From Adventures 2019 fourth-quarter letter:
Anyone who tells you that money is a commodity has never raised capital, done a deal or had a partner. Money is always attached to people, and people come with a variety of temperaments, time horizons and incentives. A dollar that can walk tomorrow is less valuable than a long-term trusted partner.
The problem is that traditional private equity terms create terrible incentives for buying and operating a company. A private equity firm is being completely rational when it continues to pay higher prices, does less due diligence, raises larger and larger funds, buys bigger companies, makes short-term decisions and bills the heck out of investors.
If that sounds like strange behaviour, you don’t understand how traditional private equity works. It’s not because they’re bad people. Some are, but most are decent people who are trying to make a living and doing the best they can under the circumstances. Those circumstances are co-created with Limited Partners (ie the people with the money) who hog tie the dollars with all kinds of nutty and perverse strings attached.
Here’s a big management fee to pay yourself handsomely. Want more? Raise more. Don’t worry about putting much skin in the game. Feel free to use copious amounts of debt, just make sure it’s non-recourse. If the company detonates, walk away. And for goodness sake, never hold an investment longer than five years. In fact, make sure you sell your winners early so you can raise your next fund.
If the standard model is broken, why don’t more people want to change it? The short answer is career risk. No-one wants to break wind in a crowded elevator, but as the great philosopher Austin Powers replied when asked how he dared do that: “I didn’t know it was your turn, baby.”