Trends Watch: Private Equity Perspective

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with M. Damian Billy, Founder & CEO, The Econophy™ Group.

What is your outlook for private equity?

The industry traces its origin back to 1946. Outside the initial private equity model transitioning into two distinct sub-industries, leveraged buyout and venture capital, the 73-year-old standard fee structure of 2/20 has not changed. What has occurred in their operational sphere is the implementation and integration of layered fees and other costs that are more opaque than transparent to limited partners. As cited by Preqin, an estimated $2 trillion in dry power exists today. That is a lot of incentive to keep the status quo.

Questioned by LPs for costs vs. return on investment (ROI), a new forward-looking perspective on private equity has emerged, i.e., the independent sponsor (IS). The model is based on a deal-by-deal basis, not a collective capital pool. The proficiency gained is (i) a lower transaction cost vs. a higher performance outcome; (ii) a more effective acquisition timeline; (iii) the capability to create a dual asset class opportunity, consisting of a direct equity stakeholder status and a higher yield, fixed-income offering from within the same transaction; (iv) the means to create multiple liquidity options; and (v), setting a performance enhancement target at 300+ bps above industry metrics vs. fee income accumulation.

Our outlook is that the Fintech era is a game changer for the private equity industry. Fundamental and critical changes to occur will address a host of issues, such as adaptability, accountability and delivering greater transparency to the investor. The result is an inherent mindset to discover a “hidden champions” deal that is a fair and balanced allocation outcome, for all concerned. Consequently, the relationship prioritizes a “partner-like” working agenda to create a joint venture mindset that builds upon and sustains a growth equity strategy. As the private equity industry evolves, David will battle Goliath.

From the continuous manipulation of the interest rate environment controlled by central bankers and at-risk equities being subjected to predatory high-frequency trading execution mechanisms, the transitioning private equity industry’s realignment of investor interests will become more so a “go-to” portfolio consideration.   

What is your outlook for the economy?

It depends on whom you talk to today. I seem to come across three types; (1) the “Happy Days are Here Again” crowd, (2) the individual that whistles while walking past the graveyard, and (3), those that live in “Realville,” home of the informed skeptic. I am of the latter type.

The “Happy Days are Here Again” revelers seem to think things could not possibly get any better. After all, the government reports that 1Q 2019 GDP was 3.2%. Grand, except for the fact the auto industry was channel stuffing their cars to make it look like sales were robust. The agriculture sector is on its heels due to new tariffs. Once outlawed, corporate stock buybacks replaced CAPEX investments. Inflation is ever-present, whether shopping at the grocery store, filling your car with gas, seeing  a movie or going out to dinner. The reality is 1Q GDP measured 1.4%. If things are so delightful, why has J.P. Morgan just lowered their 2Q estimate to 1.0%?   Do you think their economists might have ample resources to know a tad more than Joe Six-Pack? (Not a character swipe, just an acknowledgement between continual analysis vs. uninformed perception.)

For those not familiar with the graveyard U.S. idiomatic phrase, it means an attempt to stay cheerful in a dire situation; to proceed with a task, ignoring an upcoming hazard, hoping for a good outcome. Inclusively, to enter a situation with little or no understanding of the possible consequences. On March 18, 2019, our country’s debt exceeded $22 trillion. The “why, I am not worried” individual may want to reconsider the consequences, especially when the economy falls into a recession, the market crashes, or social strife dominates our daily lives. 

In Realville, I do not see people dancing in the street. Nor are they spending freely, needlessly, or selfishly. Their efforts are directed toward productivity and accomplishment, not being the beneficiary of a government bailout or an entitlement program. A stable and fostering economy, for any country, that is administered for the purpose of self-indulgent, political gain, is not sustainable. Hopium should not be the preferred inhalant of the future. In my small but growing town, I remain a skeptic until a true free market system is restored and the economy is not controlled for the benefit of only a select few. If it is going to work for all, it must start in Middle America.   

What keeps you up at night?

The experience that I carry as a former U.S. Marine Staff Non-Commissioned Officer stays with me every step of my life. From the outset, the words - "Duty, Honor, Country" - are precisely hallowed and reverently dictate what you ought to be, what you can be, what you will be. They are an implicit rallying point to build courage when courage seems to fail; and to regain faith when there seems to be little cause for faith.

A myriad of societal issues is needlessly influencing our country. Again, I am shaped by my experiences, and I believe, to save our culture and society, we must meet them by addressing the most troubling thought first: that, socialism is the cure for all that ails us. It is the demise, not the aid. As a nation, we must begin to recognize what is at stake. Too many men and women have died defending our nation’s historical ethical and related moral values. Under no circumstances should their sacrifices have been in vain.