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Greg Lemkau of MSD Partners walks through the basics of Private Equity investments
Key Takeaways
- Private equity is at its core making equity investments into private companies.
- Managers add value via operational turnarounds (like cost cutting), growth financing (like acquisitions), and redoing the capital structure to make it more efficient by adding leverage.
- In some deals, public market investors will get the ability to participate, but it's often after the fact and potentially on less favorable terms because the risk has been taken by a private investor.
Transcript
My name is Greg Lemkau; I'm CEO of MSD Partners. I joined the firm about a year ago after spending 28 years at Goldman Sachs, where my last job was the head of global investment banking. MSD partners is really two things there's MSD Capital and MSD Partners. MSD Capital was started in 1998 really as the family office of the Dell Family. In 2009 we started MSD Partners, which is a registered investment advisor that allows us to take third-party capital. So today, we've actually got MSD Capital, MSD Partners.
Really what private equity is, is investing capital, in this case, equity into a company that is not publicly traded. So it's owning it privately, oftentimes alongside the management team or alongside a family that may on the business and helping to invest money to help them grow the firm, to help them diversify the ownership of the business, and ideally to help grow value over time.
In private capital, the main strategies people look at will either be operational turnarounds. So, trying to find ways that they can go in and improve the business they're buying, and that may be investing more to drive top-line growth, that may be looking at the cost structure to drive bottom-line growth. And so there's a lot of operationally-focused private equity firms that really get their hands dirty and work with managed teams to evolve a business model. Oftentimes that can be capital that goes in alongside the company to help them grow via acquisition. And then there's the other element of private equity that tends to help drive returns and has driven returns over the past ten or 20 years across the asset classes has been the use of leverage. I think a lot of these companies don't really use debt on their balance sheet to drive returns, and often private equity will come in, will buy the equity with cash, and we'll put some more debt on the business that allow them to drive greater returns and drive greater bottom line. I'd say that the opportunity for kind of uniquely structured things is probably more open for private equity and private credit. I'd say oftentimes, the public market investors get the ability to participate, but it's often after the fact. You know, the deal will get structured, and then the take-out financing will happen in the public markets potentially on less favorable terms because the risk has been taken by the private provider.
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