How Can Investors Implement A Successful Private Equity Strategy Into The Public Markets

In his recent interview with Tobias, Dan Rasmussen, who is the Founder and Portfolio Manager of Verdad Advisors provides some great insights into how investors can implement a successful private equity strategy in the public markets. Here’s an excerpt from the interview:

Q1 hedge fund letters, conference, scoops etc


mohamed_hassan / Pixabay

Tobias Carlisle: So, just so we can understand the strategy that you’re approaching right now, can you give a little background to how you came up with the strategy and how you’re implementing it now?

Dan Rasmussen: Yeah, absolutely. The strategy really borrows from private equities. So, if you look at the broad history of private equity, from 1980 to 2006, private equity was the best performing asset class by a wide margin. And I think 80% of private equity funds that were raised during that period, outperformed the public market equivalent. So a tremendous track record of success. According to Cambridge Associates from late 1980’s until 2006, it was 6% net of fee outperformance the public market for the private equity index. So what were the private equity firms doing during that period?

Dan Rasmussen: I had a really unique chance to figure this out when I was at Bain Capital, because we were trying to answer this exact question. What had driven our historical success? What do we need to do to continue it? And when we started to look into it. We found that there were some fascinating elements of what had made private equity work, and it’s gonna resonate very closely with your Acquirers Multiple as you indicated in the opening. But, what we found is there are really three characteristics that predicted success in private equity. Well, there were two that defined it and one that predicted it.

Dan Rasmussen: So, private equity relative to public markets; private equity firms are buying companies that are small, generally 200 million of market cap versus 30 billion for the S&P 500, that are levered, typically about 65% net debt to enterprise value verse 10% for the Russell 2000. And 3rd, if you divide private equity by purchase multiple; the cheapest 25% of deals turns in at less than seven times EBITDA, accounted for 60% of the industry’s profits. And the most expensive 50% of deals done over 10 times of EBITDA, accounted for only about 10% of the industry’s profits. So, in aggregate the story of private equity was buying small, cheap stocks with debt.

Dan Rasmussen: And, if you think about why that worked; it’s small value on steroids. It’s small value times leverage and, gee if you buy something cheap and it’s small, so you’ve got a lot of upside, and you lever it right, no surprise it works. And, it looks like private equity was earning about 6% outperformance of the broader market and they were taking about 6% a year out in fees, so the true outperformance of the growth strategy was about 12% per year. And, so, what I set out to do was say, “Gee, I wonder if we could replicate what private equity had done in the 80’s and 90’s by buying these companies that had the same quantitative characteristics in public markets.” They were small, they were cheap, and they were levered. And probably the leverage is the biggest departure point between me and most other value investors, but I’m sure we’ll talk more about that.

The Acquirers Podcast

You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:

For more articles like this, check out our recent articles here.

Article by The Acquirer’s Multiple

Saved Articles

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Congrats! Are you a smart person?

We have an exclusive targeted for being a sophisticated and loyal reader.

Sign up for ValueWalkPremium today and get our exclusive content for 35% off.

Use coupon code vip19 or click on the button below

Limited time offer only ENDS 12/31/2019 or after next 25 subscribers take advantage whichever comes first – please do not share this discount with others