$2.5 Trillion UNinvested Capital Is An Industry of its Own
There are an increasing number of investment bankers who have identified the PE demand for financing Small-to-Mid-Cap companies. The current focus has been on "EXIT" financing for funding the sale of a company for its current owner(s) which generates closing-based-fee-income for the investment bankers.
But it will likely not remain focused on "Exit" financing. That focus is expanding into semi-exits where the sellers remain in place as management and they sell only a portion of their company to the PE investors.
Whether it is a total sale or a partial sale it leaves the question concerning management wide open for review. Management of PE investments will become a major new focus for PE firms and it will be an expanding issue. It expands over time with changing market conditions, and it expands over time with increased size of invested portfolio, and it expands over time with increasing "bad investments" occurring.
Financing a growing industry portfolio of owned and semi-owned small-mid-cap companies will generate a big demand for quality-of-management issues. This field of quality-of-management will become an industry in itself.
Remember, $2.5 trillion of UNinvested funds (now more than 50% of the entire federal budget) means that the PE industry has a two-sided problem:
- Ramping up to being able to respond to finding, evaluating, closing and booking thousands (perhaps 10's of thousands) of investments is no small challenge. The banking industry fields total personnel overhead approximately 20 times more people than the PE industry has in place.
- Facing portfolio-quality-of-management issues will spawn a demand for the answer to how to do this which itself will have a quality-of-management issue of its own. Meaning that they have to manage the managers.
Remember, there are approximately 5,800 commercial banks in the US and over 6,800 US-Oriented PE Firms. Commercial banks have approximately 20 times larger staffs originating, evaluating, and managing their portfolios. PE firms are significantly under staffed for their mission at a hand.
Having $2.5 Trillion of UNinvested funds is very significant. The PE industry IS an "industry" and it is huge.
Our Plan focuses not only on feeding the industry with close-able deals generating closing fees in sufficient quality as to be meaningful, but also to face the issue of portfolio-quality-of-management as an additional source of revenue as well. Portfolio management revenue could exceed the closing fee potential albeit an overhead challenge.
Private Equity (PE) Is an Industry - Coping With Private Equity Requires Focusing on its Size
That UNinvested capital exists is not new at all. But that a group of investment companies, called Private Equity firms, have amassed such a huge amount is unusual.
This is now a industry of its own. It is larger than the automotive industry or the cereal industry. The estimates of the total US Private Equity's uninvested capital range from $1.5 trillion to over $2.5 trillion for the US alone. Worldwide it is far greater.
This capital cannot, in most cases, be returned to the original investors. And, sitting in many PE firms uninvested could incur penalties for the PE firms. The PE firms are faced with a multiple trillion dollar need to invest... and quickly.
This has given rise to concerns that they will push the prices of their pending investment deals very high as they compete for quality opportunities. Price increases along with the drive to lower the threshold of acceptable qualities is not a strong place to be for the industry.
And this problem has several key facets:
- Price competition makes this a sellers' market
- Push to invest makes this a conflicting situation where they need to increase quality personnel by high multiples at the same time they face need to cut expenses
- They face a portfolio-quality-of-management demand that only increases as they do invest. They have to have a handle on their portfolio and its management.
These three factors lie at the basis of the Plan offered here in abbreviated form to invite presentation.
This is a remarkable situation replete with opportunity.