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Doug McCormick

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2018-02-25

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2018-02-25

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1. “So, the name of the book is Family Inc. Using Business Principles to Maximize Your Family's Wealth. And I have a website. So that's familyinc.com, F-A-M-I-O-Y-I-N-C.com. And as you were so nice to describe, there's a bunch of tools there that help an individual create financial statements as if they were a business. So that's a balance sheet and an income statement. And I think just going through that exercise will force you to think a little bit differently about things like your labor assets. So it was worth the time.”

   2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

2. “I don't know if I'd say favorite, but the one that I'm most interested in right now and have really enjoyed, it's called Lead Yourself First. It's inspiring leadership through solitude. And this is written by a guy Mike Irwin, who happens to be a buddy of mine, but essentially Mike studies leaders throughout history that have used solitude as an important tool for creative thought, using your moral compass, emotional balance, and confronting tough problems. And so he studies people like Eisenhower, Martin Luther King. So I love the historical aspect of it. But I also love the timeliness of it. You know, I think technology has a lot of unintended consequences. And in today's environment, if you don't purposely carve out an environment where you're going to not be disturbed and you can have good quality solitude, I think it's very hard to have any kind of deep creative thought these days. And so it's a book that”

   2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

3. “Yep, yep. I think it's right. And I think that's a real competitive advantage. It's a real competitive advantage as an investor if you're able to look past the noise of a year and think about 10-year time horizons. And it's a real competitive advantage as an entrepreneur, just a life choice as well.”

   2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

4. “Yeah, I honestly, it's a little bit of the same applied to your personal situation, not your investing situation, but it has to do with duration. And I think being able to think long term, being able to make choices that have long-term payouts is a real competitive advantage, strategic advantage. And I wish when I was 20 I had thought more about what these decisions, what the ramifications of these decisions would be when I was 50. And I think when we're 20, we think about what it's going to be like when we're 20 and a half. And so forcing people to think longer term.”

   2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

5. “Warren Buffett talks about all the time is patience and conviction. And so when you believe you've got you're well founded in your conclusions, you've got to have patience to let the market do its thing for a young person. That's often very difficult.”

   2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

6. “Okay, all right. So, you know, I think young investors make a couple common mistakes. The first is return over dollars. And that concept is everybody focuses on IRR. People want to talk about my return on an investment in a percentage terms. I think dollars gained is a much more relevant metric. And so I don't want a 20% return for six months. That's 10% big deal. I want to invest in businesses where I can compound for long periods of time, which result in multiples of capital returned. So, you know, 20% for five years returning multiples of capital, that's the name of the game. And I didn't, you know, early on, I think I thought about return and be damned what the duration was. And I think duration is another concept that is hard for young people to deal with. But the name of the game here.”

   2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

7. “A matter of mix. So an entrepreneur is kind of nine parts, human capital, one part capital, and a private equity investor is probably nine parts capital, one part human capital. But it's really, they're both very similar activities when you think about taking an idea, a strategy, and operationalizing it through labor and a combination of capital.”

   2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

8. “Yeah, I think they're very similar activities on different ends of the spectrum. But so first of all, I consider myself, and I'm a private equity investor, I consider myself a financial entrepreneur. And essentially what that means is my skill set is not technology or software. My skill set is capital. And I'm trying to apply that in an entrepreneurial environment. And so, you know, I would argue if you're an entrepreneur and you're trying to create a business, you still are taking your intellectual property and your human capital and you're combining it with financial capital to create a business. And in that case, your primary tool is your intellectual property, your human capital. I'm kind of coming at it from the other side of the equation saying, I'm trying to find businesses that have a capital need. My primary tool is the capital, but I'm also using my intellectual capital and human capital. And so I think it's almost.”

   2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

9. “So going back to the background, I'm very curious to hear how you would equate that to a buzzword like entrepreneurship, which is something that you always share these days. So if you have entrepreneurship on one hand, then private”

   2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

10. “Well, thanks, Preston, and for what it's worth. I agree with you, if I could encourage folks in school to take one course, I think it'd be an accounting course, and not because you want to be an accountant, but it is the communication of the language of business. And I think it just gives you so many such perspective as you apply it in other fields. And so I think forcing yourself to sit down and kind of think through what a person's balance sheet looks like and include non-traditional assets like lifetime value of labor, lifetime value of social security, and think through what the implications of those things are on your investment choices. I think that's a really valuable exercise. You know, I encourage people to do it periodically so you can see progress in the balance sheet or essentially accumulation of net worth. Having said that, just, you know, if that's not your thing, if you do it once and force yourself to kind of look at it, I think that's still very eye-opening.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

11. “That's absolutely correct. And a little bit of history on how some of the key concepts of the book evolve for me. My inspiration for the book as a product of my experiences as a young private equity investor. And so I'm working on a number of portfolio companies looking at making investments. And what I realized is many of the tools and analytics that we were using to assist the portfolio company could actually be applied to my personal finance situation. So essentially I argue We're all in the business of selling our labor into the market. So you're in the business of you. I'm in the business of me. You can make that leap, then the same kind of tools and logic apply that we teach folks in business school. We should be thinking about that in our own personal financial decisions. Now, I'm not saying that means you need to make every choice that is the financially optimal choice, but I think at least it forces you to understand the financial implications.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

12. “And listen, I did it because I'm passionate about the topic and I think there's a big opportunity to have an impact on people and really change the way people are thinking about financial literacy. I argue it's one of the biggest challenges that we face in America today. There are so many trends out there that are making it harder for people to navigate their life in a way that's financially secure. It's job mobility, it's wage stagnation, it's increasing cost of education. It's diminishing social safety nets and it's increased life expectancy. You throw all those things together and the skills required to create a life where you're financially secure are dramatically different than they were 20 years ago. The problem is we're teaching this topic the same way we did 20 years ago. And so my book is really an attempt to give people an actionable framework where they can make good decisions for themselves.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

13. “So, first of all, let me just reaffirm something. You said I'm pretty sure that I'm violating minimum wage laws if you look at how much I've made on the book versus ours invested. So I can promise you there's not a money-making adventure.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

14. “Yeah, essentially think about the stock market. You know, the stock market goes up, the stock market goes down, and I still have value. The good news is the concern has not been impaired. And over time, I can still kind of grow my money back, if you will. And impairment essentially means you've permanently diminished value in the asset. So a good example is a bankruptcy, right? At that point in the cycle, you were forced to turn over the keys to another owner, essentially. And so there's no way you can kind of overcome that impairment.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

15. “And then we talked about capital structure, and that drives a better return because I'm using leverage. The reverse of that is if you're too aggressive with capital structure and you hit a bump in the road, it's very difficult to kind of course correct. And so we think about leverage as a double-edged sword. We want to use it to leverage returns, but we try not to take the last dollar to give ourselves kind of a zone of error or a margin of error in a way that we can navigate Murphy's law, if you will. And listen, we talked about teams on the positive side, teams. Bad teams can be an opportunity or a liability. If you find a situation where you have a bad team, if you're willing to make changes, that actually can be an opportunity. But I think you've got to go into the deal knowing that you think you're going to change out the management team and be committed to doing that. But I find generally, you know, on the deals we've struggled with, we thought we had a management problem. We probably didn't actually.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

16. “Yeah, so first of all, I think, let me go back to one thing I said when we were talking about good deals, all these deals have challenges, so you got to expect them. We kind of joke. There's no such thing as a 20% T-bill. We're pricing these assets with an expected high return. And implicitly, that means I've got significant risk here. And so I think a lot of the game in my mind is setting yourself up to avoid long-term impairment. And what I mean by that is, you know, these things will go through cycles and there'll be tough times. But if you can avoid long-term impairment, you generally can find a way to work your way home to a decent outcome, or at least an outcome where you haven't lost significant capital. Where I find you run into real impairment risk that's hard to navigate through, I think businesses with real customer concentration can lead to real drivers of impairment.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

17. “Absolutely, yeah. No, for us, it's not so much in theoretical what is the cost of capital, it's what's the IRR to the investor.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

18. “What can we pay assuming a certain capital structure? We've been out in the market. We've talked to lenders. We know how much leverage they would provide at roughly what rates. And then we do a forecast over a five-year period. And we generally assume we're going to exit the same multiple that we bought in at. And the combination of those things drives a certain return profile. And we would expect on deals that are in our kind of wheelhouse that those pencil out somewhere in the 20 to 30 percent IRR over a five-year period kind of timeframe. So that is a planning process, not necessarily the gospel, but that's how we think about the process.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

19. “Let's talk about DCF and discount rates and cap income in general. So it's tremendously theoretical. And so it's interesting, but I think it's interesting not because of the answer it gives you, but because of the process that forces you to explicitly make assumptions, right? So when you're doing that analysis, you've got to make assumptions about growth rates. You've got to make assumptions around exit. And so those are all valuable processes to kind of work through. But I think the answer doesn't really drive how we think about what we're going to pay. So first of all, the great thing in the private equity market is you pay a combination of what you think it's worth, but also what you think you have to pay, right? Because again, it's a negotiated transaction. So we think about the analysis we do is what can we afford to pay? What's the top end? And then if we can, we obviously try to do better than that. But as we think about the actual modeling, we think about it in the context of a five-year hole period.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

20. “Absolutely. And it's kind of interesting, all the analytics are quantitative and they focus on the metrics, but it's easy to forget that those metrics are driven by people. And so it really is a combination of financial capital and human capital that create a successful situation.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

21. “I'm a work in process and my experiences cause me to think about things differently. But I have a lot more confidence in my ability to underwrite the Than my ability to underwrite growth in a market. So for example, you think about trying to project GDP growth or the growth of an end market like oil and gas or commercial aerospace. I think that's really challenging. And in many ways, it's a little bit like a coin toss. But if you ask me to underwrite what makes a good business model and you think about the attributes of that, once you've identified that, I think those attributes are likely to be persistent. So for example, we look at things that have very low customer concentration. We look at businesses that have barriers to entry. We look at businesses that have relatively high variable costs because that allows you to navigate changes in the marketplace. We talk about value in terms of multiples of cash flow, but we talk about quality of businesses as a product of return on tangible capital. How much cash flow do the tangible assets of this business generate?”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

22. “To me, but I take a lot of comfort in. There's numerous ways to kind of drive value in this business, and we'll figure out, you know, of the five we've identified, two, three, or four that can really help get us home. And then listen, I think in every good deal, there's some element of luck.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

23. “Deal that I've been involved with, even if they're good deals, there are always periods of struggle. And so you got to acknowledge that and put the team in place that can execute against those struggles. And I think competitive advantage is ephemeral. So, you know, if you're not continually moving, continually improving your competitive advantages often kind of quickly eroded. The other thing that I see is when we underwrite something, There are a number of unknowns, but I take a lot of comfort when I see situations where there are multiple levers for improvement. And I essentially look at that as if I'm buying a decent business with embedded options. And what I mean by that is there's options to grow through acquisition. There's options to grow geographically through opening new entities. There's options through pricing or through supply chain management. And so when I'm underwriting that, I don't know for sure which of those options will present themselves.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

24. “So, I guess the first thing I'd say is if anybody's been in the business a long time and they're not talking about both their good and bad deals, they're not being genuine with you because everybody sees kind of both sides of that equation. And I think the first thing is it starts with good underwriting. It's often in this business when you're a long-term investor. It's hard to win on the buy because you buy so well that you've immediately created value, but you sure can lose. Warren Buffett has a one of my favorite sayings which says when a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. So very simply put, you know, good managers, it's hard to overcome a bad industry even if you have a good management team. And that good industry, good business model starts with good underwriting. I will say the second thing, though, is because you're a long-term investor, you got to have a good team to go execute and take advantage of the opportunities in every”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

25. “Not through a private equity investment professional, but lots of angel investing networks out there. I think investing in real estate in some ways is a private equity play. And then many of us are involved in families that have family businesses. And to some degree, that family business is private equity interest.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

26. “Yeah, it's absolutely possible. And I think it's a mixed bag candidly, but there are a number of very large private equity firms that over the course of the last decade have gone public. So KKR, Carlisle, Blackstone, Apollo, I think all those four are public now. And so you can participate by buy-in and equity interest in a business that's investing in private equity. There are also ETFs out there that are investing in those kind of businesses. So that's an option. We started off the conversation by talking about what a great time we had at the Berkshire Hathway Annual Meeting. I would argue in many ways, you know, Berkshire is a private equity holding company. So you think about some of the big assets that they own and have bought, Burlington Northern, Heinz, Geico. I mean, those essentially are private equity plays. And so that's an interesting way to play private equity. And then, you know, I think there are some ways that individuals can play directly.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

27. “I think they get better deal flow, success perpetuates success. And I also think they continue to develop their skill sets and their capabilities. And this is an area where you're not just competing on capital. You're competing on human capital, right? So I think a lot of times, at least in the market that I'm in, which is the lower end of the middle market, entrepreneurs are not only picking capital solution, they're picking a partner. And as they evaluate a partnership, they want to work with people they like, people that they're aligned with, and also people that they believe can help them build a better business.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

28. “those kind of businesses and you're trying to evaluate consistency of strategy, quality of team, teamwork, team's ability to source deals and add value. And so that's a challenging process as well. The last thing I would tell you about the market is I think averages are deceiving. And what you see in the market, I think it's one of those markets where persistency of performance is very high. What I mean by that is if you look at the public markets and you look at top quartile performers in a period, let's say a year or five years, and you compare that to top quartile the next period, the pull through between high performers in both periods is often relatively low. But in the private equity space, you see persistence where if you were a top performer this period, you are likely a top performer in the next period. And I think that's indicative of an inefficient market. But what I also think that means is it's very hard to”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

29. “Lack of liquidity, right? So these are generally 10-year limited partnerships. And so the duration between the time you invest your capital and you get it back is going to be a very long period of time. So you kind of got to be comfortable with parking this money for a long time and not expecting to get at it. And if you do need to get at it, in many cases, you're taking a significant discount to avoid that illiquidity. The second thing is, we talked about this inefficiency in the market, lack of transparency. That also exists in terms of trying to find investments as a retail or an individual investor. And that's good news and bad news, but it's very hard to identify good deals. And candidly, it's very hard to identify good teams. So if you think it's challenging to underwrite a business where you can see the business, you can see the financial performance, and you can evaluate the business as it performs today. Imagine trying to underwrite a team that's going to invest.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

30. “Yeah, I think it's specializing in niches or specializing in business model. So you can define your core competency as we know everything about aerospace and defense. You could define your core competency as we know certain types of business models, distribution, transportation, let's say, or you could define your core competency as, you know, we have operational capabilities to drive enhancements in operations.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

31. “But common strategies are bringing operational expertise to the party or bringing unique industry expertise to the party so you can really help grow the business. And so I think to a certain extent, organizations are evolving to be strategic buyers. They come at it from a financial perspective, but they've got to bring more than capital to be successful.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

32. “You think about we just described how this market's experienced tremendous growth and as it's experienced tremendous growth it's matured a lot as well And so you know I generally break it down into three stages when people first started doing this in the 70s and the 80s the real value of driver was price price discrepancies real discounts to the public markets and then in the 80s and 90s a lot of the value was driven by leverage and you were able to get much higher leverage reads at that point and so you could finance a much greater percentage of the deal with cheap capital. And in today's market, I think both of those two previous sources of value have been kind of commoditized, if you will. And to be successful, you've got to be a really good underwriter, which means you need to specialize in certain industries where you have a competitive edge. And then you've got to figure out how to drive value or do something different with that asset over time. And so lots of firms have developed different strategies for that.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

33. “Terms of there's no information out there. And that makes it very challenging to get good deals done, but it also creates real opportunity where we think you can find real value because of just the inefficient nature of information. Another aspect of why this is such an interesting asset class is it actually solves a real problems. And what I mean by that is when you're trading stock in the market, it's buyer and seller directly as a secondary share. And the company is really not a participant in that transaction. When you think about private equity, you are solving a corporate finance need, a capital or a company needs capital to grow and they're raising capital from you or a founder or an owner needs capital to execute a succession plan or a consolidation strategy. And in all cases, I think those are win-win scenarios, not just buyer and seller where one wins and one loses. And so I think that's a big contributor.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

34. “So, I think that's the number one reason things have grown. And as you kind of think about why private equity is interesting or why it's performed well, a couple comments. First of all, it should, right? This is a very illiquid asset class. There are risks associated with being in the asset class. So if it's not returning better than the public equity markets where you can turn around and sell tomorrow if you don't like the way things are going, then it's not going to be a smart investment. But I think at a very high level, there are some things that make this asset class sustainably attractive. One is the overall supply and demand equation. There's a lot of capital out there and there's certainly a lot of capital that's come into this market, but it's also a very big fragmented market in terms of where this money can go reside in terms of the deals. And so I think the supply demand equation has been favorable to private equity. I talked about the inefficiency of this market.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

35. “No doubt about it, this asset class has experienced tremendous growth. So if you define the asset class by assets under management, AUM, in the 2000 timeframe, the entire market was about $600 billion of assets under management. And today that's approaching $2.5 trillion. So, you know, kind of a 4x growth here. And as I mentioned, there are now 4,000 firms approximately in this market space. Very simplistically, I think the number one reason the asset class has grown is it's been an attractive returner. You know, there's lots of firms out there that estimate what the kind of market return looks like for the asset class. And most reports would say that the private equity asset class has returned three to four hundred basis points in excess of a broad equity indices. So if the Russells doing 10% on a long-term basis, private equity is kind of done 13 or 14 percent.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

36. “Yeah, well, I think as we talk about the big landscape of private equity and we talked about leverage buyout as one of those. And so those are more. One of the ways that that part of the asset class drives returns is they finance the transaction with a significant amount of debt. And I would argue it's often appropriate because those businesses are slower growth businesses, but more mature, less earnings volatility. And the analogy I would make is it's the same analogy as buying a house. If you bought a house with no financing and the house appreciates 10%, your equity went up by 10%. If you bought a house with 90% purchase price finance with debt, the house goes up by 10%, you've doubled your equity money. Same concept in financing leverage buyouts. And there are numerous benefits to that. The first we talked about is you leverage your equity investment. The second is you're providing a cheaper, lower source cost of capital. And then the third is there are tax deductibility issues with interest. And so when you add all the”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

37. “Absolutely. We look at enterprise value relative to metrics of cash flow and depending on the business, there may be slightly different metrics to look at. But to your point, enterprise value to EBIT, I think is probably one of the most important. And essentially enterprise value allows you to think about the value of the concern absent capital structure.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

38. “That's really interesting. So, first of all, it's a classic conversation around means and medians, right? So if you think about means, the averages are skewed to the very big and there's some very big private equity firms out there, KKR, Carlisle, Blackstone, for example, and they would be dealing with very, very large companies, billions of dollars in enterprise value. Having said that, there's probably about 4,000 private equity firms out there. And if you look at medians, most of those private equity firms are focused on much smaller businesses. Like good American businesses that are not in urban areas but are a critical part of today's economy. And those have kind of enterprise values well under $100 million.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

39. “Yeah, so I actually think the way I would describe it is I think venture capital is a subset of private equity. So private equity are all things not listed on exchanges like we just talked about. And then within private equity, you have growth equity, which is a business model that's been established, but looking to really scale. You've got venture capital, which is a lot of the early stage stuff that we think about in Silicon Valley. And then you've got things like leverage buyout, which are big mature businesses. And often because they're mature, they can afford to be financed with debt. And then you've got a bunch of other smaller kind of niches like turnarounds, like mezzanine financing, which is private debt capital. But all of those strategies kind of play in the overall private equity asset class.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

40. “with that significant portion comes some level of governance or control or influence. The fourth would be duration. On average, I think private equity investors expect to be in their investment for five or six years. Compare that to average hold period on the New York Stock Exchange is well under a year. So I think those are the four biggies.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

41. “statements you're really making decisions only on the diligence that you've done as buyer and the information that's been shared to you by the seller. And so that makes underwriting much more difficult, but it also makes for a much less efficient market. So that's kind of one key difference. The second is everything's negotiated. So when you think about a public market, all the terms of an equity offering or a debt offering are set and the investor determines the price. In a private equity situation, you're negotiating not only the price, but you're negotiating terms and conditions, things like governance, things like interest rates, if it's a contractual return, et cetera. The third would be governance. These type of securities are often take a while to get into. They take a lot of work. And so private equity investors generally buy a meaningful portion of the company. So a minority or a majority stake.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

42. “Sure, sometimes describing it's almost easier to talk about what it isn't. So very simply put, private equity refers to making investments in equity securities in companies that are not listed on exchange, like the Nasdaq or the New York Stock Exchange. If you want to list on an exchange like one of those, there are a number of criteria you've got to meet regarding financial performance, liquidity, governance. And essentially these requirements ensure that there's enough interest and information in the marketplace to have a liquid market. So private equity investors are essentially pursuing opportunities that don't meet these size, liquidity, or information or governance requirements. And as a result, you see some very different attributes in these kind of investments. So I think there are five worth noting. The first is lack of information. So there's no equity reports, no published financial.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

43. “Yeah, well, first of all, I would say it's a very big, very well attended event. And I think having a chance to go with you guys, because you guys know the whole circuit, you know where to go, where to stand in line, how to get good seats. So first of all, if you're going to go, you got to go with you because you guys got it wired. So that would be the first thing. The second thing I'd say is, listen, I think it's a chance to see history. No other investor has been as successful as Warren Buffett, and he's not going to be around forever. And just to be able to watch he and Charlie think and respond to questions was absolutely amazing. And then the social stuff is equally good. So it was a thumbs up event all around.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT

44. “Glad to be back and had a lot of fun last time as well. Not as much fun as the Warren Buffett annual meeting, but still a lot of fun.”

    2018-02-25 · We Study Billionaires · TIP179: Private Equity Investing w/ Doug McCormick (Business Podcast) · IDENTIFIED FROM THE TRANSCRIPT