PureVC

The Most Important Thing About Running Money

I continue to receive a lot of inquiries from people who want to run money or put together deals. Typically what I see comes in three flavors:

1) an entrepreneur looking for capital
2) a fund looking for LPs
3) a developer looking for equity or debt for a real estate development

I welcome these inquiries, but for those who are sending information here are some thoughts that might help you understand our process. All of our deals go through an investment committee. Occasionally I will invest personal funds into deals that the committee rejects. However, typically, we either file the PPM or decide that it is a promising manager but that either we do not know them well enough or it does not fit any of our stage, geographic, or stylistic allocations. For those managers that we like and we do not commit to, we encourage them to keep us in the loop and begin a discovery type of relationship. We encourage them to send us correspondence regularly and treat us as if we were an LP in their fund. I can say that 99% of the time this does not happen. However, the 1% of the time it does happen, it allows us to really understand the ethos and style of a firm. We have found that firms that are willing to take this effort and have this type of "open door" policy are the types of managers we want to partner with. We will wait in line to invest and partner with these types of firms, assuming that their performance is good.

For entrepreneurs or developers looking for capital, we are happy to give you feedback and/or direct you to partners or colleagues within our network who may have an interest.

Now that I've cleared that up, here is the main point of this post:

Whether you are looking for capital for your startup, for your fund, or for your RE deal, the bottom line is that you are "Running Money". I use this term loosely because "Running Money" typically refers to the money management business. I happen to believe that when you take someone's funds with the promise of some sort of return, you are Running Money.

The most important thing about Running Money is to understand that Running Money is really about building relationships. I know that sounds pretty cliche, but the best managers or entrepreneurs are those who understand this concept. They are not so focused on bagging the big fish one time. They understand that in finance, your last fund or deal or company is not all that matters. It really is about your track record of performance and your track record of how you treat people. If you treat each investor or partner as a lifelong business partner, you'll soon realize that people on the other end are not necessarily just about returns. They do have an interest in being a part of something successful and larger. They do have an interest in building something rather than just riding coattails. But you have to consciously make efforts to do this through your words and actions. We continue to back managers and entrepreneurs who have had an unsuccessful fund, company, or deal if they have acted responsibly and continue to have promise. Similarly, we expect our partners to continue to back us if we have an average fund.

It's quite easy for me to distinguish when someone just wants money versus someone who wants money, advice, or a partner for their business journey. I continue to enjoy working with and investing with younger managers or entrepreneurs or established managers who are lifting out on their own for this precise reason. If you take the long view you will not just focus on this one fund, or one RE deal, or one company but rather perhaps on your firm, your career, and your network of relationships.

Blackstone vs KKR - a tale of two firms

In the past several months, we've seen Fortress go public. We've seen Blackstone go public. We've now seen the KKR filing and recently Och-Ziff, a hedge fund manager has filed for its own IPO. Amidst all the ruckus about taxes on private equity for carried interest as well as management fees, I've finally had a chance to do some thinking about what it all means.

I'm really not as concerned with the tax issue as my feelings on the matter are pretty clear. Management fees should be considered as ordinary income, carried interest should not. Fund managers take a risk of managing other people's money, they put their time, energy, and reputation on the line, much like the founders of any startup - their carry should be a capital gain. Since the cat is out of the bag and we are the type of country that allows elected officials with no specific domain expertise to make decisions about those specific domains, there is really nothing that can be done about it. Decisions are going to be made about the industry by people who really do not know anything about private equity and who have only read about the industry for a few months. I am confident that increasing taxes on private equity will stifle innovation and the entrepreneurial spirit of our country. But I am also confident that the brain trust of private equity will simply find alternate means to avoid taxation.

At any rate, I've finally had a chance to do some dissecting of the KKR IPO filing and go back and take another read of the Blackstone prospectus. What it reveals is something that is only now coming to surface - two drastically different ideologies about capitalism and both the private and public marketplace. In Blackstone, you have the fighting personality of Schwarzman, who by all accounts, is the type of guy who wants to win. The type of money he has reaped from the IPO is the stuff of financial legends. While many in the industry are badmouthing him a bit because his extravagance may have attracted interest from revenue hungry Congressmen, his firm clearly has set out to dominate and be the number one player.

In KKR and Henry Kravis, you really have one of the founding fathers of the LBO. This guy has seen the gyrations and cyclical behavior of three decades of private equity and has been on top of the LBO kingdom for 30 years. You could easily call many in the industry mere imitators of this craftsman. In the KKR filing you see a radically different outline of strategy. You clearly see that KKR, cloaked as a LBO shop, is making the move toward an investment bank - it has applied for a broker-dealer license and has plans to syndicate financing and rely less on third party capital. In addition to saving on all of those debt placement fees, it is going to have the power to syndicate and earn fees. Additionally, some proceeds will be used to launch a proprietary trading arm to take advantage of synergies and insight from all of the firms various activities. Clearly, this will put KKR on a collision course with the likes of Goldman Sachs. It will also definitely bring about some conflicts of interest between itself and its clients.

What I like about KKR's filing is that management is not cashing out or taking proceeds from the IPO. Many of you know that this isn't KKR's first IPO. They launched a fund last year on the Amsterdam exchange giving them $5 billion of permanent capital. Kravis has done the IPO thing before and the filing shows that he truly understands the capital market system well - his firm is setting out course to be a major structural player in the capital market, not just an LBO player and dealmaker, but an underwriter and liquidity maker.

Blackstone could just as easily go in this direction, and perhaps they will once they read KKR's prospectus. However, their IPO more clearly states that Blackstone wants to be the top private equity firm in the world.

There are advantages and disadvantages to both strategies. As an investor, you can be nimble and opportunistic when the market is hot and cold. However, you can't get that extra juice as you need to pay your syndication team and market makers. As a market maker and underwriter, you are entrenched in the system and can make good money as market players will rely on your services to make the market work. However, as things cool, risk can only be hedged to a certain extent - if there is no demand or traffic coming through the gates, you have to absorb losses until the market comes back.

It's an exciting time to be involved in private equity, particularly as the deep secrets of many storied firms are finally coming to public light. As this cycle continues to heat up and eventually wind down, it will be interesting to see who is still standing at the top of the heap.

KKR Files S-1 for IPO

I know its the 4th of July holiday tomorrow, but KKR has filed for its IPO today. Here is the link to the S-1 Filing. I haven't had time to sort through it much, but Henry Kravis and Company are the pioneers of the industry so it will be awesome to read the details and hear the story in the filing and all the inevitable press that will come out. I'm sure there will be lots of interesting comparisons between Blackstone and KKR. At a glance, it looks like KKR has about $60 billion under management, whereas Blackstone has almost $80 billion. So clearly Blackstone has the edge. If you find anything interesting in the filing before I do, please let me know. Happy 4th!