Buddy Flerl is an active participant and investor in a number of markets. He acts as an investor and limited partner in institutional funds in the secondary market, providing liquidity to PE firms. He also has experience investing overseas.
In both scenarios, he says, it comes down to people.
“It’s all about people, at least for the foreseeable future,” says the former venture capitalist and current chairman of IT company RDX. “Most investing decisions in the private equity world and secondary world, their investment committees are going to be run by humans, not robots, at least for a while. So yeah, it is a people business, and the best way to get to know people is to see them and know them. I’m a big believer in understanding the people behind the underwriting, because being in the position they’re in often can create some dangerous pressures.”
Buddy Flerl is one of the 40 host committee members who is shaping the Smart Business Dealmakers Conference (formerly ASPIRE), presented by Metz Lewis, which will be held March 5, 2020, at the Wyndham Grand Pittsburgh Downtown.
How does the secondary market of PE work?
There are two ways that you can be involved today in the private equity world as an investor, if you’re not an institutional grade limited partner investor in a big PE fund.
One would be more on the friends and family side, so, investing alongside the other limited partners, but perhaps on a different scale. A number of the financial sponsors have baskets of friends and family that co-invest with them.
The second way, which is the secondary market, is a little bit of a different proposition. It’s evolving into a very large and liquid market, where capital formation exists for the purpose of providing capital for the actual partnerships or corporations, or however they’re structured as a general partner, to actually put money on their balance sheet and take a stake in the firm.
So, in some ways, it’s not terribly different than if you were to go out in the public markets and buy stock in like a Blackstone, one of the publicly traded PE firms.
Why might PE firms reach into those secondary markets?
Sometimes it’s succession-based capital. You may have a handful of founding partners in the general partner ranks, and over the years, as they’ve grown, they’ve brought in other partners. But the founders perhaps are starting to think about the longer life of the fund and their firm, and there’s got to be a capital structure that can allow them to create room for the next generation of partners to be able to have a stake and some upside.
Sometimes, one or two holdings are in a fund that otherwise has been harvested and realized. Maybe they have a company sitting in that fund that’s doing okay — it’s gone through some hiccups and it’s still turning around. In order to close out the fund, it can be a good option to go into the secondary markets. The limited partners sell out that position at some negotiated price.
What’s your advice for people who want to invest in the secondary market?
You definitely want to do your homework because it’s certainly not like index investing. Today, there’s no a way to index invest in private equity. I’m sure it’s coming, but these are very event-driven.
You mentioned that you’ve invested overseas. How different is that?
There is plenty that’s different, but generally the biggest differences have to do with people and cultures.
One area in the Middle East where I have some experience brings a very different kind of mindset than in Asia or Europe. Regardless of Eurozone formation, Europe still, very much so, is a collection of unique behavioral economies, both on the commercial and consumer side.
So, it boils down to people and culture — how people interact, how people think — and on some level, supply and demand, as well.
I’ve had some experience investing in Israel, which is unique in ways that are unique to themselves. Their uniqueness is even unique, given a lot of the geopolitical and historical factors that are at play.
I’ve heard European investing can be slower paced than in the U.S. Do you find that to be true?
You’ll hear that, and you’ll certainly see it. But I’ve certainly seen things seeing things happen very quickly.
We had a deal get away from us in 2018 that moved very quickly, a deal in Germany that we were hot and heavy after. It was more of a large corporate divestiture, so it wasn’t necessarily trading between financial investors. That one moved very quickly, so they certainly know how to move quickly when they need to or want to — at least in Germany in this particular situation.
I can name other countries where it’s been awhile since something happened quickly. Italy would come to mind. We don’t look in Italy for anything.
How can dealmakers prepare to work internationally?
If someone is looking to work as a dealmaker that has an aspect overseas, make sure your bases are covered in terms of personnel and awareness and history of the markets where you’d like to operate. That’s really no different than if you’re expanding your own business into some of those markets.