Monday Sep 8 2008
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Here’s something of interest. Well, something of interest to certain people: a textbook about private equity for those minded to invest.

Guy Fraser-Sampson, the author of “Private Equity as an asset class”, is a former hedge fund manager from Horsley Bridge, who hung up his alpha boots to pursue a writing career. He’s just been interviewed on the Interactive Investor blog by Richard Beddard. Some nuggets:

• On the face of things, the venture capital side of the business may look far more employee-friendly that its bigger buyout brother, but that increased general efficiency brought about by private equity really shouldn’t be underplayed.
• Any effort to change the tax regime for private equity in the UK would cause an exodus of operators from London, “It would be a massive, massive blow to the UK economy. I’m guessing, but you could be talking about taking one or two percent off GDP.”

Fraser-Sampson says the buyout industry’s real problem is not buyouts themselves, but the ever-increasing size of the funds raised to make the transactions.

• He argues that the incentive for private equity professionals has moved away from carried interest on the investments to the management fee of the fund itself. “Most buyout managers, for large funds anyway, are probably at least as motivated by management fee as they are by carried interest”. While fund managers grow fat on management fees, the prospect of a big profit for investors is reduced.

• If private equity is to deliver super returns in future, it’s unlikely to be from the 6% of private equity funds over $1bn in size that have attracted 55% of all private equity capital since 2001. Instead it will come from the best of the other 94%, many of them small venture funds.

Indeed, in Sampson-Fraser’s view, the smart money is already moving on, leaving a heap of dumb money sitting at the bigger funds. The figures suggest a clear inverse correlation between fund size and returns but still investors pile in. “It’s a classic case of the herd mentality”.