A thoughtful weekend read and a timely reminder for reflecting on all bad decisions made this year and in the last four years...
"Life is tricky. It is never clear when you are at your peak (and about to head downwards into a death spiral) or at your bottom (and about to skyrocket upwards to your greatest heights). Right now, you could be sitting at the very peak of your life (or you could be sitting at the very bottom of your life), and there is no way to tell which is which. It is the scary truth for all of us. This truth applies to people, companies, and countries. Change can happen gradually over time or it can happen instantly. For me, success is the greatest imposter. In life, business, or martial arts, winning is a falsehood. It seduces smart people into thinking that they are invincible. It tricks good people into believing that they are infallible. And it robs all people of reality and truth. Don’t believe the hype. And don’t eat your own bullshit. Or you will lose everything. The only antidote to the poison of success is humility, hunger, and gratitude. Stay humble. Stay hungry. Stay grateful. And outwork everyone. Always." - Chatri Sityodtong
Despite being familiar with the names of the titans in private equity, I consistently revisit the stories that chronicle their professional lives:
"Henry R. Kravis...is an American businessman, investor, and philanthropist."
"Stephen Allen Schwarzman...is an American businessman, investor, and philanthropist."
"Weijian Shan...is a Chinese economist, businessman, and author based in Hong Kong."
One thing that is common in all the opening lines of their wiki pages is the word businessman.
Good investors are businessmen.
Good investors are inherently entrepreneurs. They either have owned businesses before, or have been placed in a position of making decisions, such as opening markets, launching new products, retrenching staff, etc,
These decisions also have a direct and consequential impact on them.
If the business does well, managers reap the profits and bonuses. If not, they get axed from their roles. How people deal with their successes and failures are often reveal more important attributes about their attitudes as investors rather than their curated abilities.
Do they let success get to their heads? Do they become arrogant and conceited? When defeated, do they remain beaten? How do they pick themselves up?
Without going through first-hand, the experience of a founder, it is nearly impossible for any good investor to genuinely feel what it is like to be on the other side of the table...
This also includes fundraising, pitching and sourcing for customers, managing employees and payroll, engaging with competitors and other business people, and worrying about the day to day cash flows.
Execution is everything.
Private equity firm, TPG in its early days was founded through the turnaround of Continental Airlines. The deal embodied more than just investing capital but also the hard work of returning the airline to profitability. In successfully doing so shot TPG to stardom.
Had the transaction gone sideways, history would have been written very differently. I believed that Continental Airlines came back to life because of the folks driving the day-to-day leadership, management and execution, and not by simply throwing money at the company.
That said, anyone who has founded and built a business appreciate what it means to be putting your money on the line. The notion of “every dollar of revenue counts” takes on a very different perspective for a business owner as compared to a passive investor in the side-seat, running a company using someone else's money.
But the majority of people take this for granted.
Prudence is a virtue.
I used to know of junior investment bankers deliberately staying late in the office to claim dinner and transport allowances, even though they could have gone home earlier.
While this amount wasn’t significant, it was the attitude that revealed (i) the ‘employee’ mindset and (ii) how one treats money.
Any fund manager who doesn’t appreciate the value of thrift and prudence should not be managing capital - especially third party capital.
So what if you have money?
Some years back, I met a family-run manufacturing firm based in Southeast Asia on a potential deal. They brought in their freshly graduated kid into the meeting. He had basically near zero professional experience and showed little interest in furthering the ambitions of the company. The owners were also incredibly averse to the idea of bringing an external investor to the table because of many horror stories involving strict quarterly reporting requirements and the need to achieve ambitious sales and profit targets.
I can totally feel for them.
At the end of the day, if my business is raking 10 million in operating cash every year, why would I want to give it all up for 80 million and live with the pain of an external party harassing me over the next 5 years? I’d be much wiser and better off keeping the status quo for 8 years and achieving the same financial result (disregarding time value and opportunity costs).
Although we eventually did not invest in them, I spent the rest of the meeting getting them acquainted with the workings and dynamics of the private equity and venture capital world.
Raising a fund isn't everything...
"Let's raise a fund leh...". Too many people today want to start a fund because it sounds glamorous to manage money. It’s just the wrong way to go.
Some of the same folks I know see the buy-side as an omnipotent force in the investment world, top of the food chain. They crave for delusional respect and worship from the target companies they meet. But in reality, most of them are just employees at a very large firm.
Henry Kravis from KKR says, "Don’t congratulate us when we buy a company. Any fool can buy a company.” I'd like to rephrase that to:
"Don't congratulate us when we start a company. Any fool can start a company..."
Much like the congratulatory notes by friends and colleagues when starting a new business, many people continue to give the thumbs up to those who announced that they have started their own fund (in good faith nevertheless). It offers a glimpse of hope and inspiration for those wanting to pursue the same track. But too few understand what they are really getting themselves into. Setting up and running a fund certainly does not represent the pinnacle of success in the business world.
Having the right credentials and experience, an impressive business network, formulating a strategy of simply buying undervalued companies and saying that you'll sell them for a profit after 5 years - is too trivial and over-simplified.
Aside from the corporate finance and investment banking skillsets of business valuation & deal structuring, you missed out on the complexity of human-to-human relationships and negotiations, effective (and efficient) deal sourcing and the many intricacies of fundraising that goes beyond just lining up an LP roadshow. And, did you think post-investment value creation is that easy? It's more operations and roll-up-the-sleeves kinda work, instead of the heroic corporate dramas that you read in your MBA and Harvard Business Review case studies.
Pure ambition and skill sets are not good enough for getting into the fund management business without a well grounded mindset and right perspective.
There is less “skin in the game” today than there was fifty years ago, or even twenty years ago. More people determine the fates of others without having to pay the consequences. Skin in the game means you own your own risk. It means people who make decisions in any walk of life should never be insulated from the consequences of those decisions, period...if you’re making economic decisions, you should bear the cost if you’re wrong. - Nassim Taleb
I came across this dated article on Esquire some days back. Fully resonate with it. Too many people try to their give point of views, put on the virtual decision maker's cap and try to play the role of the senior authoritative figure. Unfortunately, too many of these people also do not have the appropriate execution capabilities and sufficient skin in the game.
I have got nothing against them. I appreciate the offer of goodwill and the sharing of perspectives. Maybe I am a cynic and could come across as being arrogant or aloof. But maybe after 4 years, I've just lost my patience for "testosterone talk".
At the end of the day, there is always a fine line between being heard / appreciated and making decisions. As Ray Dalio puts it: "Make sure people don’t confuse the right to complain, give advice, and openly debate with the right to make decisions"