✶Explainer06:43
How Private Equity Grew From a Sub-$1 Billion Niche
Fisch recalls an institutional private equity market that was extraordinarily small in 1983, with KKR's $175 million fund then the world's largest. He explains how bootstrap buyers and wealthy families helped turn a nascent LBO practice into today's private equity industry.
- Global institutional private equity had less than $1 billion of committed capital in 1983
- KKR's $175 million fund was then the largest
- Bootstrap buyers evaluated cash flow differently from public companies
- The once-small niche became a massive industry
“the entire global institutional private equity business was less than a billion dollars of committed capital.”
“this, you know, little side niche has become so huge is really shocking to me.”
#private equity#lbo#industry history#wall street
✶Explainer24:20
Platform Investments Versus Add-On Acquisitions
Fisch defines a platform as the first major investment in a company, usually with the private equity firm taking control while management also invests. Add-ons are later acquisitions folded into that platform to expand scale, enter adjacent markets, or create operating synergies.
- A platform is the initial major investment in a company
- The private equity firm usually owns a controlling stake
- Management remains an investor
- Add-ons can acquire competitors or adjacent businesses
- Some platforms grow organically without acquisitions
“a platform investment for us is really the first big investment.”
“the add ons are all about building the existing business”
#platform investment#add-on acquisitions#buyouts#m&a
✶Explainer32:04
How Five Percentage Points of Rates Reshape Company Cash Flow
Fisch illustrates the move from roughly 6.25% to 10.25% borrowing costs and combines it with inflation-driven inventory needs and supply-chain delays. Even a stable or growing business can face a cash squeeze when debt service and working capital rise together.
- Senior borrowing costs rose by roughly four percentage points in the example
- Floating-rate debt transmits rate increases directly to borrowers
- Inflation requires more cash to finance the same inventory volume
- Supply delays can force companies to hold more units
- Liquidity planning matters even when revenue is stable or growing
“instead of paying six dollars and twenty five cents, you're now paying ten dollars and twenty five cents in interest.”
“even companies that are flat or growing can have cash flow problems if they didn't plan to have enough liquidity.”
#interest rates#cash flow#working capital#liquidity
✶Explainer35:18
Fixed Debt, Floating Debt, and the Expiring-Hedge Problem
Refinancing during a low-rate period did not necessarily lock in cheap funding because much private-company debt remained floating rate. Fixed-rate bonds provided insulation, while temporary hedges only delayed the impact until they expired.
- Refinancing does not eliminate rate risk when the new debt floats
- Fixed-rate debt insulates borrowers through its term
- Hedges are commonly practical for only two or three years
- Companies face a payment jump when floating-rate hedges expire
“did you issue fixed rate debt or floating”
“When your hedge runs out, it's gonna be ten and a quarter if rates stay the same as they are today.”
#debt#fixed rates#floating rates#hedging
✶Explainer37:45
The Two Ways Higher Rates Constrain Buyout Valuations
Private-company values face pressure from both reduced debt capacity and increased interest expense. A buyer that can borrow only five times EBITDA instead of six or more must contribute additional equity while also accepting lower post-interest cash flow.
- Debt capacity fell from roughly six to 6.5 times EBITDA toward five times for strong companies
- More equity is required when lenders provide less debt
- Higher interest expense reduces available cash flow
- Flat or modest earnings growth may not offset both pressures
“Now that six and a half is more like five for a good company”
“those two things constrain value”
#valuation#leverage#ebitda#interest rates
✶Explainer44:22
Why Successful Private Equity Portfolios Become Overallocated
Institutional investors target a percentage allocation to private equity, but that percentage rises when private holdings appreciate or public assets decline. Fisch calls these the numerator and denominator effects, which can force institutions to slow new commitments despite strong performance.
- Private-asset appreciation increases the numerator of the allocation ratio
- Public-market declines shrink the denominator
- Either force can push an institution above its target allocation
- Overallocated investors may pause new private equity commitments
“They're called the numerator and the denominator effect.”
“That has caused some institutions to slow down their commitments to private equity to get those back in balance”
#asset allocation#private equity#institutional investors#portfolio management
✶Explainer45:56
Why Private Equity Marks Arrive Late—but Aren't Necessarily Fake
Private equity firms value holdings quarterly rather than continuously, and collecting company data creates an inherent reporting delay. Fisch argues that SEC oversight, annual audit scrutiny, and sophisticated investors make marks broadly credible, while much criticism confuses stale valuation dates with inaccurate valuation work.
- Registered US private equity firms value holdings every quarter
- Annual audits typically examine those valuations
- Quarter-end values may reach investors about 45 days later
- Private marks lack a definitive market test until an asset is sold
- A lagged mark should not reflect market movements occurring after its valuation date
“all private equity firms value their holdings every quarter”
“In general, it's very real. The sec comes in, looks at it, the auditors bless it”
#private markets#valuation marks#sec#reporting lag