Christopher Langford, Assistant Fund Manager
DCG Real Assets
For many ancillary service providers to the world of M&A, the allure of private equity seems to evoke images of 1980’s corporate raidership and enormous windfalls of money. Business valuation professionals are no different and many ponder the jump from purchase price allocations to purchaser. However, the realities of the world of private equity often can be a poor fit for those who excel at the practice of valuation. Certainly, there are many BV executives who possess the applicable skill sets to transition into the world of PE. That said, it is important to recognize the potential pitfalls of making that jump to properly analyze one’s chance of long-term success.
The Difference in Understanding and Execution
It is often said that the CEO of a company must be a visionary, not to be constrained by the details of validation. When others say why, he says why not. The CFO, on the other hand, tends to be inextricably mired in the details for it is his job to figure out how to make the vision of the CEO feasible and financeable. The best private equity investors are CEOs; they see value where others may not and they inspire others to come along for the ride. Most of the best BV executives are CFOs; incredible analytical machines able to recite the most intricate details of a recent FASB pronouncement and immediately determine the most appropriate methodology for application. It is this dedication to precision that can paralyze (and often blind) an executive from seeing the ultimate value of a deal.
Set the Market, Don’t Follow It
If I stood in a room full of great BV professionals and asked them to price a middle-market transaction, chances are the consensus would fall somewhere between 4x and 6x EBITDA. They would spout off a hundred transactions as backup. And in a court of law, they would probably be right. If I asked a room full of successful PE professionals, the answers would probably range from 3x to 12x. And to their investors, they would probably be right. The realities of the private equity world are that Capital IQ and Pratt’s Stats multiples help justify to a tax court why a deal should be priced as it is. But when executing a deal, the value is about what kind of IRR can I generate and how can I maximize my carried interest. Making the market and analyzing the market are very different skill sets and the BV professional will have to step outside of his or her comfort zone to properly execute.
Private Jets and Houses in the Hamptons? Not Always
The final, and perhaps most important, misconception about PE to those on the outside looking in is that it is glamorous, sexy, and full of decadent, opulent lifestyle. That may be true if you are a partner at a megafund. However, like every other industry, the majority of PE firms are middle-market focused and running on a tighter budget than that. Taking the Gulfstream to due diligence meetings? Doubtful. Most junior executives at PE firms are making upper middle class kind of paychecks and living a lifestyle that is probably not far exceeding a Senior Manager at a Big 4 firm. There is big money in PE for sure, but most of that money is made from a history of big successes. Don’t expect to walk in day one and get handed the keys to a Bentley.
The goal of this article is not to steer anyone from exploring a career in PE or to say that the two skill sets are completely incompatible. I have known many BV professionals who would excel at deal making. I have also know a great deal who would not. Understanding the realities of what PE is, how it works, and what it takes to succeed will go a long way in your ultimate success or failure.
Christopher Langford is the Assistant Fund Manager of DCG Real Assets Fund. DCG Real Assets Fund is focused on generating exceptional returns to its investors through forward-thinking investment policy in real assets. The Funds real asset strategy includes investments in mining properties, natural resource properties, and select real estate projects. The fund is in the midst of a capital raise, with targeted capital under management of $50 million.