eg. an investment company which buys shares of a private company and holds them for a long period, is it considered PE or AM?
or say BlackRock becomes a shareholder of a tech unicorn, can this be labelled as PE?
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Private Equity is limited to investing in private companies. In many cases the investor finances the purchase by levering it's acquisition target and backing said leverage with a combination of the PE companies balance sheet and the target's creditworthiness (usually). Also PE companies purchase entire companies (or a controlling interest) and have a direct say in the operations of their acquisitions (usually some PE companies will take a non-controlling position in joint ventures). Theoretically they could fire the entire board and bring on their own board/management, a lot of firms don't do this entirely, they will usually leave much of the existing mgmt structure as that mgmt understand the company more so than the PE firm/ outside mgmt. Leveraged buyout PE companies specialize in the leverage I mentioned and are what most people think when they think of PE companies whereas growth equity blurs the line between PE and VC. What I just described is pretty narrow because PE can also be involved in mezz debt, convertible pref shares etc. and not just common stock but this is the general idea of PE.
Asset Management is very different. AM firms as we think of it invest in public companies and generally do not try and take a controlling interest/ make management changes etc. They may take on some leverage by purchasing stock on margin and are generally prohibited from engaging in options. They can also invest in fixed income. This all depends on the firm and the specific fund strategy. PE has things like lock-up periods (where you can't take your money out) and capital calls (where investors must agree to fund further investments if necessary) while AM funds generally do not have such stipulations, this makes liquidity far more important to an AM firm than a PE firm. But that's okay since most AM firms invest in public stocks which are easily exchanged for cash if an investor decides to redeem shares. BlackRock is the world's largest AM firm (pretty sure) but they also have a PE arm. I am sure veterans and people more knowledgeable can add on and give further color because this is the most basic of overviews. I hope this helps.
BlackRock have a PE arm? I thought they only had PE Funds of Funds?
They do. BKCC (BlackRock Capital Investment Corp, listed) is one of the PE vehicles by BlackRock. They have private investing, private equity, PE funds of funds, all sorts. BlackRock is a behemoth - they do everything....
BobTheBaker,
Would you consider PIPE transactions PE or AM investments?
I would say it is PE just by the nature of such an investment, the way they're usually structured limits liquidity.
Bob's correct above. Beyond both falling under the broad finance umbrella, PE and AM are entirely different beasts. The investment thesis is completely different: think about analyzing a public company where you can buy a very small portion of it's equity where you have very little to no control over the direction of the company (yes, there are exceptions with the activist investor types but just to keep it in the general sense and how the vast majority of AM and PE firms operate), it's a completely liquid investment and it can be a short term hold in AM (yes, it can be long term but if shit hits the fan a PM can sell it very quickly) compared to PE where you typically buy a control share of a company that is private or that you take private, can and do make decisions that change the direction of the company and have a long term outlook and very little liquidity other than an exit.
The process is also entirely different. Again just to generalize because there are exceptions and the lines can blur, when a traditional equity Asset Management co wants to buy a stock, they just do it, and seconds later they can own the stock. In PE, you need to find a target (maybe off market but most likely a brokered deal through a banker), win the deal then actually close it while you're most likely negotiating with lenders and performing gigantic amounts of due diligence on the company and managing teams of lawyers, consultants, accountants, etc. Then you're most likely going to hold it for 3-7 years or more and look towards an exit-a sale or an IPO type of event and that's another long process. When an AM wants to sell a stock, they hit sell.
There are tons of other differences, but I look at it like this: I've been in PE for almost 2 decades, I know what I'm doing and have tons of experience putting complicated deals together and have hit more bumps in the road than you could ever imagine but I wouldn't have the slightest clue how to be a portfolio manager in traditional asset management and my friends who are in AM (from traditional long only equity and debt to complex hedge funds, some of whom are really successful and powerful) wouldn't be able to get to first base in PE. I'm not saying one is better than the other, they're just very different.
Dingdong08, BobTheBaker: Thanks for the insights and clarification. I have a better understanding now. I've a question though, do PMs in Asset Management companies take positions in private companies and hold them for a long period? Or do they only buy public companies?
Can asset management include a PE or VC fund? (Originally Posted: 05/09/2013)
Can you be working in Asset Management as part of a company/fund that invests in PE or VC opportunities? Or is it only PE and VC companies that actually invest in those opportunities?
I guess I am wondering whether there is a difference between a PE/VC company and a PE/VC fund. Could a PE or VC company just be setting up the deal but then offering AM companies investments in whatever PE or startups they are working with?
Since AM firms also look at the liquidity of the assets they control, private companies' shares do not reach this bar. So PMs do not favour them usually. There are often much better public stock alternatives that provide them the same growth that they would expect from their private acquisition without the management hassles and the illiquidity.
High Yield funds typically have a portion of the portfolio in "private companies". I would say the debt instruments are the better things to own in most of these cases anyway than a private companies shares (shareholders get paid last boiz). These companies don't publicly report and often you have to track their financials on specialized sites like syndtrack or intralinks. Often these companies are owned by a P/E firm but they gotta get the real money from the debt markets so they can be big time issuers (think of Dell aka denali holdings). These private company holdings can be where real alpha is generated because the bonds aren't traded much and there can be real dislocations on price.
A PE/VC fund gets most of its capital from outside institutional investors (foundations, endowments, pension funds, etc). So yes, you could work for an AM firm, who then says "we want to invest $300mm of our client's capital in PE/VC Fund X". PE/VC Fund X then takes your money, pools it with other investor's money, and eventually invests it.
As an AM you do due diligence on the PE/VC fund, the PE/VC fund's sponsor (the PE/VC company that actually runs the funds and executes investments, such as a KKR, Carlyle, TPG, etc) and the sponsor's track record; however, as an AM, you're not actively analyzing the companies the PE/VC fund will be investing in.
PE/VC sponsors (the PE/VC companies mentioned earlier) do not own 100% of the PE/VC funds they manage; they may have a small percentage of ownership in them, but the majority of the funds are owned by outside institutional investors.
Well actually some asset managers have internal PE/VC funds too.
Many of the larger/more well known AM's have FOF vehicles
Thanks for the replies.
This question is fair game, but why is it on the front page?
Because tons of college freshers grazing these pastures this time of the year?
PMs themselves range in what they can do and what they are trying to do (aside from making money). Perhaps I should say how they make money. Institutional portfolio managers have to invest in "investment grade" vehicles. Private companies may not fit this criterion. other more specialized (read smaller funds) PMs may invest in PE funds, or funds of funds as part of their strategy
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