suitable for a tweet.
6/ Buyouts
Interesting origin of LBO which started with a tidy $10,000 equity 65 years ago. From those humble origin buyouts have come a long as today there are ~1900 buyout firms in the US.
7/ Large deals did as well, if not better, than mid-market deals.
8/ Current EV/EBITDA multiple for deals: 11.5x. Word of caution: ~50% deals above 10x multiple lost money.
Besides interest rates, one driver of high multiples is greater proportion of software buyouts which are typically more expensive.
9/ ~40% deals now mention "adjusted EBITDA" rather than just EBITDA, the highest on record. Companies that forecast "adjusted EBITDA" miss those projections by an avg of 35% two years following the deal.
I guess we all should fear the word "adjusted".
10/ For buyout firms, avg holding period was 7 yrs in '70s and '80s, then fell to 4 yrs in '08, and gradually rose to 5.5 yrs in 2019.
Most exits happen through a sale to a secondary buyout typically at a higher multiple.
11/ Look at these tables closely. Pre and post-2000 depicts such a stark contrast when it comes to persistence of return. Post-2000 looks just random.
12/ Why is this happening? Paradox of skill.
I used the same idea to explain that "paradox of skill" is very much present in Cricket. If you follow the sport, you can read this thread.
13/ Venture Capital
I had no idea a HBS Professor, who taught a course called "Manufacturing", influenced the likes of Tom Perkins and Don Valentine.
14/ Incredible factoids
# of IPO in 1969 = ~20% of total public companies today
~50% US VC AUM is in the Bay Area, 75% after including NYC and Boston i.e. VC AUM is very, very geographically concentrated. Total US VC AUM is $455 Bn with $120 Bn dry powder.
15/ It took 18 years to surpass dot com level VC investments.
Buyout firms can scale their AUM more easily than VC firms although their fees are comparable i.e. 2-20 structure.
16/ Super-majority of VC exits happen via M&A and the median M&A exit for a loss.
While IPOs are limited in number, the avg return is much higher than M&A exits.
17/ Companies stay private for far longer than they used to. Median age of firm before IPO increased 50% from 1976-2000 to 2001-2019.
18/ There are 225 unicorns in the US worth $662 Bn in aggregate.
But these valuations are often exaggerated. In some estimates, unicorn valuations are on avg ~50% above the fair value.
19/ Strengths and weaknesses of IPO, SPAC, Direct Listing
20/ Unlike buyout firms, VCs exhibit robust persistence. Some argue successful VCs enjoy preferential access because of their past success/reputation which helps their return persist.
21/ The dispersion of returns in VCs also makes it clear if anyone justifies the fees in the whole investment management industry, it's the top quartile VCs.
22/ Where from here?
Regulatory tailwinds can ensure PEs can enjoy the good times to persist although high valuations remain a concern.
23/ Also, more competition for the fees is coming with a very familiar face in the charge again: Vanguard.
If those persistence numbers remain random as it did for last 20 years, PE firms have very little right to enjoy 2-20 fees.
