1 00:00:10,640 --> 00:00:13,360 Speaker 1: Hello, and welcome to today's episode of The Money Puzzle. 2 00:00:13,400 --> 00:00:16,160 Speaker 1: I'm your host James Gerard, standing in for James Kirby 3 00:00:16,160 --> 00:00:19,080 Speaker 1: this week as he enjoys a well deserved break. Today 4 00:00:19,120 --> 00:00:21,880 Speaker 1: we've got a special episode plan which is all about 5 00:00:22,040 --> 00:00:26,520 Speaker 1: private equity investments and venture capital investments. It may sound 6 00:00:26,600 --> 00:00:29,120 Speaker 1: very mysterious, at the end of the day, private equity 7 00:00:29,160 --> 00:00:32,159 Speaker 1: is just basically investing in a company that's not listed 8 00:00:32,200 --> 00:00:35,879 Speaker 1: on the share market. So imagine investing in your local bakery. 9 00:00:36,120 --> 00:00:39,000 Speaker 1: That could be considered private equity. And for those who 10 00:00:39,000 --> 00:00:41,199 Speaker 1: have watched the TV show Billions, if you don't have 11 00:00:41,320 --> 00:00:44,519 Speaker 1: billions of dollars like Bobby Axelrod does to invest there 12 00:00:44,560 --> 00:00:47,000 Speaker 1: are still some pathways for the everyday mum and dad 13 00:00:47,040 --> 00:00:51,800 Speaker 1: investor to invest into private equity. But this particular asset class, 14 00:00:52,240 --> 00:00:56,400 Speaker 1: it requires a lot of research into it because it's 15 00:00:56,560 --> 00:00:59,520 Speaker 1: a big case of buyer, where with private equity there's 16 00:00:59,520 --> 00:01:02,400 Speaker 1: a lot less information there, there's a lot more risks, 17 00:01:02,720 --> 00:01:07,320 Speaker 1: so it's generally a lot more less transparent than the 18 00:01:07,360 --> 00:01:09,479 Speaker 1: share on the share market. So investors need to be 19 00:01:09,600 --> 00:01:11,800 Speaker 1: a lot more careful before they invest into private equity. 20 00:01:11,880 --> 00:01:14,120 Speaker 1: So today we'll break down the basics, we'll share some 21 00:01:14,240 --> 00:01:16,679 Speaker 1: tips and tricks, we'll discuss the ins and outs of 22 00:01:16,680 --> 00:01:18,880 Speaker 1: private equity. And to help us do this, we've got 23 00:01:18,920 --> 00:01:22,000 Speaker 1: a very special guest. Rudy Engelbreck is a close friend 24 00:01:22,000 --> 00:01:24,920 Speaker 1: of mine and also a private investor, and he's kindly 25 00:01:24,920 --> 00:01:27,520 Speaker 1: agreed to open the books and share his experience on 26 00:01:27,560 --> 00:01:30,720 Speaker 1: private equity investing in Australia. Have he migrated from South 27 00:01:30,720 --> 00:01:33,360 Speaker 1: Africa around ten years ago. But to be very clear, 28 00:01:33,440 --> 00:01:35,920 Speaker 1: Rudy's not providing advice. All his views are his own 29 00:01:35,959 --> 00:01:39,520 Speaker 1: personal views. He's not acting in any other capacity. So always, 30 00:01:39,560 --> 00:01:41,720 Speaker 1: as is the case on the Money Puzzle, everything we 31 00:01:41,800 --> 00:01:44,800 Speaker 1: discuss is general advice. It's not personal advice, and you 32 00:01:44,840 --> 00:01:48,000 Speaker 1: should seek your own advice from a professional before making 33 00:01:48,000 --> 00:01:51,400 Speaker 1: any decisions. So, without any further ado, Rudy, welcome to 34 00:01:51,480 --> 00:01:52,240 Speaker 1: the Money Puzzle. 35 00:01:52,680 --> 00:01:55,280 Speaker 2: Thank you, Jane, thank you for inviting me to go 36 00:01:55,400 --> 00:01:55,880 Speaker 2: to the show. 37 00:01:56,560 --> 00:02:00,160 Speaker 1: My pleasure. Let's get right into it. So firstly, I'd 38 00:02:00,280 --> 00:02:02,680 Speaker 1: liked for you to tell our listeners a little bit 39 00:02:02,680 --> 00:02:05,680 Speaker 1: about yourself. So you're your background and what's your history 40 00:02:05,720 --> 00:02:08,320 Speaker 1: of private equity? What he attracted you to this type 41 00:02:08,360 --> 00:02:09,560 Speaker 1: of asset class? 42 00:02:10,040 --> 00:02:13,280 Speaker 2: Sure to be a quick overview. My journey started in 43 00:02:13,360 --> 00:02:15,800 Speaker 2: two thousand when I was still in South Africa and 44 00:02:15,880 --> 00:02:18,600 Speaker 2: I had an opportunity to join a young fintech startup 45 00:02:18,760 --> 00:02:21,680 Speaker 2: and they were going to build a new wealth management platform. 46 00:02:21,840 --> 00:02:24,320 Speaker 2: I had experience in that industry and then as a 47 00:02:24,360 --> 00:02:27,240 Speaker 2: key person in the venture, I wanted to lever reach 48 00:02:27,320 --> 00:02:30,680 Speaker 2: my knowledge, use my experience of wealth platforms and technology, 49 00:02:31,240 --> 00:02:34,600 Speaker 2: and to do that I ask them to invest in 50 00:02:34,639 --> 00:02:37,120 Speaker 2: the holding company who actually owned a fintech startup at 51 00:02:37,120 --> 00:02:40,600 Speaker 2: that time. That was quite nice and two years later, 52 00:02:40,600 --> 00:02:43,080 Speaker 2: when I left the fintech to pursue my next venture, 53 00:02:43,600 --> 00:02:46,440 Speaker 2: I then realized, hang on, these shares are now locked 54 00:02:46,520 --> 00:02:49,480 Speaker 2: up somewhere and I need to find a buyer for 55 00:02:49,600 --> 00:02:51,760 Speaker 2: my shares or leave it beyond and wait for a 56 00:02:51,760 --> 00:02:55,200 Speaker 2: future exit. So that was my first introduction. It's into 57 00:02:55,560 --> 00:03:00,080 Speaker 2: liquidity and also the premium on buyer and selling the 58 00:03:00,080 --> 00:03:02,480 Speaker 2: shares and the differences in the prices. So it was 59 00:03:02,480 --> 00:03:06,360 Speaker 2: a good introduction into this unlisted private equew market. It 60 00:03:06,400 --> 00:03:09,000 Speaker 2: was a good lesson and I managed to sell my 61 00:03:09,080 --> 00:03:11,840 Speaker 2: shares for a slight loss, but I went on and 62 00:03:11,880 --> 00:03:12,560 Speaker 2: I learned from that. 63 00:03:13,040 --> 00:03:15,880 Speaker 1: Great So to start, you fell into it by default 64 00:03:15,960 --> 00:03:18,160 Speaker 1: you joined a company that was a private company that 65 00:03:18,240 --> 00:03:20,160 Speaker 1: was growing. So it wasn't so much you were actively 66 00:03:20,200 --> 00:03:22,799 Speaker 1: seeking a private equity investment. You were a staff member 67 00:03:22,800 --> 00:03:24,720 Speaker 1: that had equity in this company. 68 00:03:24,800 --> 00:03:27,360 Speaker 2: That's right. Yes, I wanted to just being a normal 69 00:03:27,360 --> 00:03:30,040 Speaker 2: STOLF member and also be part of the key team. 70 00:03:30,720 --> 00:03:33,760 Speaker 2: I wanted to leverach that knowledge and so look, I 71 00:03:33,800 --> 00:03:36,760 Speaker 2: want to take my investment and grow it in a 72 00:03:36,800 --> 00:03:37,600 Speaker 2: higher capacity. 73 00:03:38,200 --> 00:03:41,200 Speaker 1: Perfect you started there, and then what happened from that point? 74 00:03:41,240 --> 00:03:42,560 Speaker 1: What more did you do in private equity? 75 00:03:42,800 --> 00:03:45,920 Speaker 2: Then? Was the normal business world. I started a business 76 00:03:46,240 --> 00:03:49,640 Speaker 2: as well, and when I moved to Australia, I started 77 00:03:49,640 --> 00:03:53,240 Speaker 2: another business year and through starting that business, I got 78 00:03:53,280 --> 00:03:58,119 Speaker 2: involved in another fintech startup, also in the wealth platform industry. 79 00:03:58,600 --> 00:04:02,240 Speaker 2: This was a wealth platform that offered their products and 80 00:04:02,360 --> 00:04:06,560 Speaker 2: services to Australian financial advisors. So it sounds a bit 81 00:04:06,680 --> 00:04:08,920 Speaker 2: like a case of deja vu, and it is. So 82 00:04:09,000 --> 00:04:12,760 Speaker 2: I ended up investing in the startup and I educated 83 00:04:12,960 --> 00:04:17,960 Speaker 2: myself on shelled agreements, company constitutions, got introduced more to 84 00:04:18,120 --> 00:04:22,440 Speaker 2: subscription notices, company valuations and your financial statements. And in 85 00:04:22,480 --> 00:04:26,640 Speaker 2: this case, I also engaged with legal advice and legal 86 00:04:26,680 --> 00:04:31,080 Speaker 2: counsel to review shelters, agreements and the terms and conditions 87 00:04:31,080 --> 00:04:33,120 Speaker 2: and term sheets. It was a bit expensive because I 88 00:04:33,120 --> 00:04:35,960 Speaker 2: had to pay the market rates for legal advice, but 89 00:04:36,040 --> 00:04:38,599 Speaker 2: it was a good lesson again because I learned a 90 00:04:38,600 --> 00:04:43,039 Speaker 2: lot from reading pages and pages of documentation got it. 91 00:04:43,080 --> 00:04:44,920 Speaker 1: So it sounds like that this is another case of 92 00:04:45,200 --> 00:04:48,840 Speaker 1: using your professional experience be in a company, but also 93 00:04:48,920 --> 00:04:51,720 Speaker 1: invest in that company as well. Apart from that, have 94 00:04:51,760 --> 00:04:54,560 Speaker 1: you invested in other companies that you haven't worked in 95 00:04:54,640 --> 00:04:55,680 Speaker 1: or you don't work in. 96 00:04:56,120 --> 00:04:59,080 Speaker 2: Definitely, As you can see, at first, I started with 97 00:04:59,240 --> 00:05:02,440 Speaker 2: companies where I had a deep understanding of the industry 98 00:05:02,640 --> 00:05:06,000 Speaker 2: and I had a passion in that world, and over 99 00:05:06,080 --> 00:05:09,000 Speaker 2: time I started to look for other opportunities out there. 100 00:05:09,200 --> 00:05:12,440 Speaker 2: I branched out into other industries not connected to world platforms, 101 00:05:12,640 --> 00:05:15,479 Speaker 2: but still were the heavy focus on technology because of 102 00:05:15,480 --> 00:05:19,479 Speaker 2: my background in technology. So one was a evaluation platform 103 00:05:19,600 --> 00:05:26,920 Speaker 2: for property, another one was a financial advisor platform providing 104 00:05:27,040 --> 00:05:32,720 Speaker 2: financial advice technology. Another platform was purely building out fund 105 00:05:32,800 --> 00:05:38,160 Speaker 2: management type solutions. And then over time I even ventured 106 00:05:38,160 --> 00:05:41,799 Speaker 2: into more nuts and bolts type of businesses, VISA businesses 107 00:05:41,800 --> 00:05:46,719 Speaker 2: that would say invest in it's a fund management company 108 00:05:46,760 --> 00:05:52,000 Speaker 2: that they would then acquire a company that builds patios 109 00:05:52,040 --> 00:05:56,240 Speaker 2: and roofs, for instance, and they have then a different profile. 110 00:05:56,520 --> 00:05:59,120 Speaker 2: It's a lower risk profile, and there's a dividend income 111 00:05:59,160 --> 00:06:02,560 Speaker 2: coming out of that investment. Yeah, so it actually brought 112 00:06:02,560 --> 00:06:04,480 Speaker 2: it out to anything. 113 00:06:04,080 --> 00:06:07,200 Speaker 1: Else excellent, But it still sounds like that the type 114 00:06:07,200 --> 00:06:10,440 Speaker 1: of companies you invest in, you understand them because they're 115 00:06:10,480 --> 00:06:13,560 Speaker 1: either in the finance sector or the IT sector, or 116 00:06:13,560 --> 00:06:16,000 Speaker 1: maybe a crossover of both. So is it fair to 117 00:06:16,000 --> 00:06:19,479 Speaker 1: say that you have a preference to invest into private 118 00:06:19,480 --> 00:06:23,159 Speaker 1: companies that you have a finger on the pulse using 119 00:06:23,200 --> 00:06:25,960 Speaker 1: that saying rather than something that might be totally foreign 120 00:06:26,040 --> 00:06:30,039 Speaker 1: to you. So investing into a home tools company, for example. 121 00:06:30,120 --> 00:06:33,640 Speaker 2: At first, I obviously wanted to be engaged and wanted 122 00:06:33,680 --> 00:06:36,360 Speaker 2: to understand a lot about the businesses. And then over 123 00:06:36,440 --> 00:06:39,560 Speaker 2: time the last few investments I've made were more about 124 00:06:39,720 --> 00:06:43,480 Speaker 2: show me your track record, show me your history with 125 00:06:43,640 --> 00:06:47,919 Speaker 2: a company, show me the returns, look at the balanced statement, 126 00:06:48,000 --> 00:06:52,839 Speaker 2: financial statements, and look at the risk profile. I've actually 127 00:06:52,920 --> 00:06:56,240 Speaker 2: I've entered into other more I would say, as I 128 00:06:56,240 --> 00:06:58,680 Speaker 2: said before, the nuts and bolts. The other one is 129 00:06:58,880 --> 00:07:03,640 Speaker 2: also a building trust company, so they actually provide construction services. 130 00:07:03,800 --> 00:07:06,920 Speaker 2: I don't know anything really about that industry, but I 131 00:07:07,040 --> 00:07:09,920 Speaker 2: like the fact that there's a sound financial model and 132 00:07:10,120 --> 00:07:14,360 Speaker 2: it's literally about products and services they sell and then 133 00:07:14,560 --> 00:07:17,440 Speaker 2: they have estimated earnings and then they either deliver on 134 00:07:17,480 --> 00:07:17,880 Speaker 2: that or not. 135 00:07:18,560 --> 00:07:21,800 Speaker 1: I'd like to know more about how these opportunities come 136 00:07:21,840 --> 00:07:24,679 Speaker 1: across your plate, but also how you do the due diligence. 137 00:07:24,720 --> 00:07:26,680 Speaker 1: We might do that a little bit more detail later, 138 00:07:26,800 --> 00:07:28,880 Speaker 1: but for now, I'd like to move on to getting 139 00:07:28,920 --> 00:07:32,040 Speaker 1: started in private equity. So what type of investor is 140 00:07:32,080 --> 00:07:35,520 Speaker 1: suited to private equity in your opinion? 141 00:07:36,120 --> 00:07:39,240 Speaker 2: Yeah, this really depends on each individual. A probaect with 142 00:07:39,600 --> 00:07:42,600 Speaker 2: is quite different from list that shares and some of 143 00:07:42,600 --> 00:07:44,520 Speaker 2: the factors you need to consider for yourself as an 144 00:07:44,520 --> 00:07:47,360 Speaker 2: individual as your financial capacity, how much savings you have 145 00:07:47,880 --> 00:07:49,960 Speaker 2: that you want to allocate to this. As at last, 146 00:07:50,360 --> 00:07:53,280 Speaker 2: what kind of risk do you what kind of risks 147 00:07:53,280 --> 00:07:56,880 Speaker 2: are you prepared to take, because many of these investments 148 00:07:56,960 --> 00:08:00,840 Speaker 2: are quite risky and and some you could actually lose 149 00:08:01,080 --> 00:08:04,160 Speaker 2: your whole investment. And then also the other one is 150 00:08:04,240 --> 00:08:07,440 Speaker 2: how long would you are you prepared to keep your 151 00:08:07,440 --> 00:08:10,120 Speaker 2: capital locked up in this investment because they're typically are 152 00:08:10,200 --> 00:08:14,120 Speaker 2: quite lengthy type of investments that could be five plus years, 153 00:08:14,160 --> 00:08:15,720 Speaker 2: ten years, sometimes even love it. 154 00:08:17,840 --> 00:08:19,920 Speaker 1: I think it'd be good to explain a little bit 155 00:08:19,960 --> 00:08:23,160 Speaker 1: more about what is the whole life cycle of a 156 00:08:23,160 --> 00:08:26,760 Speaker 1: private equity or a venture capital investment, And maybe we'll 157 00:08:26,760 --> 00:08:29,360 Speaker 1: start with just clarifying the difference between venture capital and 158 00:08:29,440 --> 00:08:31,400 Speaker 1: private equity, and then we'll talk through what the life 159 00:08:31,400 --> 00:08:33,400 Speaker 1: cycle is, and we're going to have a brief chat 160 00:08:33,400 --> 00:08:36,280 Speaker 1: about the different rounds of funding as well that companies 161 00:08:36,280 --> 00:08:38,959 Speaker 1: would typically seek. So my understanding is that a venture 162 00:08:38,960 --> 00:08:42,960 Speaker 1: capital company is more at the incubator early stage, where 163 00:08:43,240 --> 00:08:45,959 Speaker 1: they're at their infancy. They're either just an idea or 164 00:08:46,000 --> 00:08:49,800 Speaker 1: they're a company that's relatively recently formed that's running at 165 00:08:49,800 --> 00:08:52,040 Speaker 1: a loss because they have wages, but they're not selling 166 00:08:52,240 --> 00:08:54,920 Speaker 1: any products or services yet, whereas private equity is a 167 00:08:54,960 --> 00:08:57,000 Speaker 1: little bit further down the track. They're not there as 168 00:08:57,000 --> 00:09:00,720 Speaker 1: a share market listed company, but they're probably developed with 169 00:09:00,760 --> 00:09:03,240 Speaker 1: regards to their offering, and they still maybe running out 170 00:09:03,280 --> 00:09:04,880 Speaker 1: of a loss and they may need some capital to 171 00:09:05,520 --> 00:09:09,440 Speaker 1: kicker off marketing further or to develop further, but it's 172 00:09:09,600 --> 00:09:12,200 Speaker 1: later on. So is that your understanding as well, Really 173 00:09:12,440 --> 00:09:14,920 Speaker 1: how private equity and venture capital are different. 174 00:09:15,840 --> 00:09:21,440 Speaker 2: Yeah, that's right. So usually most people will start up 175 00:09:21,760 --> 00:09:24,760 Speaker 2: in the first phase will be I've got an idea 176 00:09:24,800 --> 00:09:26,880 Speaker 2: and I think I've got a great business that I'm 177 00:09:26,880 --> 00:09:33,199 Speaker 2: going to know bold and typically you could access there 178 00:09:33,240 --> 00:09:35,520 Speaker 2: are different ways you could access capital. You could go 179 00:09:35,600 --> 00:09:37,559 Speaker 2: to friends and family, if you get your own funds, 180 00:09:37,559 --> 00:09:40,520 Speaker 2: et cetera, and you kick that off over time. What's 181 00:09:40,679 --> 00:09:43,080 Speaker 2: what you could do is then go to an early 182 00:09:43,160 --> 00:09:48,280 Speaker 2: stage and again you would talk to angel investors. You'll 183 00:09:48,280 --> 00:09:51,480 Speaker 2: have your pitchtick ready, which will explain later exactly what 184 00:09:51,520 --> 00:09:55,160 Speaker 2: goes into that. You'll have areas that you highlight and 185 00:09:55,240 --> 00:09:57,960 Speaker 2: that which is your valuation, how much capital that you require, 186 00:09:58,400 --> 00:10:00,240 Speaker 2: and how you're going to sell that to the to 187 00:10:00,320 --> 00:10:03,160 Speaker 2: the angel investors. And then over time you get into 188 00:10:03,200 --> 00:10:06,559 Speaker 2: a growth phase where you will then do subsequent rounds 189 00:10:06,679 --> 00:10:08,760 Speaker 2: and this is how you can get more private equity 190 00:10:08,800 --> 00:10:12,400 Speaker 2: companies and also venture capital companies to then invest bigger 191 00:10:12,480 --> 00:10:15,840 Speaker 2: chunks of capital into your business. And now you're in 192 00:10:15,920 --> 00:10:19,240 Speaker 2: the final stages and if you're lucky, then you could 193 00:10:19,320 --> 00:10:22,960 Speaker 2: actually have a positive return where you actually have dividence 194 00:10:23,000 --> 00:10:25,640 Speaker 2: coming out or not, or if it's a growth based company. 195 00:10:25,920 --> 00:10:29,280 Speaker 2: You could focus on growing the business through revenue, and 196 00:10:29,360 --> 00:10:31,240 Speaker 2: even if you're making a loss, as long as there's 197 00:10:31,320 --> 00:10:35,320 Speaker 2: enough growth to back it. You could then get uses 198 00:10:35,360 --> 00:10:39,640 Speaker 2: to come in as well or other institutions, and an 199 00:10:39,720 --> 00:10:42,360 Speaker 2: exit can be prepared where you could sell the company 200 00:10:42,800 --> 00:10:45,200 Speaker 2: as well and work through the phases, or we could 201 00:10:45,200 --> 00:10:48,560 Speaker 2: ipo it even So, yeah, that was a quick summary 202 00:10:48,559 --> 00:10:50,319 Speaker 2: of that, and you can dive into more detail into 203 00:10:50,320 --> 00:10:52,400 Speaker 2: each of the phases again now. 204 00:10:52,280 --> 00:10:54,280 Speaker 1: I think that as good as a high level summary. 205 00:10:54,320 --> 00:10:57,800 Speaker 1: So basically a company starts up. The first one is 206 00:10:57,840 --> 00:11:01,520 Speaker 1: the angel round, so that's right at the beginning to 207 00:11:01,559 --> 00:11:04,320 Speaker 1: help kick things off. And then you have the seed round, 208 00:11:04,400 --> 00:11:06,480 Speaker 1: which is at the early stage of development, and then 209 00:11:06,520 --> 00:11:09,120 Speaker 1: you might have a Bridge round and Series ABC and 210 00:11:09,160 --> 00:11:11,800 Speaker 1: so forth, and then you might have a pre IPO 211 00:11:12,080 --> 00:11:15,320 Speaker 1: raise or there there might be other raisers beyond that, 212 00:11:15,440 --> 00:11:19,400 Speaker 1: but the general cycle there with raises, and what generally 213 00:11:19,400 --> 00:11:23,199 Speaker 1: happens is that new investors brought in, new shares are issued. 214 00:11:23,280 --> 00:11:26,560 Speaker 1: Existing shareholders can be diluted because there's more shares now, 215 00:11:26,880 --> 00:11:29,600 Speaker 1: but generally the company valuations go up every time a 216 00:11:29,640 --> 00:11:34,320 Speaker 1: company raises capital. That is the hope. It doesn't always happen. Now. 217 00:11:34,480 --> 00:11:37,120 Speaker 1: One thing which I find interesting because I look at 218 00:11:37,120 --> 00:11:40,120 Speaker 1: private equity investments as well and have invested in some, 219 00:11:40,320 --> 00:11:43,000 Speaker 1: is how they come to me and or how they 220 00:11:43,000 --> 00:11:44,880 Speaker 1: come to you? How do they get in front of us? 221 00:11:44,920 --> 00:11:47,320 Speaker 1: And the first thing that I always think is why 222 00:11:47,440 --> 00:11:50,680 Speaker 1: is this company come in to me? Because in my 223 00:11:50,760 --> 00:11:53,160 Speaker 1: head I have this thing called the sucker money, and 224 00:11:53,240 --> 00:11:55,559 Speaker 1: so I think, is this company trying to find the 225 00:11:55,600 --> 00:11:58,920 Speaker 1: easier source of money? They're showing a fancy pitch deck, 226 00:11:58,960 --> 00:12:03,040 Speaker 1: a nice PowerPoint presentation with all these charts around the opportunity, 227 00:12:03,080 --> 00:12:05,640 Speaker 1: the billions of dollars of market there, and how they're 228 00:12:05,640 --> 00:12:08,360 Speaker 1: going to penetrate that market and do great. And they're 229 00:12:08,360 --> 00:12:10,720 Speaker 1: hoping to to dazzle the mom and dad investor and 230 00:12:10,760 --> 00:12:14,320 Speaker 1: get them to invest into it. But a more seasoned 231 00:12:14,360 --> 00:12:18,199 Speaker 1: private equity investor or a private equity firm would probably 232 00:12:18,200 --> 00:12:20,160 Speaker 1: be able to see through that. What are your thoughts 233 00:12:20,280 --> 00:12:23,600 Speaker 1: around the funding side of things? And also how do 234 00:12:23,640 --> 00:12:25,439 Speaker 1: they come across your desk these opportunities. 235 00:12:25,840 --> 00:12:29,200 Speaker 2: Yeah, so that is certainly true, James. There's, as you said, 236 00:12:29,200 --> 00:12:32,320 Speaker 2: the term the sucker money, or sometimes the triple F 237 00:12:32,559 --> 00:12:35,320 Speaker 2: which is the friends, family and fools. So yeah, you've 238 00:12:35,320 --> 00:12:37,480 Speaker 2: got to watch out and if you have any they're 239 00:12:37,520 --> 00:12:41,920 Speaker 2: going after the easy money, then you're probably ninety percent 240 00:12:41,920 --> 00:12:43,959 Speaker 2: of the time, right, there is a lot of that. 241 00:12:44,400 --> 00:12:46,960 Speaker 2: What I do is I try to see who else 242 00:12:47,080 --> 00:12:50,280 Speaker 2: is also part of this investing round. I look at 243 00:12:50,280 --> 00:12:53,120 Speaker 2: their track record in terms of you are they If 244 00:12:53,160 --> 00:12:56,840 Speaker 2: they're they're like a Macquarie Bank is also investing then 245 00:12:57,040 --> 00:13:00,800 Speaker 2: or another listed company or even a companies who are 246 00:13:00,800 --> 00:13:04,440 Speaker 2: specializing in this industry with big funds or they've done 247 00:13:04,480 --> 00:13:07,720 Speaker 2: this before, then you know that their due diligence are 248 00:13:07,880 --> 00:13:09,559 Speaker 2: going to be quite thorough because they're not going to 249 00:13:09,600 --> 00:13:14,040 Speaker 2: invest their millions of dollars alongside your few hundred thousand 250 00:13:14,120 --> 00:13:16,640 Speaker 2: or ten thousand or whatever it is. They're going to 251 00:13:16,640 --> 00:13:19,679 Speaker 2: make sure that they look after themselves at first. So 252 00:13:19,720 --> 00:13:22,839 Speaker 2: you can be rest assured that most of the times 253 00:13:22,880 --> 00:13:26,959 Speaker 2: they've got armies of consultants and auditors, etc. For the 254 00:13:27,040 --> 00:13:29,960 Speaker 2: due diligence. So that's a good one. If you're in 255 00:13:30,000 --> 00:13:35,440 Speaker 2: a scenario we don't have other investors or what co 256 00:13:35,520 --> 00:13:39,160 Speaker 2: investing that you can lean on, then you've got to 257 00:13:39,240 --> 00:13:42,319 Speaker 2: do a lot of your undue diligence. And this literally 258 00:13:42,400 --> 00:13:47,440 Speaker 2: means working through the sessions with the founders, the current 259 00:13:47,480 --> 00:13:51,760 Speaker 2: executive team, the man, the key management, we're working into 260 00:13:51,800 --> 00:13:55,400 Speaker 2: the next level down in the company, the senior leadership 261 00:13:55,400 --> 00:13:59,880 Speaker 2: team in the company. And in my case, because I 262 00:14:00,120 --> 00:14:03,880 Speaker 2: had some of the knowledge in the industry, I worked 263 00:14:03,880 --> 00:14:08,840 Speaker 2: in also quite a lot of details into technology as 264 00:14:08,880 --> 00:14:12,679 Speaker 2: well as the financial models, and I had some experience 265 00:14:13,720 --> 00:14:16,320 Speaker 2: in an area where you don't have that experience. You 266 00:14:16,360 --> 00:14:20,000 Speaker 2: can also then engage with other people who've got similar 267 00:14:20,000 --> 00:14:22,360 Speaker 2: experience and bring them in. And this is how this 268 00:14:22,840 --> 00:14:25,760 Speaker 2: market works. As people talk to other people, there's a 269 00:14:25,800 --> 00:14:30,600 Speaker 2: network of people. You start to build up a I 270 00:14:30,720 --> 00:14:32,840 Speaker 2: like a trusted network. If I trust this person, then 271 00:14:32,880 --> 00:14:35,800 Speaker 2: they trust that person. Then I can probably lean on 272 00:14:35,880 --> 00:14:39,040 Speaker 2: the trust relationship between these parties, and then I can 273 00:14:39,080 --> 00:14:42,960 Speaker 2: also start to do some more due diligence there. Unfortunately, 274 00:14:43,280 --> 00:14:46,600 Speaker 2: it's ninety percent of the cases. You do tend up 275 00:14:46,960 --> 00:14:49,640 Speaker 2: to tend to do a lot of the due diligence 276 00:14:50,000 --> 00:14:52,560 Speaker 2: for yourself because this is your money that you're going 277 00:14:52,600 --> 00:14:55,280 Speaker 2: to invest. And yeah, if you don't do that, it's 278 00:14:55,320 --> 00:14:57,160 Speaker 2: a buyableware situation. 279 00:14:57,360 --> 00:14:59,680 Speaker 1: Yeah, and you've told me before with some of the 280 00:14:59,760 --> 00:15:03,840 Speaker 1: you diligence that you do you mentioned doing due diligence 281 00:15:03,840 --> 00:15:06,240 Speaker 1: on the management team, and that can include things like 282 00:15:06,320 --> 00:15:09,520 Speaker 1: looking at their LinkedIn history, where were they at before, 283 00:15:09,560 --> 00:15:12,960 Speaker 1: were there's companies successful, what was the exit for that company, 284 00:15:13,600 --> 00:15:16,840 Speaker 1: and you can get a census to whether they're being 285 00:15:16,960 --> 00:15:20,320 Speaker 1: successful or whether they're serial entrepreneurs where they're jumping from 286 00:15:20,320 --> 00:15:23,760 Speaker 1: one startup to another startup. They're raising capital, so ie 287 00:15:23,920 --> 00:15:26,600 Speaker 1: using other people's money to try and get a business 288 00:15:26,640 --> 00:15:29,360 Speaker 1: off the ground. If it does great, If it doesn't, 289 00:15:29,520 --> 00:15:32,920 Speaker 1: they sink it and they start something again. So they're 290 00:15:32,960 --> 00:15:36,320 Speaker 1: the type of entrepreneurs we probably don't want to invest into, 291 00:15:36,400 --> 00:15:40,640 Speaker 1: whereas we have others that have been management in companies. 292 00:15:40,640 --> 00:15:43,120 Speaker 1: They've grown it it's e the iPod or they've trade 293 00:15:43,120 --> 00:15:45,360 Speaker 1: so out it and then they go for a holiday 294 00:15:45,360 --> 00:15:47,320 Speaker 1: for a while, they come back they do something else, 295 00:15:47,440 --> 00:15:50,800 Speaker 1: so they've got pedigree, they've got runs on the board. Well, 296 00:15:50,840 --> 00:15:53,240 Speaker 1: what we'll do is Rudy will take a quick break 297 00:15:53,360 --> 00:15:55,160 Speaker 1: and then we'll come back and have a chat more 298 00:15:55,200 --> 00:15:58,880 Speaker 1: and we'll jump into private equity jargon. Listeners will be 299 00:15:58,920 --> 00:16:12,040 Speaker 1: back in a moment. Hello and welcome back to the 300 00:16:12,120 --> 00:16:14,600 Speaker 1: Money Puzzle. I'm James Gerard, writer a contributor to the 301 00:16:14,640 --> 00:16:17,440 Speaker 1: Wealth section of The Australian and also Financial Advisor with 302 00:16:17,640 --> 00:16:21,000 Speaker 1: Financial Advisor dot com dot Au. And on this week's show, 303 00:16:21,040 --> 00:16:23,560 Speaker 1: I have Rudy angle Breck. So we're going to dig 304 00:16:23,600 --> 00:16:26,080 Speaker 1: deeper into private equity. But before I do that, I 305 00:16:26,120 --> 00:16:28,800 Speaker 1: just want to remind everybody again that this is general advice, 306 00:16:28,880 --> 00:16:31,480 Speaker 1: not personal advice, so please seek out a qualified advisor 307 00:16:31,520 --> 00:16:34,520 Speaker 1: before making any decisions. Now, Rudy, let's have a chat 308 00:16:34,520 --> 00:16:38,600 Speaker 1: about some jargon in private equity. There's all these words 309 00:16:38,640 --> 00:16:41,760 Speaker 1: that sort of flow around burn rates and runways and 310 00:16:41,840 --> 00:16:43,720 Speaker 1: pitch decks. So what don't we go through some of 311 00:16:43,800 --> 00:16:45,840 Speaker 1: those top ones and you can just break it down 312 00:16:45,880 --> 00:16:47,960 Speaker 1: in simple English? What are these things? So let's start 313 00:16:47,960 --> 00:16:51,040 Speaker 1: with a pitch deck p t ch deck. 314 00:16:51,360 --> 00:16:55,880 Speaker 2: What is that? So a pitch deck is very detailed. 315 00:16:56,640 --> 00:17:02,560 Speaker 2: Usually it's a presentation that could from literally five pages 316 00:17:02,880 --> 00:17:06,480 Speaker 2: to fifty pages, and the whole key is to get 317 00:17:06,480 --> 00:17:10,200 Speaker 2: the message across in thirty minutes or less to invest. 318 00:17:10,200 --> 00:17:13,960 Speaker 2: As you can imagine that a founder and their team 319 00:17:14,240 --> 00:17:19,560 Speaker 2: I have to pitch this deck to probably ten two 320 00:17:19,680 --> 00:17:23,000 Speaker 2: hundred people to raise money, and they want to make 321 00:17:23,040 --> 00:17:26,359 Speaker 2: it as streamline as possible. The details that will usually 322 00:17:26,440 --> 00:17:29,600 Speaker 2: be and that pitch check will be a quick over 323 00:17:29,600 --> 00:17:33,760 Speaker 2: with the company, the market opportunity and the company's unique 324 00:17:33,800 --> 00:17:37,880 Speaker 2: selling proposition, the competitive advantage. They have a bit about 325 00:17:37,920 --> 00:17:40,560 Speaker 2: the management team. If they've got a good management team 326 00:17:40,560 --> 00:17:44,720 Speaker 2: with a good track record and runs on the board, 327 00:17:44,760 --> 00:17:47,320 Speaker 2: then they're obviously going to put that in there. The 328 00:17:47,400 --> 00:17:51,040 Speaker 2: business model with their revenue streams and cost structures. And 329 00:17:51,280 --> 00:17:54,800 Speaker 2: I usually look at those numbers and I multiply all 330 00:17:54,880 --> 00:17:59,000 Speaker 2: costs by three on our revisal revenues and divide by three, 331 00:17:59,119 --> 00:18:01,480 Speaker 2: and then I also look get up and down cases 332 00:18:01,520 --> 00:18:03,880 Speaker 2: and that so I always look at those numbers. Never 333 00:18:03,920 --> 00:18:07,040 Speaker 2: trust the numbers. Ask these questions on those numbers when 334 00:18:07,080 --> 00:18:09,879 Speaker 2: you see them, the product offering or the service offering 335 00:18:10,000 --> 00:18:12,800 Speaker 2: that they will have in the pipeline. And then they 336 00:18:12,880 --> 00:18:17,640 Speaker 2: even should have financial performance a sorry performance as well 337 00:18:17,680 --> 00:18:21,520 Speaker 2: as future projections and forecasts. And then also a little 338 00:18:21,560 --> 00:18:24,240 Speaker 2: bit more about the capital structure in terms of how 339 00:18:24,280 --> 00:18:26,760 Speaker 2: much money they've got in the bank, how much money 340 00:18:26,760 --> 00:18:29,680 Speaker 2: they're inter raise, how much money they have raised, and 341 00:18:29,680 --> 00:18:33,640 Speaker 2: what evaluations they've used in the past. And then basically 342 00:18:33,640 --> 00:18:36,640 Speaker 2: some of the risk factors that they see or companies 343 00:18:36,760 --> 00:18:40,000 Speaker 2: carry risk and issues that they can try and look 344 00:18:40,000 --> 00:18:44,159 Speaker 2: at and prevent, and then some reasonable excess strategy or 345 00:18:44,480 --> 00:18:46,640 Speaker 2: sometimes they don't have one, but if they have one, 346 00:18:46,800 --> 00:18:50,760 Speaker 2: then usually some clear numbers or in three years they 347 00:18:50,800 --> 00:18:53,359 Speaker 2: want to do this or sell to someone or list, 348 00:18:53,480 --> 00:18:53,960 Speaker 2: et cetera. 349 00:18:54,600 --> 00:18:58,399 Speaker 1: Excellent thanks Reddie. What I find is a red flag 350 00:18:58,400 --> 00:19:00,919 Speaker 1: when I review pitch decks is if there is no 351 00:19:01,080 --> 00:19:04,920 Speaker 1: financial forecast, if there are no financial numbers in there 352 00:19:04,960 --> 00:19:08,359 Speaker 1: around income and expense or even projected because in a 353 00:19:08,400 --> 00:19:10,480 Speaker 1: pitch deck that the company is trying to show you 354 00:19:10,520 --> 00:19:12,600 Speaker 1: things that they want you to see. If they don't 355 00:19:12,600 --> 00:19:14,240 Speaker 1: want you to see something that they don't put it 356 00:19:14,280 --> 00:19:16,080 Speaker 1: in the pitch deck. So I get a bit concerned 357 00:19:16,080 --> 00:19:18,920 Speaker 1: when they're light on the financial and the forecasts and 358 00:19:19,119 --> 00:19:21,520 Speaker 1: they're more about the big picture. This is the market 359 00:19:21,560 --> 00:19:25,480 Speaker 1: opportunity because they then have this valuation which could be 360 00:19:25,520 --> 00:19:28,560 Speaker 1: anywhere from a few hundred thousand to tens of millions 361 00:19:28,560 --> 00:19:31,199 Speaker 1: of dollars, and there may not be as much science 362 00:19:31,240 --> 00:19:34,440 Speaker 1: behind it as the investor would want, particularly if they're 363 00:19:34,440 --> 00:19:36,359 Speaker 1: not showing that the financials in the pitch deck. So 364 00:19:36,400 --> 00:19:40,000 Speaker 1: it's always prudent that if you're interested in the company 365 00:19:40,119 --> 00:19:42,640 Speaker 1: and you see the pitch deck, but it has even 366 00:19:42,640 --> 00:19:44,879 Speaker 1: if it has financials, it's generally a good idea to 367 00:19:45,000 --> 00:19:48,159 Speaker 1: ask for what's called the data room, which is generally 368 00:19:48,160 --> 00:19:52,120 Speaker 1: a cloud based location where the company will store more information. 369 00:19:52,280 --> 00:19:55,200 Speaker 1: So they might have an Excel spreadsheet with financial forecasts, 370 00:19:55,240 --> 00:19:59,200 Speaker 1: and it's interesting to drill down into that because although 371 00:19:59,440 --> 00:20:01,800 Speaker 1: they may be projecting certain things around the growth of 372 00:20:01,840 --> 00:20:05,560 Speaker 1: the company, you need to check that and be critical. 373 00:20:05,560 --> 00:20:08,520 Speaker 1: As you were saying, rudy of those assumptions. So is 374 00:20:08,560 --> 00:20:11,399 Speaker 1: the growth rate they're using of say forty percent, is 375 00:20:11,440 --> 00:20:13,199 Speaker 1: that in line with the market growth rate for that 376 00:20:13,240 --> 00:20:17,800 Speaker 1: particular company. Is it achievable to increase customers from x 377 00:20:17,840 --> 00:20:20,840 Speaker 1: to y over a twelve month period? Is it reasonable 378 00:20:20,960 --> 00:20:23,640 Speaker 1: that they're going to only spend this amount of marketing 379 00:20:23,680 --> 00:20:25,760 Speaker 1: to acquire customers. So all these sort of things need 380 00:20:25,840 --> 00:20:29,960 Speaker 1: to be sense checked to get a good understanding of 381 00:20:30,320 --> 00:20:32,919 Speaker 1: is this a realistic picture of where the company might 382 00:20:32,960 --> 00:20:35,240 Speaker 1: be into the future. What do you reckon really. 383 00:20:35,280 --> 00:20:38,359 Speaker 2: One hundred percent agree a good check is exactly the 384 00:20:38,520 --> 00:20:41,359 Speaker 2: historic numbers. Look at the historic numbers, and if there 385 00:20:41,440 --> 00:20:44,440 Speaker 2: was a forty growth rate over the last two years 386 00:20:44,760 --> 00:20:47,600 Speaker 2: and they're projecting a two hundred percent growth rate over 387 00:20:47,640 --> 00:20:50,160 Speaker 2: the next two years. You want to know what events 388 00:20:50,480 --> 00:20:53,240 Speaker 2: are actually going to trigger those and you can ask 389 00:20:53,320 --> 00:20:55,800 Speaker 2: questions around that, and you can see on a growth visually, 390 00:20:56,200 --> 00:21:00,320 Speaker 2: why is this thing spiking up the revenue whatever your 391 00:21:00,359 --> 00:21:02,679 Speaker 2: costs and was the cost not going to go up, 392 00:21:02,680 --> 00:21:04,720 Speaker 2: et cetera. So there's a lot of promit there can 393 00:21:04,760 --> 00:21:07,879 Speaker 2: be a lot of promises made without the real backing, 394 00:21:08,040 --> 00:21:10,800 Speaker 2: and that you want to see historic numbers because that 395 00:21:10,840 --> 00:21:11,800 Speaker 2: gives you good indication. 396 00:21:12,520 --> 00:21:16,120 Speaker 1: Yeah, no, it does. And what would be a rule 397 00:21:16,119 --> 00:21:18,960 Speaker 1: of thumb or is there one for valuations? How do 398 00:21:19,000 --> 00:21:22,000 Speaker 1: you value a private equity company? Is there is it 399 00:21:22,000 --> 00:21:24,800 Speaker 1: a multiple of revenue? Is it a multiple of profit? 400 00:21:25,200 --> 00:21:27,080 Speaker 1: What about in the early stage, whether there is no 401 00:21:27,240 --> 00:21:31,720 Speaker 1: revenue or profit, there's just an idea or maybe just losses. 402 00:21:32,040 --> 00:21:33,919 Speaker 1: That makes it more difficult to value that type of 403 00:21:33,920 --> 00:21:34,600 Speaker 1: company as well. 404 00:21:35,640 --> 00:21:39,600 Speaker 2: Yeah, so, first of before we jump into the manue, 405 00:21:39,680 --> 00:21:41,680 Speaker 2: the rule of fun could be if you don't have 406 00:21:42,400 --> 00:21:46,159 Speaker 2: any earnings or profits, then you could use revenue or 407 00:21:46,200 --> 00:21:49,359 Speaker 2: sales and you could use multiples there. You could you 408 00:21:49,600 --> 00:21:53,040 Speaker 2: literally look at other companies in the market who are 409 00:21:53,080 --> 00:21:57,040 Speaker 2: either listed, so you can then get good ratios in 410 00:21:57,119 --> 00:22:00,399 Speaker 2: terms of their revenue is x and their evaluation is 411 00:22:00,720 --> 00:22:03,640 Speaker 2: a multiple of X. What is that multiple? You can 412 00:22:03,680 --> 00:22:06,879 Speaker 2: start to apply that, but remember listed company is different 413 00:22:06,880 --> 00:22:10,720 Speaker 2: from an unlisted company because they are liquid and they 414 00:22:10,760 --> 00:22:13,600 Speaker 2: have nice financials that you can look at. In this case, 415 00:22:13,640 --> 00:22:16,719 Speaker 2: you can then enough to reduce the multiple by a 416 00:22:16,720 --> 00:22:19,680 Speaker 2: factor to so it's unlisted, it's not proven yet, it's 417 00:22:19,680 --> 00:22:22,480 Speaker 2: still in the growth page as well. That's one way. 418 00:22:22,560 --> 00:22:25,040 Speaker 2: If there are earnings you can use that. And again 419 00:22:25,080 --> 00:22:27,720 Speaker 2: you can relate it to other companies in the market, 420 00:22:27,720 --> 00:22:30,199 Speaker 2: if they are listed or if they are unlisted. You 421 00:22:30,280 --> 00:22:32,879 Speaker 2: might get information. You might have had a company that 422 00:22:32,920 --> 00:22:35,200 Speaker 2: you raised, that you were involved and then they raise 423 00:22:35,280 --> 00:22:38,359 Speaker 2: money and you can use similar multiples. And you can 424 00:22:38,400 --> 00:22:42,119 Speaker 2: also then look at the unique areas that they claim 425 00:22:42,160 --> 00:22:44,080 Speaker 2: that's going to be better, and then you could adjust 426 00:22:44,080 --> 00:22:46,840 Speaker 2: the multiples. But those are typically the rules of umbers. 427 00:22:46,920 --> 00:22:49,639 Speaker 2: Look at other companies and multiples and try to find 428 00:22:49,640 --> 00:22:50,480 Speaker 2: something that works. 429 00:22:50,960 --> 00:22:53,240 Speaker 1: Got it in the companies that you've invested into. What 430 00:22:53,240 --> 00:22:55,840 Speaker 1: would be a broad range of multiples of revenue that 431 00:22:55,960 --> 00:22:58,439 Speaker 1: have been attached to valuations of those companies that are 432 00:22:58,480 --> 00:23:01,520 Speaker 1: we talking in five times revenue, ten twenty times. 433 00:23:01,720 --> 00:23:05,480 Speaker 2: Yeah, it's a if it's a non if it's non tech, 434 00:23:06,000 --> 00:23:09,439 Speaker 2: you could have three times to five times sale sales, 435 00:23:09,520 --> 00:23:14,320 Speaker 2: so the revenue so free times. It depends on the industry. Again, 436 00:23:14,320 --> 00:23:17,359 Speaker 2: look at the industry. Tech companies could sometimes go five 437 00:23:17,440 --> 00:23:20,400 Speaker 2: times or more. And obviously if they have a unique 438 00:23:20,560 --> 00:23:23,720 Speaker 2: product of no one else as then the scars the limit. 439 00:23:23,920 --> 00:23:27,800 Speaker 2: Someone could literally see the idea and value that differently 440 00:23:27,880 --> 00:23:30,280 Speaker 2: and you could get ten times or twenty times. And 441 00:23:30,400 --> 00:23:32,399 Speaker 2: if you look at in the past, you could have 442 00:23:32,480 --> 00:23:37,159 Speaker 2: seen typically crazy types of multiple supply to certain industries 443 00:23:37,160 --> 00:23:40,240 Speaker 2: and certain companies. But look at the average and work 444 00:23:40,280 --> 00:23:43,399 Speaker 2: with that. But yeah, five to ten times is high, 445 00:23:43,480 --> 00:23:45,040 Speaker 2: but it can be happened. 446 00:23:45,200 --> 00:23:47,399 Speaker 1: Well, let's do one more jargon and then we'll move on. Really, 447 00:23:47,480 --> 00:23:50,200 Speaker 1: tell me what is the burn rate? What does that mean? 448 00:23:50,680 --> 00:23:55,199 Speaker 2: Okay, a company obviously, every day that it operates, it 449 00:23:55,240 --> 00:23:59,120 Speaker 2: has expenses and it also has revenue coming in. And 450 00:23:59,200 --> 00:24:01,720 Speaker 2: if you measure that on a monkey basis, then this 451 00:24:01,760 --> 00:24:05,240 Speaker 2: is how much money is either being burned because they're 452 00:24:05,280 --> 00:24:08,720 Speaker 2: running at a loss or if they're lucky, they actually 453 00:24:08,720 --> 00:24:11,959 Speaker 2: show profit. But usually because you're investing in a growth 454 00:24:12,160 --> 00:24:16,720 Speaker 2: oriented company, they'll be burning at a loss, and you 455 00:24:16,800 --> 00:24:20,040 Speaker 2: measure this on a monkey basis. And then the other 456 00:24:20,320 --> 00:24:22,840 Speaker 2: piece of jargon that we can add on is the runway. 457 00:24:23,040 --> 00:24:25,560 Speaker 2: So often you've calculated the burn rate, you can then 458 00:24:25,640 --> 00:24:28,919 Speaker 2: figure out based on these numbers and your future cash flows, 459 00:24:29,240 --> 00:24:32,359 Speaker 2: you're going to have, say twenty four months of runway left. 460 00:24:32,760 --> 00:24:35,280 Speaker 2: And it's typically used in the context of an aeroplane 461 00:24:35,320 --> 00:24:37,600 Speaker 2: when they want to take off. There's a piece of 462 00:24:37,680 --> 00:24:40,159 Speaker 2: runway left and the aeroplane needs to be up in 463 00:24:40,200 --> 00:24:43,920 Speaker 2: the air before it runs out of runway. And obviously 464 00:24:43,960 --> 00:24:47,240 Speaker 2: if the runway is going to be too short, then 465 00:24:47,320 --> 00:24:49,120 Speaker 2: we need to raise more money again and that's when 466 00:24:49,160 --> 00:24:51,200 Speaker 2: the next round happens, hopefully at a higher evaluation. 467 00:24:51,680 --> 00:24:54,320 Speaker 1: I like it. I like the financial engineering there with 468 00:24:54,400 --> 00:24:56,680 Speaker 1: the wording of it. Rather than saying I'm losing heaps 469 00:24:56,680 --> 00:24:58,199 Speaker 1: of money every month and I'm going to run out 470 00:24:58,240 --> 00:25:00,639 Speaker 1: of money in X number of months, I've got a 471 00:25:00,680 --> 00:25:02,600 Speaker 1: burn rate of this and a runwate of that. Sounds 472 00:25:02,600 --> 00:25:03,160 Speaker 1: a lot better. 473 00:25:03,640 --> 00:25:05,240 Speaker 2: Yeah, all right. 474 00:25:05,240 --> 00:25:07,440 Speaker 1: Let's have a chat about risks. So what would you 475 00:25:07,480 --> 00:25:12,080 Speaker 1: say the top couple of risks that you would say 476 00:25:12,119 --> 00:25:14,480 Speaker 1: to investors to think about before they jump into a 477 00:25:14,480 --> 00:25:16,560 Speaker 1: private equity or adventure capital type investment. 478 00:25:17,080 --> 00:25:20,880 Speaker 2: We've touched briefly on this before and when we discuss 479 00:25:20,960 --> 00:25:23,080 Speaker 2: what top investor would like to invest, but and what 480 00:25:23,160 --> 00:25:25,399 Speaker 2: factors you need to consider. So the risk or the 481 00:25:25,440 --> 00:25:28,439 Speaker 2: one is liquidit to your risks. So pe or private 482 00:25:28,440 --> 00:25:31,960 Speaker 2: equity investments are not traded on public markets, and your 483 00:25:32,000 --> 00:25:34,480 Speaker 2: capital could be locked up for five to ten years. 484 00:25:34,640 --> 00:25:37,240 Speaker 2: Sometimes you like in less than five, but it's a 485 00:25:37,240 --> 00:25:40,200 Speaker 2: long time. So are you prepared to have it locked 486 00:25:40,280 --> 00:25:43,040 Speaker 2: up and you can't sell it? If you sell it, 487 00:25:43,200 --> 00:25:46,280 Speaker 2: usually sell it at a discount to other investors, and 488 00:25:46,440 --> 00:25:49,440 Speaker 2: you don't want to do that market risk. If there's 489 00:25:49,480 --> 00:25:53,160 Speaker 2: a market downturn, then the cost of capital and debt 490 00:25:53,440 --> 00:25:58,159 Speaker 2: becomes quite expensive. So if you raising capital and investing 491 00:25:58,240 --> 00:26:02,320 Speaker 2: through a downturn, obviously you could invest at a time 492 00:26:02,359 --> 00:26:06,240 Speaker 2: when the company is valued at x, and then two 493 00:26:06,359 --> 00:26:09,719 Speaker 2: years later they valued at a lower evaluation, and then, 494 00:26:09,760 --> 00:26:12,359 Speaker 2: like anything in any investment that could be lower, they 495 00:26:12,560 --> 00:26:15,000 Speaker 2: now need to raise new money. They ran out of 496 00:26:15,080 --> 00:26:18,240 Speaker 2: run way. They raise new money and the shares that 497 00:26:18,280 --> 00:26:20,320 Speaker 2: the issue will be at a lower evaluation. This is 498 00:26:20,359 --> 00:26:24,439 Speaker 2: known as a downrounde and typically it's not favorable and 499 00:26:24,520 --> 00:26:27,000 Speaker 2: it will leave the current shelds even further. And then 500 00:26:27,040 --> 00:26:30,120 Speaker 2: there's the other one, which is the operational and execution risk. 501 00:26:30,240 --> 00:26:34,000 Speaker 2: So the company and management team simply they just could 502 00:26:34,080 --> 00:26:37,600 Speaker 2: simply struggle to execute operationally, or there's no sales or 503 00:26:37,760 --> 00:26:40,960 Speaker 2: something change in the market, some regulation came through and 504 00:26:41,200 --> 00:26:44,000 Speaker 2: closed down the market opportunities for them. So that's a 505 00:26:44,000 --> 00:26:44,920 Speaker 2: few of the risks. 506 00:26:45,560 --> 00:26:48,199 Speaker 1: Got it all right, So we've got liquidity. Money is 507 00:26:48,320 --> 00:26:50,840 Speaker 1: trapped until there's an exit event. In most cases, there's 508 00:26:50,840 --> 00:26:53,840 Speaker 1: this market whereso conditions can change and evaluation of the 509 00:26:53,880 --> 00:26:56,080 Speaker 1: company can be affected. And then we've got operational resk 510 00:26:56,080 --> 00:26:58,080 Speaker 1: so things may not go to plan and that might 511 00:26:58,119 --> 00:27:02,000 Speaker 1: be due to the company itself broader market conditions. That's 512 00:27:02,040 --> 00:27:04,480 Speaker 1: really good, Rudy. I want to get your tips and 513 00:27:04,560 --> 00:27:07,800 Speaker 1: tricks for success in private equity. But before we do that, 514 00:27:07,920 --> 00:27:26,840 Speaker 1: let's just take another short break. Hello and welcome back 515 00:27:26,840 --> 00:27:29,359 Speaker 1: to the Money Puzzle. I'm James Gerard, writer contributor to 516 00:27:29,359 --> 00:27:31,960 Speaker 1: the Wealth section of The Australian and also financial advisor 517 00:27:32,040 --> 00:27:35,080 Speaker 1: with Financial Advisor dot com dot Au and on this 518 00:27:35,119 --> 00:27:37,800 Speaker 1: week show, I have Rudy Engel break. So Rudy, let's 519 00:27:37,840 --> 00:27:41,720 Speaker 1: have a chat about tips and tricks for private equity investors. 520 00:27:42,160 --> 00:27:44,119 Speaker 1: So what are some of the things that you've learned 521 00:27:44,240 --> 00:27:46,760 Speaker 1: over the years that you think would be useful for 522 00:27:46,840 --> 00:27:49,800 Speaker 1: a new investor in this area to know about. 523 00:27:50,400 --> 00:27:53,160 Speaker 2: I would start off with looking at the people, the 524 00:27:53,200 --> 00:27:57,080 Speaker 2: management team, the key executives, their track record, much of 525 00:27:57,160 --> 00:27:59,480 Speaker 2: that I'm comfortable with them, then I can actually relate 526 00:27:59,520 --> 00:28:02,439 Speaker 2: to them. Is my own personal way of doing a 527 00:28:02,440 --> 00:28:06,080 Speaker 2: bit of due diligence on the people. First. Ultimately, companies 528 00:28:06,080 --> 00:28:09,399 Speaker 2: are built by people selling products built by people again 529 00:28:09,520 --> 00:28:12,919 Speaker 2: and selling it to other people, so it is ultimately 530 00:28:13,480 --> 00:28:16,240 Speaker 2: driven by that. The second thing I would do is 531 00:28:16,520 --> 00:28:21,119 Speaker 2: work through the numbers due diligence questions, try to break 532 00:28:21,320 --> 00:28:26,920 Speaker 2: their assumptions and models and ideas. And sometimes it could 533 00:28:26,920 --> 00:28:29,040 Speaker 2: be that you just don't know enough and they do 534 00:28:29,160 --> 00:28:32,160 Speaker 2: know quite a lot more than you do. But keep 535 00:28:32,160 --> 00:28:36,159 Speaker 2: on asking the questions that would seem obvious even in 536 00:28:36,200 --> 00:28:39,960 Speaker 2: that way. Also, don't be too scared by too much 537 00:28:40,080 --> 00:28:44,160 Speaker 2: technology talk or other questions. If they cannot explain it clearly, 538 00:28:44,520 --> 00:28:46,720 Speaker 2: then they're going to have to sell these products and 539 00:28:46,800 --> 00:28:48,800 Speaker 2: explain it to other people. So it must be simple 540 00:28:48,840 --> 00:28:51,240 Speaker 2: to understand for you. If you don't understand it, then 541 00:28:51,240 --> 00:28:54,240 Speaker 2: maybe it's also not for you and you can pass. 542 00:28:54,320 --> 00:28:57,400 Speaker 2: Another area that I look at as the industry, I'll 543 00:28:57,400 --> 00:29:01,240 Speaker 2: look at similar companies or compare it. I compare to 544 00:29:01,320 --> 00:29:05,600 Speaker 2: aaliations like we mentioned before, look at similar multiples. I'll 545 00:29:05,640 --> 00:29:07,720 Speaker 2: look at how they raise capital, how much capital that 546 00:29:07,800 --> 00:29:11,120 Speaker 2: they raise, just to get another data point and guideline 547 00:29:11,120 --> 00:29:15,920 Speaker 2: on that. And in general, I avoid companies with debt. 548 00:29:16,200 --> 00:29:18,920 Speaker 2: I don't understand why you would want to raise capital 549 00:29:19,280 --> 00:29:21,680 Speaker 2: and then use that to service your current debt, even 550 00:29:21,720 --> 00:29:24,479 Speaker 2: if they promise not to pay back debt and they 551 00:29:24,600 --> 00:29:27,960 Speaker 2: use it working capital as I just don't understand while 552 00:29:28,120 --> 00:29:30,800 Speaker 2: they can't just issue more shares. Again, there could be 553 00:29:30,800 --> 00:29:33,360 Speaker 2: other reasons for that. That's me. I just don't want 554 00:29:33,400 --> 00:29:37,040 Speaker 2: more debt. And then be patient, ensure that you're comfortable 555 00:29:37,360 --> 00:29:40,600 Speaker 2: that the money that you invest it can be locked 556 00:29:40,640 --> 00:29:43,560 Speaker 2: up for many years, don't expected to have a return 557 00:29:43,640 --> 00:29:47,520 Speaker 2: next year, and then also accept it not all investments 558 00:29:47,560 --> 00:29:51,080 Speaker 2: will yield the five x or ten x or twenty 559 00:29:51,240 --> 00:29:55,680 Speaker 2: x type of returns and multiples that everyone else talks about. Remember, 560 00:29:55,760 --> 00:29:59,160 Speaker 2: people talk about the winner, not the ten losers out 561 00:29:59,160 --> 00:30:02,240 Speaker 2: there or the average return spere that in. 562 00:30:02,280 --> 00:30:06,360 Speaker 1: Mind excellent and in terms of the way that people 563 00:30:06,400 --> 00:30:09,480 Speaker 1: can get access to private equity investments, we've been talking 564 00:30:09,520 --> 00:30:13,760 Speaker 1: mainly about the direct pathway where we're investing, we become 565 00:30:13,880 --> 00:30:16,480 Speaker 1: shareholders on the share register of a private company. But 566 00:30:16,520 --> 00:30:21,360 Speaker 1: there's also other pathways available to the everyday investor. There's ETFs. 567 00:30:21,160 --> 00:30:23,240 Speaker 1: There's a ping Ghana or maybe that's not an ETF, 568 00:30:23,280 --> 00:30:25,440 Speaker 1: but it's a maybe it's a listed investment company or 569 00:30:25,800 --> 00:30:28,240 Speaker 1: it's a listed trust. Ping Ghana have one and they 570 00:30:28,240 --> 00:30:32,360 Speaker 1: invest into private equity investments, so that's brought through the ASX. 571 00:30:32,480 --> 00:30:34,760 Speaker 1: There's a managed fund by Schroeder as well. They've got 572 00:30:34,760 --> 00:30:37,600 Speaker 1: a private equity fund. So you can take a hands 573 00:30:37,640 --> 00:30:41,080 Speaker 1: off approach and let a professional fund manager invest into 574 00:30:41,160 --> 00:30:44,400 Speaker 1: a portfolio of private equity investments for you if you 575 00:30:44,440 --> 00:30:47,280 Speaker 1: don't want to go through the trenches and the hard 576 00:30:47,280 --> 00:30:49,880 Speaker 1: work of doing the du diligence yourself, and also if 577 00:30:49,880 --> 00:30:52,400 Speaker 1: you want to diversify more and have a whole portfolio 578 00:30:52,440 --> 00:30:56,000 Speaker 1: of investments rather than a smaller amount, because generally private 579 00:30:56,000 --> 00:30:59,080 Speaker 1: equity investments, if you go direct, they will usually want 580 00:30:59,120 --> 00:31:01,440 Speaker 1: you to be what's called a whole sale investor, which 581 00:31:01,480 --> 00:31:05,080 Speaker 1: means that they will want you to have an accountant's 582 00:31:05,400 --> 00:31:08,200 Speaker 1: letter clearance as signed off on, which means that the 583 00:31:08,200 --> 00:31:10,760 Speaker 1: accountant needs to certify that you earn either more than 584 00:31:10,760 --> 00:31:13,040 Speaker 1: two hundred and fifty thousand dollars per it a past 585 00:31:13,040 --> 00:31:15,520 Speaker 1: two financial years or your net worth is more than 586 00:31:15,560 --> 00:31:18,680 Speaker 1: two point five million dollars. And then the minimum investment 587 00:31:19,120 --> 00:31:22,400 Speaker 1: it's generally one hundred thousand, sometimes two hundred thousand. Some 588 00:31:22,440 --> 00:31:25,240 Speaker 1: companies will drop it to fifty thousand, but they're larger 589 00:31:25,240 --> 00:31:27,480 Speaker 1: amounts that they're not like five hundred dollars, which is 590 00:31:27,480 --> 00:31:29,480 Speaker 1: the case when you buy shares on the share market. 591 00:31:29,760 --> 00:31:32,680 Speaker 1: Even for quite wealthy investors. It's quite difficult to invest 592 00:31:32,680 --> 00:31:35,200 Speaker 1: in a whole heap of private equity investments just due 593 00:31:35,240 --> 00:31:38,520 Speaker 1: to the minimum investment restrictions. Funds are another way to 594 00:31:38,560 --> 00:31:40,840 Speaker 1: do it, and really there's a few websites around, aren't 595 00:31:40,840 --> 00:31:44,920 Speaker 1: there that they like they crowdfund into private equity investments. 596 00:31:45,080 --> 00:31:48,040 Speaker 1: So they put up a campaign about a chili sauce 597 00:31:48,120 --> 00:31:50,880 Speaker 1: or something like that, or a new gin distillery, and 598 00:31:50,960 --> 00:31:53,000 Speaker 1: they try and get people into that. That's another way 599 00:31:53,080 --> 00:31:56,640 Speaker 1: that people can get into private equity investments. But I 600 00:31:56,680 --> 00:32:00,920 Speaker 1: would caution that pathway because my perception is that pathway 601 00:32:01,000 --> 00:32:03,480 Speaker 1: appeals to more I have to use that term, but 602 00:32:03,520 --> 00:32:06,440 Speaker 1: the sucker money because they're throwing more around the images 603 00:32:06,600 --> 00:32:10,000 Speaker 1: and the market opportunity more than the numbers. In those 604 00:32:10,000 --> 00:32:13,040 Speaker 1: type of things. It's more of a psychological thing that, oh, yes, 605 00:32:13,240 --> 00:32:15,120 Speaker 1: I use this product. I can actually go buy some 606 00:32:15,160 --> 00:32:17,960 Speaker 1: shares and be a shareholder. But when you have a 607 00:32:17,960 --> 00:32:20,040 Speaker 1: look at what you own of the company, it might 608 00:32:20,080 --> 00:32:23,040 Speaker 1: be like zero point zero one percent, whereas you thought 609 00:32:23,080 --> 00:32:24,480 Speaker 1: it might have been a bit more than that. But 610 00:32:24,480 --> 00:32:26,960 Speaker 1: it's a little bit opaque with regards to the financials 611 00:32:26,960 --> 00:32:30,120 Speaker 1: and evaluations. It's more on the idea, that's right. 612 00:32:30,400 --> 00:32:36,320 Speaker 2: Yeah. To add on to your comments about investing in 613 00:32:36,440 --> 00:32:40,280 Speaker 2: the listed trusts or on the ASX, there are companies 614 00:32:40,800 --> 00:32:45,760 Speaker 2: and funds that will offer you a product where you invest, 615 00:32:46,120 --> 00:32:50,120 Speaker 2: say fifty or ten thousand dollars into the fund, and 616 00:32:50,160 --> 00:32:52,960 Speaker 2: then the fund manager will perform all the due diligence 617 00:32:53,800 --> 00:32:57,640 Speaker 2: for you because that's their job, and they will then 618 00:32:57,680 --> 00:33:00,479 Speaker 2: obviously tides an annual fee to manage the fund. There 619 00:33:00,480 --> 00:33:03,280 Speaker 2: will be performance fees that they'll sar. It's based on 620 00:33:03,320 --> 00:33:05,760 Speaker 2: the performance of the assets in the fund and the 621 00:33:05,800 --> 00:33:09,960 Speaker 2: companies invest in and you're just one of the investors 622 00:33:09,520 --> 00:33:12,720 Speaker 2: in this pe fund. However, it can be worth it, 623 00:33:13,480 --> 00:33:17,000 Speaker 2: especially when the fund investing in multiple companies over the 624 00:33:17,000 --> 00:33:20,479 Speaker 2: timeline of the fund. They diversify the risk for you, 625 00:33:20,960 --> 00:33:24,400 Speaker 2: and they will also offer you some liquidity where you 626 00:33:24,480 --> 00:33:26,520 Speaker 2: might not have to wait five to seven years. You 627 00:33:26,560 --> 00:33:29,160 Speaker 2: could once a year or twice a year be able 628 00:33:29,200 --> 00:33:32,640 Speaker 2: to retraw a percentage of your funds in them. So 629 00:33:32,680 --> 00:33:35,720 Speaker 2: that is one way instead of going crowdfunding, where James 630 00:33:35,840 --> 00:33:40,360 Speaker 2: totally right. The crowdfunding feels like a hailgun approach. We 631 00:33:40,480 --> 00:33:43,240 Speaker 2: just spray money and hope to get something back, where 632 00:33:43,280 --> 00:33:46,280 Speaker 2: at least with a fund manager with a good track record, 633 00:33:46,560 --> 00:33:48,200 Speaker 2: they will do a lot of the work for you. 634 00:33:48,840 --> 00:33:51,040 Speaker 1: That's right. Really, we're almost out of time. If you 635 00:33:51,040 --> 00:33:54,160 Speaker 1: could give me one final thought with regards to private 636 00:33:54,160 --> 00:33:58,000 Speaker 1: equity and venture capital to take our listeners away with, 637 00:33:58,080 --> 00:33:58,920 Speaker 1: what would you say? 638 00:33:59,440 --> 00:34:03,400 Speaker 2: I would definitely take the advice of a financial advisor 639 00:34:03,800 --> 00:34:08,520 Speaker 2: to walk with me this through the detail and assess 640 00:34:08,600 --> 00:34:12,520 Speaker 2: my risks and my profile and goals before I just 641 00:34:12,560 --> 00:34:15,359 Speaker 2: go and invest. Because the last thing you need is 642 00:34:15,400 --> 00:34:18,520 Speaker 2: to invest a big chunk of your life savings into 643 00:34:18,560 --> 00:34:21,640 Speaker 2: something and then wait for that. We might not get 644 00:34:21,640 --> 00:34:24,719 Speaker 2: a reach out, so make sure your ascid adication and 645 00:34:24,760 --> 00:34:26,080 Speaker 2: your goals are aligned. 646 00:34:27,480 --> 00:34:29,960 Speaker 1: Fantastic. Thank you for that, Rudy, and thank you so 647 00:34:30,040 --> 00:34:32,719 Speaker 1: much for joining us today. It's been really insightful and 648 00:34:32,760 --> 00:34:35,280 Speaker 1: I've enjoyed our chat and I'm sure our listeners will 649 00:34:35,600 --> 00:34:38,560 Speaker 1: as well. So thank you again, Rudy Engelbrek for joining 650 00:34:38,640 --> 00:34:39,560 Speaker 1: us on The Money Puzzle. 651 00:34:40,080 --> 00:34:42,680 Speaker 2: Thank you, James really enjoyed it. Thanks for the time. 652 00:34:42,719 --> 00:34:45,319 Speaker 1: Excellent, And to our listeners, thank you for tuning into 653 00:34:45,360 --> 00:34:47,840 Speaker 1: today's episode of The Money Puzzle. Send in a question 654 00:34:48,000 --> 00:34:50,040 Speaker 1: and James Kirby will answer it in a couple of 655 00:34:50,080 --> 00:34:52,360 Speaker 1: weeks time. I'll be with you for the next two weeks, 656 00:34:52,600 --> 00:34:55,120 Speaker 1: and coming up on next week's episode, we're going to 657 00:34:55,200 --> 00:34:59,040 Speaker 1: have a return of an accountant named Timothy Ricardo. He 658 00:34:59,200 --> 00:35:01,840 Speaker 1: was on a few months ago when I last guest hosted, 659 00:35:01,880 --> 00:35:04,840 Speaker 1: and he copped a bit of flak from his clients 660 00:35:04,840 --> 00:35:08,600 Speaker 1: and friends because we were talking about what are some 661 00:35:08,640 --> 00:35:10,560 Speaker 1: of the things that you can claim as a tax 662 00:35:10,600 --> 00:35:12,920 Speaker 1: deductions and we had a lot of weird scenarios, but 663 00:35:13,000 --> 00:35:15,799 Speaker 1: Tim seemed to say no to everything, so Tim's been 664 00:35:15,840 --> 00:35:18,520 Speaker 1: given the task of saying yes to something, so he's 665 00:35:18,560 --> 00:35:21,320 Speaker 1: going to come prepared next week with some tax deductions 666 00:35:21,320 --> 00:35:23,000 Speaker 1: that you didn't think that you could get that you 667 00:35:23,080 --> 00:35:26,640 Speaker 1: could actually get, as well as talking about other contemporary 668 00:35:26,640 --> 00:35:29,319 Speaker 1: tax issues. So we look forward to that. You can 669 00:35:29,400 --> 00:35:31,840 Speaker 1: tweet us your thoughts, just use a hashtag the Money 670 00:35:31,840 --> 00:35:34,200 Speaker 1: Puzzle or one word or email us on the Money 671 00:35:34,200 --> 00:35:37,759 Speaker 1: Puzzle at the Australian dot com dot au. Until next time, 672 00:35:37,840 --> 00:35:39,439 Speaker 1: I'm James Gerard. Talk to you soon.