The State of the Private Equity Industry—Is It All Down Hill From Here?

state-of-the-private-equity

In the past private equity has been a solid way of investing taking in trillions of capital, but with the ever changing world we live in, what is the state of the industry? Private equity investments typically consist of money being placed in a company by venture capital firms, private equity firms or angel investors. These are companies that are not publicly traded on any stock exchange and typically they are looking to launch, grow or prepare for a buyout. The money invested is typically aimed at expanding or creating new products or in some cases to fund a restructuring of the company. Private equity is a powerful force in the success of private companies that are not publicly traded. So what is the state of the private equity industry?

The Private Equity Industry Is Healthy

To answer that question, I spoke with Jonathan Coslet, Chief Investment Officer, and Senior Partner of TPG Capital. Jonathan explained that the private equity industry, like all industries, “is maturing but the core raison d’etre for the industry is growing rapidly and that’s because of our core client, our pension funds and our sovereign wealth funds in particular.” Jonathan compared the private equity industry to state governments. He said whereas the average state government is getting about 7-8 percent annually on its investments, the average firm in the private equity industry has returned about 13 or 14 percent every year over the last 30 years. “So it’s been delivering very strong returns against a US stock market that’s maybe 7 or 8 percent. So the need for the pension funds, sovereign wealth funds and insurance companies endowments to outperform fixed income securities and regular way public equities is creating real demand for our services.” Because of these factors the industry is growing and today the private equity industry has about $2 trillion of capital under its control.”

Growth Investing

I asked Jonathan what investment strategies he prefers the most. He mentioned two generic approaches that he would take as an investor: growth and inflection.  He explained growth to be the following: “there’s going to be a lot of folks who are 65 and 85 or older so there’s going to be a huge demand for healthcare services. So that’s just a secular growth that’s driven demographically and I need to figure out which part of that sector I want to get in front of because it has the most growth and has a supply-demand imbalance.” It’s important to get in front of something with a growing demand while supply is still lagging because this gives you pricing power.

Inflection Investing

On the other hand, with inflection investing it’s not the slope of the curve, it’s the second derivatives, or the rate of change. “The slope is inflecting up so being in front of something that’s about to change and that usually means an industry that’s being disrupted in transition. It happens to be that healthcare has both characteristics: it’s growing and it’s changing.” When you look for something that has both growth and dynamic change together you find the “hot spots” of investing and if done right it can lead to tremendous success.

Check out my interviews with Jonathan Coslet below. For more interviews with Jonathan Coslet click here!

 

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Critical Decisions When Launching a Startup

building-a-startup

There are countless aspects to launching a startup company. To do it successfully a founder has to make many critical decisions and be right on most of them. Many entrepreneurs have a great idea or product with great plans to make it successful. However, they don’t make the right business decisions, which leads to their startup either failing or never even getting off the ground. When you are ready to launch a startup you have to make sure that you have the right people in place who can help you succeed.

Put the Right People in the Right Positions

 

I recently spent some time with Montgomery (Monty) Kersten, who is an angel investor and Independent Board member of several startups. We discussed many different key aspects of startup companies and Monty shared with me some of his advice for startups that he’s gained over the years as he’s participated in the successful launch of many startups in Silicon Valley and elsewhere, “Gather around you people who have done it before and put them on the advisory board”. Instead of making them full-time employees. “Listen to their experience and wisdom because many times your early investors will be advisory board members who can help you, guide you and be supportive of you when things go wrong.”

 

Founder Must Be the Driving Force

 

Monty reiterated the importance of hiring the right people and building the right advisory board: “Never let down the bar in hiring. Only hire world class people who are willing to work as hard as you.” He added to compensate them fairly. Monty also noted how important it is for a founder to be the one who drives the company forward with a vision and a concrete achievable plan.

 

Building Your Board of Directors

 

I asked him how he recommends going about building your board of directors and how to stay in control of your company. He said the reason he is often asked to become an independent board member is because he was a successful CEO and because he serves as an independent board member and not as a representative of a venture capital firm. That’s because the founder typically wants operations advice that is for the benefit of the company.

 

Consider Your Best Long-Term Interests

 

On the other hand, venture capital firms are most interested in their own investment as board members, which is how some founders lose control of their companies. “As you build your board, you will find that the dirty secret of Silicon Valley is two out of three founders are replaced by their board of directors over the lifecycle of the company.” So in order to stay in control of your company, it’s important to build your advisory board with several independent board members instead of mostly venture capital firms.

To view the full interview with Monty please click here.

How the Internet Became Commercial

How-the-internet-became-commercial

What’s Behind the Commercial movement of the Internet? Believe it or not the Internet was not originally created to share your life on social media sites like Facebook and Instagram or to watch movies, play games or follow your favorite pastime. When it was first invented, the military and research universities were the primary users of the Internet, via several loosely connected networks. However, over time, and at a rather rapid pace, the Internet has become the commercial powerhouse it is today. That wasn’t always the plan or the goal for the Internet, so how did it become the mainstream commercialization machine that it is today?

Patterns in the Deployment of Technology

I spoke with Shane Greenstein, who is a faculty member at the Harvard School of Business, about this topic, which also happens to be the subject of his book How the Internet Became Commercial. Shane is the MBA Class of 1957 Professor of Business Administration and co-chair of the HBS Digital Initiative. He teaches in the Technology, Operations and Management Unit. Shane is also co-director of the program on the economics of digitization at The National Bureau of Economic Research. When I spoke with Shane, I noted that now that we’re moving into the realm of big data, understanding human behavior aspect of it. So I asked: “When we look at this today are there patterns that are emerging?

Repetition and Coordination

“The interesting thing is that an awful lot of what we observe today are patterns that we have seen in the past. And the more you appreciate how much repetition there is the easier it is to identify. For example, when very big things deploy you tend to find patterns of hesitance because multiple firms have to cooperate together in order to make something work as a system. Getting that coordination to work is usually quite difficult. That’s something you saw in electricity and automobiles, airplanes the Internet and we are seeing today in big data. Disagreements about fields, disagreements about getting the coordination of different ways and algorithms to get them to work with each and have standardized ways of doing machine learning so that everybody can talk to each other.”

Adaptation Problems

Shane also noted, “The other thing you typically see when big things deploy is adaptation problems. It turns out big technology isn’t useful out of the box. It requires much more investment to adapt to the needs of a particular user and that kind of adaptation is fairly expensive typically. It’s typically where most of society spends most of its money as it turns out. Again you saw it in electricity, you saw the pattern in automobiles and you see it in every major deployment. And again you saw it in the Internet and if you look at big data what’s the big problem? You see it everywhere: adaptation. Lots of firms have the data but they haven’t figured out exactly how to modify it in order to find the value in it.”

To view the full interview with Shane please click here.

How to Keep the Wealthy From Fleeing Connecticut

moving-family

When it comes to saving on taxes the wealthy have to continually consider all their options because lawmakers never seem to stop pushing for more legislation aimed at making the wealthy pay more taxes. Lately, it seems that there are more and more reports of the nation’s wealthiest individuals living in high-tax locations deciding to pack up their bags and head for states that are more tax-friendly.

Connecticut continues to face this problem because the state reportedly continues to spend more than it should. Because of the overspending the state keeps creating new efforts to squeeze more taxes from its wealthiest citizens. The problem is, many of these wealthy individuals are moving out. According to a recent report in the Hartford Courant, two of the biggest offenders are Connecticut’s estate tax and it’s gift tax.

Connecticut relies on wealthy taxpayers more than most states, but the number of wealthy individuals coming to the state is slowing down, while the number of wealthy taxpayers leaving is increasing. In fact, after the state introduced a huge tax increase in 2011, more than 27,000 residents moved out and took close to $4 billion in annual adjusted gross income with them.

Perhaps the best way to deter the exodus of high net worth individuals is to repeal, or at least reform the estate tax and to completely eliminate the gift tax, as Connecticut is the only state with a tax of that kind.

www.courant.com/opinion/op-ed/hc-op-smith-repeal-ct-estate-tax-0515-20160513-story.html
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Keys to Empowering Others

encouraging others

A common characteristic of many good leaders is the ability to delegate responsibility. One way that this can be done is by empowering others with the ability to also lead. Empowering someone else can be an excellent tool to achieve even greater success, both for the company and the individual. So how do you go about empowering someone else? What are some of the most important keys to successfully giving others power to achieve success and grow?

Empowering With Trust

I recently discussed this topic with Joel Peterson, Chairman of Jet Blue, and the Founding Partner & Chairman of Peterson Partners. Joel is also the Director of the Stanford GSB Center for Leadership Development and Research as well as the author of the 10 Laws of Trust. Joel explained some of the key aspects of truly empowering others. “I think that if you don’t empower people you’re not going to build high trust among them. Usually what that means is that you have to do it slowly. You give people a little bit of responsibility, you measure that, you talk about it and you give them more responsibility. The idea is you want to empower the organization as far out as you can; as deep into the organization as you can.”

The Role of Accountability in Empowering Others

Ultimately Joel told me that you want to figure out how to give people as much authority and power as you can. I then asked how accountability comes into play when it comes to empowering others. In other words, how do you go about measuring the success of those who you empower? According to Joel, some people feel that accountability or measuring results is counterproductive when you are trying to empower others. However, Joel feels that without accountability, true empowerment can’t really take place. “My view is if you aren’t measuring you really aren’t fully empowering them. People who don’t know what is being measured do not feel empowered. They do not feel trusted. So if you give somebody an assignment and you don’t let them know the metrics or measures being used they have not really fully been empowered. High trust organizations tend to be very clear about what’s being accounted for.”

Determining the Accountability

That led to my next question, which was essentially who should come up with the measurement or what is being accounted for: the person being empowered or the leader? Joel said he thinks it’s always best if both parties can work together to determine what the measurements are. However, there must be a clear view. “I think the leader’s job is to figure out what success is. You’re trying to figure out which peak are we climbing. How will we know when we have won? The job is to figure out what winning is, and then I think you can work with people in the organization and determine what’s the best route to the summit. You’ll find that people down in the organization know more than you do as the leader, so you want to joint venture those metrics with them, but you have to have a pretty good idea of what summit you’re climbing.”

Overcoming Failure

Lastly, I asked Joel what happens when a person falls short of the metric or measurement? “Failure is a preamble to success.” If you have that notion that really you don’t have to succeed at everything, then you sit down and talk about what went wrong, you alter course and then move forward. “If you fail because of a lack of effort that’s actually a much more serious problem than a lack of results.”

To view my full interview with Joel Peterson click here

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Finding Value Investments in Private Equity

investor

Private investors and venture capitalists are always looking for the next great company, idea or product to put their money into, in order to reap great financial rewards down the road. However, how do private investors know where to find the true value investments that exist?

Experienced Investor

Jonathan Coslet is the Chief Investment Officer at Texas Pacific Group, also known as TPG capital, and he has been with the firm since its inception in 1993. He also serves on TPG’s Executive Committee. Before joining TPG, Jonathan started his career at Drexel Burnham Lambert and later moved to Donaldson, Lufkin & Jenrette. His formal education includes earning a BS in economics and finance from the Wharton School of the University of Pennsylvania where he was Valedictorian and later he received his MBA from Harvard Business School, where he was a Baker Scholar. Jonathan currently serves on the Board of the Stanford Institute for Economic Policy Research, the Stanford Children’s Hospital and the Stanford Medical Advisory Council. Jonathan and I discussed TPG’s state of private equity, as the company currently has almost $80 billion under its management. So I asked Jonathan how he finds the value investments?

Working on the Fringe

“At the end of the day, we have to be what I call fringe capital. Private equity as a whole is maybe 5 percent of the entire equity market capital ecosystem. The public markets are very efficient. They are getting more and more efficient every day and therefore the return on that capital is going to be tighter. We have to play around the fringes. We have to see things that others don’t see and we have to be willing to do things that others won’t do.” Jonathan said his firm has to do two things around the fringes. He said they have to have a different or uncommon point of view as an investor, which means they have to specialize, which includes both industry specialization and geographical specialization.

A Change for the Better

The other thing they need to do, according to Jonathan is to change or improve companies once they own them. “We have to do the hard work, like we did at Continental Airlines, like we did at Burger King, like we did with so many other companies along the way. That often means changing management. It often means employing new operational and strategic approaches to companies that for whatever reason aren’t being managed in a way that is aligned with the shareholders’ way.” Jonathan then explained that when you have a different point of view as an investor and you can change companies, you can outperform. “It’s hard. It takes a lot of work and it takes a lot of capabilities that you develop over time, but that’s what we do.”

Be Honest With Yourself

Jonathan concluded by saying that you have to be very selective. If you realize that you don’t see it in a very different way from everyone else or you don’t think you can really change it then maybe it’s not worth the investment because you can’t add a lot of value to it, as opposed to the ones where you do have a different point of view and where you do have a different strategic approach to operational improvement.

 

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Angel Investing: As Easy as 1-2-3

angel investors

In my profession I meet with a lot of investors, mainly venture capitalists and angel investors.  When meeting with many of these investors I like to learn their thought process of determining whether or not a company is worth their time and resources. Monty Kersten, Independent Board Member and Angel Investor told me the following in regards to deciding which companies he chooses to invest in.

1.  The Market

“There must be an explosive market trend, unstoppable, a massive wave you can get on and surf for years…Market kills a lot of ideas that would sound great otherwise.” You could have a good solid business plan, a great service or product and high projected income but without the market being open and ready to receive such a company, an investment would not be wise.

2.  The Team

The investors will look at those in charge of the company, the leader(s), founder(s), and CEO.  They ask themselves the question, “[will they] do everything it takes, devout all their energy wisely, and listen to others as they forge ahead?” The leadership can make or break a company. Take Netflix for instance, the company had the potential to totally take over the video industry and were well on their way in doing so, yet one critical mistake cost them a large portion of their customer base. A company’s leader must be willing to listen and take advice given to him/her. Investors are very busy people and don’t have time to waste dealing with stubborn, unmotivated investees.

3.  The Idea

“The idea should have some break through potential, and has to be good enough to be critical mass size,” says Kersten. Is there a need for this product/service? Investors must be sold on the idea and furthermore must see a way in which your company can reach large sums of people. The idea for a company must be solid, feasible, and backed by a strong business plan. Angel Investors look at the idea third, the two most prominent factors are the market and the team. This does not mean that the idea is any less important. Even if your idea is the greatest thing since sliced bread (and it very well may be), you must have the market on your side and a strong team to make your company a reality.

Now that you know what Angel Investors look for in a company, how do you sell them on your idea, service or product? Monty Kersten says the following: “[Thinking] wishfully is the most dangerous thing a startup can engage in, instead I would urge you to prepare. Winning funding from investors is much harder than you think it is. You need to look professional and look polished. You want to get introductions at the partnership level to investors.” He continues to say, “You need to have a crisp one hour pitch that is going to cover all the aspects the investors care about.” First impressions are everything when pitching your idea, you must be prepared.

While talking with Monty, he gave a little insider’s secret about investors, “Venture Capitalists often only invest six times a year, but they see three companies a day.” Doing the math, investors turn down around 774 company pitches every year. In order to be one of those six, you must do your research on the market, form a strong team, polish your idea and give a stand out “killer pitch.”

To view my full interview with Monty please click here

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Wealthy Californians Keep Paying More in Taxes

business man waiting for train

The tax numbers are in for the state of California and all signs point to the wealthy paying more than their fair share. With tax day now behind us it’s a key time to take a closer look into the real numbers in the Golden state, especially since income taxes account for more than 65 percent of the state’s revenue in the current budget year.

According to the latest number from the Franchise Tax Board, almost 90 percent of that tax revenue comes from just 20 percent of the taxpayers; those who make $91,000 or more. Taxpayers in that income range are the only taxpayers who have seen an average income increase during the past two years.

Meantime, the top 1 percent of taxpayers, those with an adjusted gross income of at least $501,000 paid close to half – 45 percent – of all state income tax revenue. Taxpayers in this bracket reported an average AGI of $1.6 million in 2013, which is nearly double the amount of the average AGI in 1994. Meanwhile, all other income brackets have seen a decline in their average AGI.

So what does all this mean for the state budget? The governor’s spending plan now expects that income tax revenue will be higher than what lawmakers originally expected when they passed the budget last year. However, that is not due to overall income growth, but rather because they expect higher-income taxpayers to see their income increase even more, which means they will pay higher marginal tax rates.

Top Tax Tips for Business Owners

bookkeeping business owner

Chances are if you run your own business then you are always looking for ways to get, and stay ahead, especially when it comes to paying your taxes. They are so many different things to track and organize when it comes to business taxes, but keeping a few simple tips in mind can make a huge difference in how successful you are.

While this tax season has already passed, in actuality now is the perfect time to start preparing for next year if you own a business. So here are just a few things to keep in mind as you start preparing. First, don’t mix your business and personal accounts. Even if you aren’t incorporated you should still keep these two accounts separate. This makes it much easier to keep your records straight and it also keeps your personal information private.

You should also keep track of your expenses, and your taxes, as they happen. Keep real time records as you go, instead of waiting for several months to do them all at one time. This makes record keeping much easier and reduces the chances of costly mistakes.

Take advantage of your home office deduction. You can do this two ways, so it’s smart to take the extra time to calculate both methods and then choose the one that gets you the greatest return. Additionally, keep track of all the miles you use your vehicle for work. This can prove to be another nice deduction form your tax bill.

Lastly, if you are considering hiring someone, adding a family member to fill the position is often a good idea if you want a tax break. You might be able to deduct their wages as an expense, which will reduce your total taxable income. Contact GROCO for helpful tax tips for businesses. Call 1-877-CPA-2006.

 

How to Efficiently Scale With Capital

rocket growth

The goal of most startup companies is to achieve growth and profitability. However, the process of achieving those goals can be different for every company. The key to long-term success for most startups is to scale with efficiency, but that is not always easy. I recently read an interview by Alan Olsen, CPA and Managing Partner Greenstein, Rogoff, Olsen & Co., LLP a regional CPA firm of Montgomery Kersten, an angel investor and Independent Board member of several startups in Silicon Valley. Alan mentioned to Monty that many well-known startup companies have a reputation of burning through a lot of cash quickly. So Alan asked him how he helps companies scale and balance spending with growing their profits to a break-even point?

Old-Fashioned Approach

Monty said when it comes to scaling he is much more old-fashioned than many of the current crops of big-name startup companies, including Uber, which raised huge amounts of funding and have a massive marketing footprint. He has nothing against what these companies are doing.  But Monty believes in capital efficiency and building huge shareholder value with small injections of financing. “I like the old fashioned way of modest capital, great productivity, profitability; conserve and build cash, after you have to burn it for a short period of time.”

Startup Bubble Time?

Alan asked Monty if we were currently in a startup bubble? “Everybody has their own view. I strongly feel that we are in a startup bubble. We’ve had a record amount of venture capital dumped into companies that aren’t profitable and that aren’t having exits. We have almost no IPOs and many fewer acquisitions and a whole lot of unicorns with no way out for investors. I think there’s a big bubble that’s going to pop here and I think Silicon Valley traffic patterns are going to get easier for our commutes in the next year.”

More IPOs Needed

Alan asked Monty about the fact that there are no exits? “It’s a very, very serious problem because the venture capitalists promise their investors returns that are liquid cash. They have to return cash or public stock to their limited partners, as a way to pay them back and reward them with returns on their capital. If they have no acquisitions of their own investments and they have no IPOs they don’t have any value yet, beyond just the paper stock certificate that they can give back to their limited partners. So there is an imperative to break the log jam in IPOs and to have acquisitions happen more frequently.” Monty foresees a revisiting of the dot.com bust; not so much in dot.com businesses today but in young startups that have raised too little and spent too quickly. Those companies that have too thin a business model and didn’t have a plan to win customers and turn profitable in time could be in trouble. “I think you’re going to see a lot of washouts intentionally let go by the venture capitalists so they can concentrate on the stronger horses they have running in the race.”

To view the whole interview between Monty Kersten and Alan click here

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