WEBVTT - TMP 120924 - RUDI_mixdown 0:00:10.640 --> 0:00:13.360 Hello, and welcome to today's episode of The Money Puzzle. 0:00:13.400 --> 0:00:16.160 I'm your host James Gerard, standing in for James Kirby 0:00:16.160 --> 0:00:19.080 this week as he enjoys a well deserved break. Today 0:00:19.120 --> 0:00:21.880 we've got a special episode plan which is all about 0:00:22.040 --> 0:00:26.520 private equity investments and venture capital investments. It may sound 0:00:26.600 --> 0:00:29.120 very mysterious, at the end of the day, private equity 0:00:29.160 --> 0:00:32.159 is just basically investing in a company that's not listed 0:00:32.200 --> 0:00:35.879 on the share market. So imagine investing in your local bakery. 0:00:36.120 --> 0:00:39.000 That could be considered private equity. And for those who 0:00:39.000 --> 0:00:41.199 have watched the TV show Billions, if you don't have 0:00:41.320 --> 0:00:44.519 billions of dollars like Bobby Axelrod does to invest there 0:00:44.560 --> 0:00:47.000 are still some pathways for the everyday mum and dad 0:00:47.040 --> 0:00:51.800 investor to invest into private equity. But this particular asset class, 0:00:52.240 --> 0:00:56.400 it requires a lot of research into it because it's 0:00:56.560 --> 0:00:59.520 a big case of buyer, where with private equity there's 0:00:59.520 --> 0:01:02.400 a lot less information there, there's a lot more risks, 0:01:02.720 --> 0:01:07.320 so it's generally a lot more less transparent than the 0:01:07.360 --> 0:01:09.479 share on the share market. So investors need to be 0:01:09.600 --> 0:01:11.800 a lot more careful before they invest into private equity. 0:01:11.880 --> 0:01:14.120 So today we'll break down the basics, we'll share some 0:01:14.240 --> 0:01:16.679 tips and tricks, we'll discuss the ins and outs of 0:01:16.680 --> 0:01:18.880 private equity. And to help us do this, we've got 0:01:18.920 --> 0:01:22.000 a very special guest. Rudy Engelbreck is a close friend 0:01:22.000 --> 0:01:24.920 of mine and also a private investor, and he's kindly 0:01:24.920 --> 0:01:27.520 agreed to open the books and share his experience on 0:01:27.560 --> 0:01:30.720 private equity investing in Australia. Have he migrated from South 0:01:30.720 --> 0:01:33.360 Africa around ten years ago. But to be very clear, 0:01:33.440 --> 0:01:35.920 Rudy's not providing advice. All his views are his own 0:01:35.959 --> 0:01:39.520 personal views. He's not acting in any other capacity. So always, 0:01:39.560 --> 0:01:41.720 as is the case on the Money Puzzle, everything we 0:01:41.800 --> 0:01:44.800 discuss is general advice. It's not personal advice, and you 0:01:44.840 --> 0:01:48.000 should seek your own advice from a professional before making 0:01:48.000 --> 0:01:51.400 any decisions. So, without any further ado, Rudy, welcome to 0:01:51.480 --> 0:01:52.240 the Money Puzzle. 0:01:52.680 --> 0:01:55.280 Thank you, Jane, thank you for inviting me to go 0:01:55.400 --> 0:01:55.880 to the show. 0:01:56.560 --> 0:02:00.160 My pleasure. Let's get right into it. So firstly, I'd 0:02:00.280 --> 0:02:02.680 liked for you to tell our listeners a little bit 0:02:02.680 --> 0:02:05.680 about yourself. So you're your background and what's your history 0:02:05.720 --> 0:02:08.320 of private equity? What he attracted you to this type 0:02:08.360 --> 0:02:09.560 of asset class? 0:02:10.040 --> 0:02:13.280 Sure to be a quick overview. My journey started in 0:02:13.360 --> 0:02:15.800 two thousand when I was still in South Africa and 0:02:15.880 --> 0:02:18.600 I had an opportunity to join a young fintech startup 0:02:18.760 --> 0:02:21.680 and they were going to build a new wealth management platform. 0:02:21.840 --> 0:02:24.320 I had experience in that industry and then as a 0:02:24.360 --> 0:02:27.240 key person in the venture, I wanted to lever reach 0:02:27.320 --> 0:02:30.680 my knowledge, use my experience of wealth platforms and technology, 0:02:31.240 --> 0:02:34.600 and to do that I ask them to invest in 0:02:34.639 --> 0:02:37.120 the holding company who actually owned a fintech startup at 0:02:37.120 --> 0:02:40.600 that time. That was quite nice and two years later, 0:02:40.600 --> 0:02:43.080 when I left the fintech to pursue my next venture, 0:02:43.600 --> 0:02:46.440 I then realized, hang on, these shares are now locked 0:02:46.520 --> 0:02:49.480 up somewhere and I need to find a buyer for 0:02:49.600 --> 0:02:51.760 my shares or leave it beyond and wait for a 0:02:51.760 --> 0:02:55.200 future exit. So that was my first introduction. It's into 0:02:55.560 --> 0:03:00.080 liquidity and also the premium on buyer and selling the 0:03:00.080 --> 0:03:02.480 shares and the differences in the prices. So it was 0:03:02.480 --> 0:03:06.360 a good introduction into this unlisted private equew market. It 0:03:06.400 --> 0:03:09.000 was a good lesson and I managed to sell my 0:03:09.080 --> 0:03:11.840 shares for a slight loss, but I went on and 0:03:11.880 --> 0:03:12.560 I learned from that. 0:03:13.040 --> 0:03:15.880 Great So to start, you fell into it by default 0:03:15.960 --> 0:03:18.160 you joined a company that was a private company that 0:03:18.240 --> 0:03:20.160 was growing. So it wasn't so much you were actively 0:03:20.200 --> 0:03:22.799 seeking a private equity investment. You were a staff member 0:03:22.800 --> 0:03:24.720 that had equity in this company. 0:03:24.800 --> 0:03:27.360 That's right. Yes, I wanted to just being a normal 0:03:27.360 --> 0:03:30.040 STOLF member and also be part of the key team. 0:03:30.720 --> 0:03:33.760 I wanted to leverach that knowledge and so look, I 0:03:33.800 --> 0:03:36.760 want to take my investment and grow it in a 0:03:36.800 --> 0:03:37.600 higher capacity. 0:03:38.200 --> 0:03:41.200 Perfect you started there, and then what happened from that point? 0:03:41.240 --> 0:03:42.560 What more did you do in private equity? 0:03:42.800 --> 0:03:45.920 Then? Was the normal business world. I started a business 0:03:46.240 --> 0:03:49.640 as well, and when I moved to Australia, I started 0:03:49.640 --> 0:03:53.240 another business year and through starting that business, I got 0:03:53.280 --> 0:03:58.119 involved in another fintech startup, also in the wealth platform industry. 0:03:58.600 --> 0:04:02.240 This was a wealth platform that offered their products and 0:04:02.360 --> 0:04:06.560 services to Australian financial advisors. So it sounds a bit 0:04:06.680 --> 0:04:08.920 like a case of deja vu, and it is. So 0:04:09.000 --> 0:04:12.760 I ended up investing in the startup and I educated 0:04:12.960 --> 0:04:17.960 myself on shelled agreements, company constitutions, got introduced more to 0:04:18.120 --> 0:04:22.440 subscription notices, company valuations and your financial statements. And in 0:04:22.480 --> 0:04:26.640 this case, I also engaged with legal advice and legal 0:04:26.680 --> 0:04:31.080 counsel to review shelters, agreements and the terms and conditions 0:04:31.080 --> 0:04:33.120 and term sheets. It was a bit expensive because I 0:04:33.120 --> 0:04:35.960 had to pay the market rates for legal advice, but 0:04:36.040 --> 0:04:38.599 it was a good lesson again because I learned a 0:04:38.600 --> 0:04:43.039 lot from reading pages and pages of documentation got it. 0:04:43.080 --> 0:04:44.920 So it sounds like that this is another case of 0:04:45.200 --> 0:04:48.840 using your professional experience be in a company, but also 0:04:48.920 --> 0:04:51.720 invest in that company as well. Apart from that, have 0:04:51.760 --> 0:04:54.560 you invested in other companies that you haven't worked in 0:04:54.640 --> 0:04:55.680 or you don't work in. 0:04:56.120 --> 0:04:59.080 Definitely, As you can see, at first, I started with 0:04:59.240 --> 0:05:02.440 companies where I had a deep understanding of the industry 0:05:02.640 --> 0:05:06.000 and I had a passion in that world, and over 0:05:06.080 --> 0:05:09.000 time I started to look for other opportunities out there. 0:05:09.200 --> 0:05:12.440 I branched out into other industries not connected to world platforms, 0:05:12.640 --> 0:05:15.479 but still were the heavy focus on technology because of 0:05:15.480 --> 0:05:19.479 my background in technology. So one was a evaluation platform 0:05:19.600 --> 0:05:26.920 for property, another one was a financial advisor platform providing 0:05:27.040 --> 0:05:32.720 financial advice technology. Another platform was purely building out fund 0:05:32.800 --> 0:05:38.160 management type solutions. And then over time I even ventured 0:05:38.160 --> 0:05:41.799 into more nuts and bolts type of businesses, VISA businesses 0:05:41.800 --> 0:05:46.719 that would say invest in it's a fund management company 0:05:46.760 --> 0:05:52.000 that they would then acquire a company that builds patios 0:05:52.040 --> 0:05:56.240 and roofs, for instance, and they have then a different profile. 0:05:56.520 --> 0:05:59.120 It's a lower risk profile, and there's a dividend income 0:05:59.160 --> 0:06:02.560 coming out of that investment. Yeah, so it actually brought 0:06:02.560 --> 0:06:04.480 it out to anything. 0:06:04.080 --> 0:06:07.200 Else excellent, But it still sounds like that the type 0:06:07.200 --> 0:06:10.440 of companies you invest in, you understand them because they're 0:06:10.480 --> 0:06:13.560 either in the finance sector or the IT sector, or 0:06:13.560 --> 0:06:16.000 maybe a crossover of both. So is it fair to 0:06:16.000 --> 0:06:19.479 say that you have a preference to invest into private 0:06:19.480 --> 0:06:23.159 companies that you have a finger on the pulse using 0:06:23.200 --> 0:06:25.960 that saying rather than something that might be totally foreign 0:06:26.040 --> 0:06:30.039 to you. So investing into a home tools company, for example. 0:06:30.120 --> 0:06:33.640 At first, I obviously wanted to be engaged and wanted 0:06:33.680 --> 0:06:36.360 to understand a lot about the businesses. And then over 0:06:36.440 --> 0:06:39.560 time the last few investments I've made were more about 0:06:39.720 --> 0:06:43.480 show me your track record, show me your history with 0:06:43.640 --> 0:06:47.919 a company, show me the returns, look at the balanced statement, 0:06:48.000 --> 0:06:52.839 financial statements, and look at the risk profile. I've actually 0:06:52.920 --> 0:06:56.240 I've entered into other more I would say, as I 0:06:56.240 --> 0:06:58.680 said before, the nuts and bolts. The other one is 0:06:58.880 --> 0:07:03.640 also a building trust company, so they actually provide construction services. 0:07:03.800 --> 0:07:06.920 I don't know anything really about that industry, but I 0:07:07.040 --> 0:07:09.920 like the fact that there's a sound financial model and 0:07:10.120 --> 0:07:14.360 it's literally about products and services they sell and then 0:07:14.560 --> 0:07:17.440 they have estimated earnings and then they either deliver on 0:07:17.480 --> 0:07:17.880 that or not. 0:07:18.560 --> 0:07:21.800 I'd like to know more about how these opportunities come 0:07:21.840 --> 0:07:24.679 across your plate, but also how you do the due diligence. 0:07:24.720 --> 0:07:26.680 We might do that a little bit more detail later, 0:07:26.800 --> 0:07:28.880 but for now, I'd like to move on to getting 0:07:28.920 --> 0:07:32.040 started in private equity. So what type of investor is 0:07:32.080 --> 0:07:35.520 suited to private equity in your opinion? 0:07:36.120 --> 0:07:39.240 Yeah, this really depends on each individual. A probaect with 0:07:39.600 --> 0:07:42.600 is quite different from list that shares and some of 0:07:42.600 --> 0:07:44.520 the factors you need to consider for yourself as an 0:07:44.520 --> 0:07:47.360 individual as your financial capacity, how much savings you have 0:07:47.880 --> 0:07:49.960 that you want to allocate to this. As at last, 0:07:50.360 --> 0:07:53.280 what kind of risk do you what kind of risks 0:07:53.280 --> 0:07:56.880 are you prepared to take, because many of these investments 0:07:56.960 --> 0:08:00.840 are quite risky and and some you could actually lose 0:08:01.080 --> 0:08:04.160 your whole investment. And then also the other one is 0:08:04.240 --> 0:08:07.440 how long would you are you prepared to keep your 0:08:07.440 --> 0:08:10.120 capital locked up in this investment because they're typically are 0:08:10.200 --> 0:08:14.120 quite lengthy type of investments that could be five plus years, 0:08:14.160 --> 0:08:15.720 ten years, sometimes even love it. 0:08:17.840 --> 0:08:19.920 I think it'd be good to explain a little bit 0:08:19.960 --> 0:08:23.160 more about what is the whole life cycle of a 0:08:23.160 --> 0:08:26.760 private equity or a venture capital investment, And maybe we'll 0:08:26.760 --> 0:08:29.360 start with just clarifying the difference between venture capital and 0:08:29.440 --> 0:08:31.400 private equity, and then we'll talk through what the life 0:08:31.400 --> 0:08:33.400 cycle is, and we're going to have a brief chat 0:08:33.400 --> 0:08:36.280 about the different rounds of funding as well that companies 0:08:36.280 --> 0:08:38.959 would typically seek. So my understanding is that a venture 0:08:38.960 --> 0:08:42.960 capital company is more at the incubator early stage, where 0:08:43.240 --> 0:08:45.959 they're at their infancy. They're either just an idea or 0:08:46.000 --> 0:08:49.800 they're a company that's relatively recently formed that's running at 0:08:49.800 --> 0:08:52.040 a loss because they have wages, but they're not selling 0:08:52.240 --> 0:08:54.920 any products or services yet, whereas private equity is a 0:08:54.960 --> 0:08:57.000 little bit further down the track. They're not there as 0:08:57.000 --> 0:09:00.720 a share market listed company, but they're probably developed with 0:09:00.760 --> 0:09:03.240 regards to their offering, and they still maybe running out 0:09:03.280 --> 0:09:04.880 of a loss and they may need some capital to 0:09:05.520 --> 0:09:09.440 kicker off marketing further or to develop further, but it's 0:09:09.600 --> 0:09:12.200 later on. So is that your understanding as well, Really 0:09:12.440 --> 0:09:14.920 how private equity and venture capital are different. 0:09:15.840 --> 0:09:21.440 Yeah, that's right. So usually most people will start up 0:09:21.760 --> 0:09:24.760 in the first phase will be I've got an idea 0:09:24.800 --> 0:09:26.880 and I think I've got a great business that I'm 0:09:26.880 --> 0:09:33.199 going to know bold and typically you could access there 0:09:33.240 --> 0:09:35.520 are different ways you could access capital. You could go 0:09:35.600 --> 0:09:37.559 to friends and family, if you get your own funds, 0:09:37.559 --> 0:09:40.520 et cetera, and you kick that off over time. What's 0:09:40.679 --> 0:09:43.080 what you could do is then go to an early 0:09:43.160 --> 0:09:48.280 stage and again you would talk to angel investors. You'll 0:09:48.280 --> 0:09:51.480 have your pitchtick ready, which will explain later exactly what 0:09:51.520 --> 0:09:55.160 goes into that. You'll have areas that you highlight and 0:09:55.240 --> 0:09:57.960 that which is your valuation, how much capital that you require, 0:09:58.400 --> 0:10:00.240 and how you're going to sell that to the to 0:10:00.320 --> 0:10:03.160 the angel investors. And then over time you get into 0:10:03.200 --> 0:10:06.559 a growth phase where you will then do subsequent rounds 0:10:06.679 --> 0:10:08.760 and this is how you can get more private equity 0:10:08.800 --> 0:10:12.400 companies and also venture capital companies to then invest bigger 0:10:12.480 --> 0:10:15.840 chunks of capital into your business. And now you're in 0:10:15.920 --> 0:10:19.240 the final stages and if you're lucky, then you could 0:10:19.320 --> 0:10:22.960 actually have a positive return where you actually have dividence 0:10:23.000 --> 0:10:25.640 coming out or not, or if it's a growth based company. 0:10:25.920 --> 0:10:29.280 You could focus on growing the business through revenue, and 0:10:29.360 --> 0:10:31.240 even if you're making a loss, as long as there's 0:10:31.320 --> 0:10:35.320 enough growth to back it. You could then get uses 0:10:35.360 --> 0:10:39.640 to come in as well or other institutions, and an 0:10:39.720 --> 0:10:42.360 exit can be prepared where you could sell the company 0:10:42.800 --> 0:10:45.200 as well and work through the phases, or we could 0:10:45.200 --> 0:10:48.560 ipo it even So, yeah, that was a quick summary 0:10:48.559 --> 0:10:50.319 of that, and you can dive into more detail into 0:10:50.320 --> 0:10:52.400 each of the phases again now. 0:10:52.280 --> 0:10:54.280 I think that as good as a high level summary. 0:10:54.320 --> 0:10:57.800 So basically a company starts up. The first one is 0:10:57.840 --> 0:11:01.520 the angel round, so that's right at the beginning to 0:11:01.559 --> 0:11:04.320 help kick things off. And then you have the seed round, 0:11:04.400 --> 0:11:06.480 which is at the early stage of development, and then 0:11:06.520 --> 0:11:09.120 you might have a Bridge round and Series ABC and 0:11:09.160 --> 0:11:11.800 so forth, and then you might have a pre IPO 0:11:12.080 --> 0:11:15.320 raise or there there might be other raisers beyond that, 0:11:15.440 --> 0:11:19.400 but the general cycle there with raises, and what generally 0:11:19.400 --> 0:11:23.199 happens is that new investors brought in, new shares are issued. 0:11:23.280 --> 0:11:26.560 Existing shareholders can be diluted because there's more shares now, 0:11:26.880 --> 0:11:29.600 but generally the company valuations go up every time a 0:11:29.640 --> 0:11:34.320 company raises capital. That is the hope. It doesn't always happen. Now. 0:11:34.480 --> 0:11:37.120 One thing which I find interesting because I look at 0:11:37.120 --> 0:11:40.120 private equity investments as well and have invested in some, 0:11:40.320 --> 0:11:43.000 is how they come to me and or how they 0:11:43.000 --> 0:11:44.880 come to you? How do they get in front of us? 0:11:44.920 --> 0:11:47.320 And the first thing that I always think is why 0:11:47.440 --> 0:11:50.680 is this company come in to me? Because in my 0:11:50.760 --> 0:11:53.160 head I have this thing called the sucker money, and 0:11:53.240 --> 0:11:55.559 so I think, is this company trying to find the 0:11:55.600 --> 0:11:58.920 easier source of money? They're showing a fancy pitch deck, 0:11:58.960 --> 0:12:03.040 a nice PowerPoint presentation with all these charts around the opportunity, 0:12:03.080 --> 0:12:05.640 the billions of dollars of market there, and how they're 0:12:05.640 --> 0:12:08.360 going to penetrate that market and do great. And they're 0:12:08.360 --> 0:12:10.720 hoping to to dazzle the mom and dad investor and 0:12:10.760 --> 0:12:14.320 get them to invest into it. But a more seasoned 0:12:14.360 --> 0:12:18.199 private equity investor or a private equity firm would probably 0:12:18.200 --> 0:12:20.160 be able to see through that. What are your thoughts 0:12:20.280 --> 0:12:23.600 around the funding side of things? And also how do 0:12:23.640 --> 0:12:25.439 they come across your desk these opportunities. 0:12:25.840 --> 0:12:29.200 Yeah, so that is certainly true, James. There's, as you said, 0:12:29.200 --> 0:12:32.320 the term the sucker money, or sometimes the triple F 0:12:32.559 --> 0:12:35.320 which is the friends, family and fools. So yeah, you've 0:12:35.320 --> 0:12:37.480 got to watch out and if you have any they're 0:12:37.520 --> 0:12:41.920 going after the easy money, then you're probably ninety percent 0:12:41.920 --> 0:12:43.959 of the time, right, there is a lot of that. 0:12:44.400 --> 0:12:46.960 What I do is I try to see who else 0:12:47.080 --> 0:12:50.280 is also part of this investing round. I look at 0:12:50.280 --> 0:12:53.120 their track record in terms of you are they If 0:12:53.160 --> 0:12:56.840 they're they're like a Macquarie Bank is also investing then 0:12:57.040 --> 0:13:00.800 or another listed company or even a companies who are 0:13:00.800 --> 0:13:04.440 specializing in this industry with big funds or they've done 0:13:04.480 --> 0:13:07.720 this before, then you know that their due diligence are 0:13:07.880 --> 0:13:09.559 going to be quite thorough because they're not going to 0:13:09.600 --> 0:13:14.040 invest their millions of dollars alongside your few hundred thousand 0:13:14.120 --> 0:13:16.640 or ten thousand or whatever it is. They're going to 0:13:16.640 --> 0:13:19.679 make sure that they look after themselves at first. So 0:13:19.720 --> 0:13:22.839 you can be rest assured that most of the times 0:13:22.880 --> 0:13:26.959 they've got armies of consultants and auditors, etc. For the 0:13:27.040 --> 0:13:29.960 due diligence. So that's a good one. If you're in 0:13:30.000 --> 0:13:35.440 a scenario we don't have other investors or what co 0:13:35.520 --> 0:13:39.160 investing that you can lean on, then you've got to 0:13:39.240 --> 0:13:42.319 do a lot of your undue diligence. And this literally 0:13:42.400 --> 0:13:47.440 means working through the sessions with the founders, the current 0:13:47.480 --> 0:13:51.760 executive team, the man, the key management, we're working into 0:13:51.800 --> 0:13:55.400 the next level down in the company, the senior leadership 0:13:55.400 --> 0:13:59.880 team in the company. And in my case, because I 0:14:00.120 --> 0:14:03.880 had some of the knowledge in the industry, I worked 0:14:03.880 --> 0:14:08.840 in also quite a lot of details into technology as 0:14:08.880 --> 0:14:12.679 well as the financial models, and I had some experience 0:14:13.720 --> 0:14:16.320 in an area where you don't have that experience. You 0:14:16.360 --> 0:14:20.000 can also then engage with other people who've got similar 0:14:20.000 --> 0:14:22.360 experience and bring them in. And this is how this 0:14:22.840 --> 0:14:25.760 market works. As people talk to other people, there's a 0:14:25.800 --> 0:14:30.600 network of people. You start to build up a I 0:14:30.720 --> 0:14:32.840 like a trusted network. If I trust this person, then 0:14:32.880 --> 0:14:35.800 they trust that person. Then I can probably lean on 0:14:35.880 --> 0:14:39.040 the trust relationship between these parties, and then I can 0:14:39.080 --> 0:14:42.960 also start to do some more due diligence there. Unfortunately, 0:14:43.280 --> 0:14:46.600 it's ninety percent of the cases. You do tend up 0:14:46.960 --> 0:14:49.640 to tend to do a lot of the due diligence 0:14:50.000 --> 0:14:52.560 for yourself because this is your money that you're going 0:14:52.600 --> 0:14:55.280 to invest. And yeah, if you don't do that, it's 0:14:55.320 --> 0:14:57.160 a buyableware situation. 0:14:57.360 --> 0:14:59.680 Yeah, and you've told me before with some of the 0:14:59.760 --> 0:15:03.840 you diligence that you do you mentioned doing due diligence 0:15:03.840 --> 0:15:06.240 on the management team, and that can include things like 0:15:06.320 --> 0:15:09.520 looking at their LinkedIn history, where were they at before, 0:15:09.560 --> 0:15:12.960 were there's companies successful, what was the exit for that company, 0:15:13.600 --> 0:15:16.840 and you can get a census to whether they're being 0:15:16.960 --> 0:15:20.320 successful or whether they're serial entrepreneurs where they're jumping from 0:15:20.320 --> 0:15:23.760 one startup to another startup. They're raising capital, so ie 0:15:23.920 --> 0:15:26.600 using other people's money to try and get a business 0:15:26.640 --> 0:15:29.360 off the ground. If it does great, If it doesn't, 0:15:29.520 --> 0:15:32.920 they sink it and they start something again. So they're 0:15:32.960 --> 0:15:36.320 the type of entrepreneurs we probably don't want to invest into, 0:15:36.400 --> 0:15:40.640 whereas we have others that have been management in companies. 0:15:40.640 --> 0:15:43.120 They've grown it it's e the iPod or they've trade 0:15:43.120 --> 0:15:45.360 so out it and then they go for a holiday 0:15:45.360 --> 0:15:47.320 for a while, they come back they do something else, 0:15:47.440 --> 0:15:50.800 so they've got pedigree, they've got runs on the board. Well, 0:15:50.840 --> 0:15:53.240 what we'll do is Rudy will take a quick break 0:15:53.360 --> 0:15:55.160 and then we'll come back and have a chat more 0:15:55.200 --> 0:15:58.880 and we'll jump into private equity jargon. Listeners will be 0:15:58.920 --> 0:16:12.040 back in a moment. Hello and welcome back to the 0:16:12.120 --> 0:16:14.600 Money Puzzle. I'm James Gerard, writer a contributor to the 0:16:14.640 --> 0:16:17.440 Wealth section of The Australian and also Financial Advisor with 0:16:17.640 --> 0:16:21.000 Financial Advisor dot com dot Au. And on this week's show, 0:16:21.040 --> 0:16:23.560 I have Rudy angle Breck. So we're going to dig 0:16:23.600 --> 0:16:26.080 deeper into private equity. But before I do that, I 0:16:26.120 --> 0:16:28.800 just want to remind everybody again that this is general advice, 0:16:28.880 --> 0:16:31.480 not personal advice, so please seek out a qualified advisor 0:16:31.520 --> 0:16:34.520 before making any decisions. Now, Rudy, let's have a chat 0:16:34.520 --> 0:16:38.600 about some jargon in private equity. There's all these words 0:16:38.640 --> 0:16:41.760 that sort of flow around burn rates and runways and 0:16:41.840 --> 0:16:43.720 pitch decks. So what don't we go through some of 0:16:43.800 --> 0:16:45.840 those top ones and you can just break it down 0:16:45.880 --> 0:16:47.960 in simple English? What are these things? So let's start 0:16:47.960 --> 0:16:51.040 with a pitch deck p t ch deck. 0:16:51.360 --> 0:16:55.880 What is that? So a pitch deck is very detailed. 0:16:56.640 --> 0:17:02.560 Usually it's a presentation that could from literally five pages 0:17:02.880 --> 0:17:06.480 to fifty pages, and the whole key is to get 0:17:06.480 --> 0:17:10.200 the message across in thirty minutes or less to invest. 0:17:10.200 --> 0:17:13.960 As you can imagine that a founder and their team 0:17:14.240 --> 0:17:19.560 I have to pitch this deck to probably ten two 0:17:19.680 --> 0:17:23.000 hundred people to raise money, and they want to make 0:17:23.040 --> 0:17:26.359 it as streamline as possible. The details that will usually 0:17:26.440 --> 0:17:29.600 be and that pitch check will be a quick over 0:17:29.600 --> 0:17:33.760 with the company, the market opportunity and the company's unique 0:17:33.800 --> 0:17:37.880 selling proposition, the competitive advantage. They have a bit about 0:17:37.920 --> 0:17:40.560 the management team. If they've got a good management team 0:17:40.560 --> 0:17:44.720 with a good track record and runs on the board, 0:17:44.760 --> 0:17:47.320 then they're obviously going to put that in there. The 0:17:47.400 --> 0:17:51.040 business model with their revenue streams and cost structures. And 0:17:51.280 --> 0:17:54.800 I usually look at those numbers and I multiply all 0:17:54.880 --> 0:17:59.000 costs by three on our revisal revenues and divide by three, 0:17:59.119 --> 0:18:01.480 and then I also look get up and down cases 0:18:01.520 --> 0:18:03.880 and that so I always look at those numbers. Never 0:18:03.920 --> 0:18:07.040 trust the numbers. Ask these questions on those numbers when 0:18:07.080 --> 0:18:09.879 you see them, the product offering or the service offering 0:18:10.000 --> 0:18:12.800 that they will have in the pipeline. And then they 0:18:12.880 --> 0:18:17.640 even should have financial performance a sorry performance as well 0:18:17.680 --> 0:18:21.520 as future projections and forecasts. And then also a little 0:18:21.560 --> 0:18:24.240 bit more about the capital structure in terms of how 0:18:24.280 --> 0:18:26.760 much money they've got in the bank, how much money 0:18:26.760 --> 0:18:29.680 they're inter raise, how much money they have raised, and 0:18:29.680 --> 0:18:33.640 what evaluations they've used in the past. And then basically 0:18:33.640 --> 0:18:36.640 some of the risk factors that they see or companies 0:18:36.760 --> 0:18:40.000 carry risk and issues that they can try and look 0:18:40.000 --> 0:18:44.159 at and prevent, and then some reasonable excess strategy or 0:18:44.480 --> 0:18:46.640 sometimes they don't have one, but if they have one, 0:18:46.800 --> 0:18:50.760 then usually some clear numbers or in three years they 0:18:50.800 --> 0:18:53.359 want to do this or sell to someone or list, 0:18:53.480 --> 0:18:53.960 et cetera. 0:18:54.600 --> 0:18:58.399 Excellent thanks Reddie. What I find is a red flag 0:18:58.400 --> 0:19:00.919 when I review pitch decks is if there is no 0:19:01.080 --> 0:19:04.920 financial forecast, if there are no financial numbers in there 0:19:04.960 --> 0:19:08.359 around income and expense or even projected because in a 0:19:08.400 --> 0:19:10.480 pitch deck that the company is trying to show you 0:19:10.520 --> 0:19:12.600 things that they want you to see. If they don't 0:19:12.600 --> 0:19:14.240 want you to see something that they don't put it 0:19:14.280 --> 0:19:16.080 in the pitch deck. So I get a bit concerned 0:19:16.080 --> 0:19:18.920 when they're light on the financial and the forecasts and 0:19:19.119 --> 0:19:21.520 they're more about the big picture. This is the market 0:19:21.560 --> 0:19:25.480 opportunity because they then have this valuation which could be 0:19:25.520 --> 0:19:28.560 anywhere from a few hundred thousand to tens of millions 0:19:28.560 --> 0:19:31.199 of dollars, and there may not be as much science 0:19:31.240 --> 0:19:34.440 behind it as the investor would want, particularly if they're 0:19:34.440 --> 0:19:36.359 not showing that the financials in the pitch deck. So 0:19:36.400 --> 0:19:40.000 it's always prudent that if you're interested in the company 0:19:40.119 --> 0:19:42.640 and you see the pitch deck, but it has even 0:19:42.640 --> 0:19:44.879 if it has financials, it's generally a good idea to 0:19:45.000 --> 0:19:48.159 ask for what's called the data room, which is generally 0:19:48.160 --> 0:19:52.120 a cloud based location where the company will store more information. 0:19:52.280 --> 0:19:55.200 So they might have an Excel spreadsheet with financial forecasts, 0:19:55.240 --> 0:19:59.200 and it's interesting to drill down into that because although 0:19:59.440 --> 0:20:01.800 they may be projecting certain things around the growth of 0:20:01.840 --> 0:20:05.560 the company, you need to check that and be critical. 0:20:05.560 --> 0:20:08.520 As you were saying, rudy of those assumptions. So is 0:20:08.560 --> 0:20:11.399 the growth rate they're using of say forty percent, is 0:20:11.440 --> 0:20:13.199 that in line with the market growth rate for that 0:20:13.240 --> 0:20:17.800 particular company. Is it achievable to increase customers from x 0:20:17.840 --> 0:20:20.840 to y over a twelve month period? Is it reasonable 0:20:20.960 --> 0:20:23.640 that they're going to only spend this amount of marketing 0:20:23.680 --> 0:20:25.760 to acquire customers. So all these sort of things need 0:20:25.840 --> 0:20:29.960 to be sense checked to get a good understanding of 0:20:30.320 --> 0:20:32.919 is this a realistic picture of where the company might 0:20:32.960 --> 0:20:35.240 be into the future. What do you reckon really. 0:20:35.280 --> 0:20:38.359 One hundred percent agree a good check is exactly the 0:20:38.520 --> 0:20:41.359 historic numbers. Look at the historic numbers, and if there 0:20:41.440 --> 0:20:44.440 was a forty growth rate over the last two years 0:20:44.760 --> 0:20:47.600 and they're projecting a two hundred percent growth rate over 0:20:47.640 --> 0:20:50.160 the next two years. You want to know what events 0:20:50.480 --> 0:20:53.240 are actually going to trigger those and you can ask 0:20:53.320 --> 0:20:55.800 questions around that, and you can see on a growth visually, 0:20:56.200 --> 0:21:00.320 why is this thing spiking up the revenue whatever your 0:21:00.359 --> 0:21:02.679 costs and was the cost not going to go up, 0:21:02.680 --> 0:21:04.720 et cetera. So there's a lot of promit there can 0:21:04.760 --> 0:21:07.879 be a lot of promises made without the real backing, 0:21:08.040 --> 0:21:10.800 and that you want to see historic numbers because that 0:21:10.840 --> 0:21:11.800 gives you good indication. 0:21:12.520 --> 0:21:16.120 Yeah, no, it does. And what would be a rule 0:21:16.119 --> 0:21:18.960 of thumb or is there one for valuations? How do 0:21:19.000 --> 0:21:22.000 you value a private equity company? Is there is it 0:21:22.000 --> 0:21:24.800 a multiple of revenue? Is it a multiple of profit? 0:21:25.200 --> 0:21:27.080 What about in the early stage, whether there is no 0:21:27.240 --> 0:21:31.720