Preferred Return in Private Equity

Preferred Return in Private Equity

Preferred Return Private Equity Preferred return is the part of the distribution waterfall and it gets calculated on the Invested amount based on no. of days until …

What is Preferred Return?

Preferred Return, often called ‘pref’, is a minimum return that Limited Partners in a fund must receive before any carried interest can be distributed to General Partners. A preferred return is expressed as an annual rate of return and can be thought of as the minimum expected return for the investment.

Limited Partners will receive 100% of their gross distributions until they have reached a certain rate of return on their investment in the fund. Once this rate of return has been met, General Partners will start to earn carried interest.

How is Preferred Return calculated?

Each Fund’s Preferred Return calculations are defined by the Limited Partnership Agreement that governs the fund. Fund’s calculations can vary in several ways. The most common variations are in the compounding periods of the preferred return rate, and the method for calculating elapsed time between periods.

For example, Fund A might specify that preferred return on any given capital call starts accruing when the call is funded and stop accruing when the applicable distribution of preferred return is made. Fund B might specify that for preferred return calculation purposes, any capital call or distribution is said to have taken place on the last day of the calendar month in which the capital call or distribution occurred. Now imagine a scenario where both Funds call capital on January 1, 2020 and distribute proceeds on December 31, 2020. In this scenario, Fund A investors are receiving preferred return based on 365 days of accrual, while Fund B investors are only receiving 335 days of accrual since the capital call is considered on the last day of the month.


Investor A contributes $1MM into Real Estate Fund 1, LLC on December 31st, 2020. On December 31st, 2021, Real Estate Fund 1, LLC announces a distribution. Investor A’s gross share of the distributable proceeds is $2MM. Assuming the following structure, what Investor A’s preferred return, and total distributions?

Private Equity Post Covid in the US and in Brazil, Webinar

Private Equity Post Covid in the US and in Brazil, Webinar

This Private Equity talk details the view of the industry in today’s world. The event focuses on the economic recovery in the US, from a macro and Private Equity …

Private Equity: How it really works!

Private Equity: How it really works!

How much do you really know about Private Equity? About how it could help your business accelerate its growth plans by attacking new markets, developing …

andrew busser

Andrew Busser “The Importance of Understanding Family Dynamics

The Private Equity Profits podcast with Seth Greene Episode 007 with Andrew Busser,

President of Family Office at Pitcairn For almost a century, Pitcairn has partnered with some of the world’s wealthiest families to meet their needs and drive better outcomes year to year, decade to decade generation to generation.As President of Family Office, Andy Busser leads Pitcairn’s exceptional team of relationship managers, analysts, and client communications professionals, ensuring that the Pitcairn client experience sets the standard for families of wealth. People who know Andy describe him as curious and enthusiastic, with a passion for solving complex problems.

Andy brings a commitment to objective analysis and holistic solutions to the Leadership Team, and he is known for building successful relationships with clients and employees. Throughout his Pitcairn career, Andy has spearheaded the development of the Pitcairn Experience. He continues to position Pitcairn as a leading innovator among family offices. Before joining Pitcairn in 2015, Andy was a partner at Symphony Capital, a healthcare-focused investment manager of private equity and hedge funds. Previously, he was a management consultant at The Wilkerson Group and its successor, Wilkerson Partners.

Andy holds an AB in History from Colgate University. He has served on multiple boards, including the Colgate University Alumni Corporation and Lincoln Center Education, and Andy is currently a trustee of the National Committee on American Foreign Policy. Creative by nature, Andy enjoys painting, in particular, landscapes. He is an avid reader and can usually be seen traveling with a book on history or economics.

Originally from Columbus, Ohio, suburban Philadelphia is now home for Andy, his wife, and two sons. Whenever possible, he can be found skiing in the Rockies or fishing the waters off Cape Cod.

Listen to this informative Private Equity Profits episode with Andrew Busser about maintaining and protecting generational wealth.

Here are some of the beneficial topics covered on this week’s show:

  • Providing a comprehensive service experience across all the dimensions of family wealth.
  • What it means to truly be an advocate for clients. • The one thing that can destroy generational wealth.
  • The importance of understanding family dynamics. •
  • Pitcairn’s Gen 7 research hub.
  • Communication in teaching generations what it means to be responsible with money.

Connect with Andrew:


Larry Kaplan

Leveraging Employee Stock Ownership – Larry Kaplan

Larry Kaplan, Managing Director at CSG Partners, LLC.

Larry has built the nation’s leading leveraged employee stock ownership plan (ESOP) practice. His expertise in capital structure and ESOP optimization has led to hundreds of successful liquidity transactions and numerous accolades from industry organizations. He is also the owner of Synergy Capital I, LLC, a broker-dealer that provides corporate finance, liquidity and M&A solutions for private companies.

Listen to this informative Private Equity Profits episode with Larry Kaplan about identifying risk factors that can lead to permanent impairment of capital.

Here are some of the beneficial topics covered on this week’s show:

  • Does ESOP give shareholders more after tax value more than private equity?
  • How to determine whether it’s worth exploring an ESOP transaction.
  • Analytics and data that drive the ESOPs recommendations.
  • Employee stock ownership plans and how they are funded.
  • Operating as industry agnostics. Firm philosophy and culture.

Connect with Larry



Phone: 212 433 5500


Cliff Locks 0:01
Welcome to the private equity profits podcast. I’m Cliff locks your host and with me today is Lawrence Caplan Founder and Managing Partner at CSG partners LLC. Larry has built the nation’s leading leveraged employee stock ownership plan. It’s an Aesop practice and is actively involved in all aspects of csgs investment banking activities. He helps owners of private middle market companies achieve equity monetization, while addressing personal goals such as business continuity, legacy and estate planning. His expertise in capital structures and Aesop optimization has led to hundreds of successful liquidity transactions in numerous accolades, industry organizations. Tell me how you got started, Larry, and what led you to private equity?

Larry Kaplan 0:47
Sure, I was working at a middle market accounting firm in New York in their Consulting Group, doing some general consulting we also have m&a side of our business. And I was working with one young individual that started a company was 34 years old was constantly reinvesting in his business and wanting to sell the company and we had taken the company to market he’d gotten some bids from private equity, a few from strategic and they were really low three, let’s say four to four and a half times Eva Dodd is about 21 years ago. And at the same time, we were doing some work for the garment center company, Bill Blass here that he had passed away and his estate was selling their interest. And I found out they had an employee stock ownership plan, bill actually actually sold a piece of his companies earlier. And he used that money to fund which now I think the name has changed, but was then bill Blass Reading Room at the New York Public Library. And I became interested in the Aesop I knew nothing about it. And I started talking to people that were involved in that Aesop. I spoke to their attorney, and they were telling me the tax benefits that you receive when he sold to the sap. And I knew nothing about that. And I said, That’s amazing. Actually, I said, these tax benefits are really encrypted, you don’t pay capital gains taxes, the company receives tax deductions equal to the sale value. And so I started going around to the partners at this firm, which was an excellent firm, and I started asking them what they knew about Aesop’s and everything that they knew about Aesop’s was completely wrong, because they just didn’t have any of the facts. And these are very smart audit and tax people. And I said, Look, there’s this major disconnect in the marketplace between what’s reality and what this product actually is. And so we then took this company down the road of selling to an iOS app, he got as much money after tax if he would have sold the company. And it became a huge success. Because Three years later, he sold to the software initially for like, value the company was $40,000,000.03 years later, he ended up selling the company for $140 million. He walked away with a ton more money, the employees walked away, I think there are maybe 50 of them with over $40 million. It was a major success. And that’s what led me to say there is this opportunity in the market because business owners don’t understand Aesop transactions, nor do they’re professional advisors, the one that I came across, and that’s how I got started.

Cliff Locks 3:08
I appreciate that. Tell me about your employee stock ownership plans and how they are funded.

Larry Kaplan 3:14
Sure, we like to tell business owners that any doing an Aesop is doing a leveraged buyout of your own company, right, just like a private equity firm is gonna go in, and they’re gonna put some equity to the transaction and go to the capital markets to raise debt to finance the transaction. We’re doing the same thing, right. And initially, we had to educate the banks as to Aesop’s, we had to educate the funds to ethos, we had to educate all parts of the marketplace as to why they should be lending into an Aesop transaction at terms similar to what the private equity firms are doing. And so now we got the same access to the capital markets as a private equity firm doing up and down the markets. Last year, we closed our first high yield leverage bond offering to financing ease up which was we raised over $500 million for that transaction. So we’ve got in and said to these business owners, you could do it and we’re going to help you do it. And that’s where the money comes from. It’s a debt driven transaction. There’s no equity in the deal. But since the owners aren’t paying capital gains taxes when they receive those funds, that’s the equity piece that we’re able to fill in the gap.

Cliff Locks 4:21
Isn’t Aesop give shareholders more after tax value more than private equity?

Larry Kaplan 4:26
Well, a couple of things we’re going to talk about after tax value number one, just from a strict monetary perspective, right when you sell to an ISA, under Section 1042 of the code. When you receive those proceeds, if you reinvest into qualified replacement property similar to a 1031. In real estate, it’s much more flexible. You could defer paying capital gains taxes. As long as you hold that replacement property. There’s a whole industry that’s popped up helping business owners satisfy that qR p requirement, but number one right off the bat, you’re not paying these taxes. And that’s kind of like the great equalization factor with what you’re going to see with the private equity deal. But in addition, right, how does it give them more and this is really, sometimes we go into a transaction and the private equity offers are more than what they’re going to be able to get from selling to an ease up. Most of our deals are done directly, though, with private, family owned businesses. And they could be a business in Des Moines, Iowa, or remote portion of Iowa. And they’re the private employer in that town. So when these companies start looking for liquidity strategy, these employees have been with them. In some cases, since they’ve been in that community since the 19th century. While they want to get the value for the company, getting the absolute maximum last time off the table is not what’s driving most of the people that are doing any stuff. They want value. They want strong value, but they’re also looking at their community and what’s selling to a third party could ultimately do to their community.

Cliff Locks 5:54
Well said, What industries do you serve?

Larry Kaplan 5:56
We’re industry agnostic. So right now we’re probably working on 30 or 40 different transactions. We’re working with companies in the construction industry, manufacturing, distribution, transportation, services and consulting. We’ve got a large medical practice. Aesop transaction right now, you’ve probably done some episodes on the healthcare industry. And we’re offering Aesop’s to medical practices, the same kind of a structure that they’re getting through private equity. They could do it through an Aesop. So you name any attack, we’ve got accounting firms, we’ve been uncertain specialized law firms, you name any type of an industry. And as long as those companies are paying taxes, then Aesop could be an alternative structure for them.

Cliff Locks 6:41
Very interesting. What are you most proud of in your career to date?

Larry Kaplan 6:45
Well, I think in general, we’re both proud of we’ve probably made hundreds, if not 1000s of employees, millionaires through use of putting these up in place. And I’ll just give you one quick story. One of the earlier, Aesop’s, I did turn out extremely well. And it was limited workforce. So most of the most of the top executives at the company when the company was sold four or five years later, walked away with north of a million dollars in their retirement account. And independent of this, I was playing in a casual poker game with my brother in law and some of his friends. And there was one of the guys who I’d never met before who said, Yeah, my wife worked at that a special needs child that really needed a lot of care and it was very expensive. And he said my wife worked at me SATCOM, through the sale of her stock. When the company was sold, she was able to fund the care for the rest of his life through the proceeds that she received from the Aesop. And to me, that was amazing. And we see this time and time again, now that we’re really transforming not just the selling shareholders, right, they’re happy, and they’re getting great deal. But it’s also the people that helped build these companies that are now getting dissipate in capitalism and ultimately sell and get this money. So it’s a nice thing to do very positive.

Cliff Locks 7:59
What is your approach to identifying risk factors that can lead to permanent impairment of capital,

Larry Kaplan 8:04
just like everybody else, right? So anytime we’re going into a company, we’re going to be the liaison between the company and the credit markets. And so we try to do the same type of due diligence and stress testing as any type of private equity firms come into a company and do right, what could happen to impair this company’s future cash flow. And of course, because of the ISA up in the company not paying taxes, they’re always gonna be better off at least there’s some positive cash flow. So when you stress testing and Aesop, even if the company is performing, you know, 50% less, they’re still generating the same after tax cash flows. So you’ve got more buffer in your ability if things go wrong, but it’s the same thing, right? How How big is your order book, how sticky is your clientele, the same kind of stuff that our private equity firms gonna go when we try to analyze and the better companies could get, you know, six, seven times, even puddings that don’t have that, you know that you get two times EBIT, done alone. So it just runs the gamut. And it’s the same analysis than any private equity firm will come in and do. How

Cliff Locks 9:05
do you help clients determine whether it’s worth exploring an Aesop transaction?

Larry Kaplan 9:09
Right, so we do a lot of right. So we’re a very quantitative driven firm, right? So the first thing that we go into a business owner is that we say, look, you have all these other options, right? And which is the best option for you. We’re gonna run financial models, and we do this virtually every day, we’re gonna say, what does an Aesop look compared to private equity day one? What does it look like in years 345? What does it look like and compare it to a strategic value strategic buyer. So we’re running all these different models with different assumptions and then we come through and we work. Normally we’re introduced to these clients through a trusted advisor, whether it’s their accountant, their lawyer, or some other type of their financial wealth manager. And so we’re including them in the process and collectively, they look at it and you also need to include estate planning, all the things that you look at in any type of asset. sale gets incorporated into the analysis very, very positive.

Cliff Locks 10:03
What kind of analytics and data drive the SOPs recommendations? Number one, you

Larry Kaplan 10:09
start with the same thing. So we start with the same base financial models, they would with the private equity, you can have a low growth, moderate growth, high growth case, looking at the cash flow of the business. Is it cashflow intensive? Is it not cashflow intensive, we have to look at factors that lower taxable income such as a cubii deduction, depreciation, and then we look at the company and saying, Okay, how much the bottom line driver with does the E sub really make sense? Higher the taxes that those companies are paying? When I say to companies, they’re usually pass through entities 95% of the time, either an S or an LLC, paying taxes at the personal level? And then we say, okay, when we layer on the ISA, right, how much better off of those companies be? And then we say, how much money Can we borrow, right? What’s the value of the company for Aesop purposes, so all these when we do analysis, it’s usually a 60 page analysis that covers value, capital, raise cost of capital, the ability to pay that down based on various assumptions. So again, it’s a lot of modeling. And that’s where people appreciate the detail that goes into this analytical exercise,

Cliff Locks 11:17
very professional. Describe the culture and philosophy of the firm.

Larry Kaplan 11:22
You know, our culture philosophy is always do the right thing for the client, right. And so number one client comes first, second, and third, always, you know, tell the good news and the bad news, if it makes sense. Let’s go for it. If it doesn’t, it doesn’t, then let’s not waste everybody’s time and, and try to put a square peg in a round hole. Most people at CSG have been with us further, you know, for the last 20 years, when they start coming very few people leave most of our managing directors now they become a Managing Director Emeritus. So even though they’re not working full time anymore, what ex partner who is now in his 80s, and he’s still bringing in business. And so who worked with some of the younger people, they’ll run the deals, and he’ll do it. So we have no stop limit, you know, you could continue working. And then now what we’ve really done over the last five years is bringing a real good core group of younger people that are gonna be the future of this for I think we give the best training. I mean, we know that because a lot of times, historically, they kind of target our employees and take them over the bigger banks. And then sometimes we just hired our new head of capital markets, have worked with us 15 years ago, went to work for the major banks, and then we brought him back in, and he’s been a phenomenal help for us opening up new sources of capital that we could never have touched by ourselves. So that was great.

Cliff Locks 12:39
I’m proud of you and your team a continuity, yeah, and flourishing, and really the doing the training with internal. And then the mentor. I think it’s very, very positive. And I wanted to ask you, what do you love what you do in what do you find most rewarding personally?

Larry Kaplan 12:53
Yeah, so I’m not a normal person. Because I love I mean, I love what I do, right? I mean, we’re working with different business owners in different businesses all around the country. And one thing I really didn’t love was I was on a plane, you know, usually two or three days a week. Now I bow under COVID, I sit here, we’re doing a meeting in Los Angeles, I’m doing a meeting in Phoenix, and I don’t have to travel as much, I enjoy that. But I enjoy working with business owners, right. And I enjoy working with the companies and then seeing them transform, and then seeing the success that comes out of these businesses and how successful they could become and how value how wealth is a tremendous wealth creator, not just for the few people on top, but for all of the employees at the company. And it really is great when you start to see some of these companies in the success they’ve had. Since I’ve been doing this now it’s our 21st year, you know, we see some major, major success stories.

Cliff Locks 13:46
It’s exciting. It’s not just the top sea level, the really it’s the employees at that point. And it’s

Larry Kaplan 13:51
we’ve got, you know, hourly employee workers at companies that have got retirement accounts that are in the seven figures, tremendous, what would be your personal legacy? Well, my personal legacy, just that this see our firm and the work that we’re continuing to do, to see and continue to see that, you know, we’re out here and do more of them. Unfortunately, Aesop’s are, you know, a backwater area of finance, most people don’t know them. So when you look at the benefit they bring versus the amount of market penetration they have. We’re just scratching the surface. My what I would like to see is a company that hopefully this year we’re going to do 25 to 30 of these transactions, but in five years, we’re doing 150 to 200 of these transactions and just to continue what we’re doing but in a bigger, more broad based way. Very positive. I truly appreciate you spending the quality educational time with our listeners today, Larry. Larry, can

Cliff Locks 14:47
I share your contact information with our listeners? Absolutely. You can reach Larry by email at info at CSG partners comm which is spelled info inf o at CSGP ar T and you can reach Larry by phone at 212-433-5500. Again that’s 212-433-5500 Thank you for our listeners. I look forward to being back with you shortly for another episode of the private equity profits podcast. This show has been produced by market domination, LLC.

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Private Fund Edu: Fund Types

Private Fund Edu: Fund Types

Hedge Funds, Venture Capital Funds, Real Estate Funds, Private Equity Funds and Special Purpose Vehicles! This video gives a quick overview of these …

michael livian

Michael Livian – Combining Investing with Purpose and Fulfillment

The Private Equity Profits podcast with Cliff Locks Episode 001 Michael Livian The guest is Michael Livian, founder and CEO of LivianCo. an Investment and Wealth Management Company. Michael has over 20 years of experience in the financial services industry. He was the Chairman of the Executive Committee and Head of Asset Management at Safdie Investment Services Corp. (subsidiary of the Swiss private bank, Banque Safdie). Prior to this position he was a Managing Director at Speed Ventures, a primary pan-European private equity/VC firm. He also worked as an Associate Director for Bear Stearns & Co. in New York and in Italy with a special focus on fixed income and credit derivatives. He holds a summa cum-laude MSc degree in Economics from the University of Milan. Michael published several academic articles and books on quantitative finance, fixed income and equity valuation. He is a CFA charter holder, a member of the New York Society of Security Analysts (NYSSA) and the co-chairperson of the Private Wealth Management Committee at NYSSA. He lives in New York with his wife and three children.

Listen to this informative Private Equity Profits episode with Michael Livian about the growth of the alternative investments industry.

Here are some of the beneficial topics covered on this week’s show:

• How he helps clients achieve combining investing with purpose and fulfillment.

• The best percentage for time split between portfolio company analysis/operations and evaluation of new investment opportunities.

• Attributes that make a business a good candidate for a leveraged buyout.

• The typical capital structure prevalent in LBO transactions.

• Red flags you would look out for when assessing a potential investment opportunity.

Connect with Michael



Phone: (212) 319 8900

Connect with Cliff Locks:

Michael is the founder and CEO of Livian & Co. He has over 20 years of experience in the financial services industry. He was the Chairman of the Executive Committee and Head of Asset Management at Safdie Investment Services Corp. (subsidiary of the Swiss private bank, Banque Safdie). Prior to this position he was a Managing Director at Speed Ventures, a primary pan-European private equity/VC firm. He also worked as an Associate Director for Bear Stearns & Co. in New York and in Italy with a special focus on fixed income and credit derivatives. He holds a summa cum-laude MSc degree in Economics from the University of Milan. HeI published several academic articles and books on quantitative finance, fixed income and equity valuation.He is a CFA : charterholder, a member of the New York Society of Security Analysts (NYSSA) and the co-chairperson of the Private Wealth Management Committee at NYSSA.

Listen and subscribe:

Interview Transcript:

Cliff Locks 1:05
Welcome to the private equity profit podcast. I’m Cliff Locks your host and with me today is Michael Livian, the founder and CEO of a lending company, an investment in wealth management company. Michael, tell us a bit about your background and how you got started.

Michael Livian 1:20
Hi Cliff, thank you for having me on your show. Very excited to be here today started, actually in a different country. I was born in the US but raised in Europe. That’s where I started my career. And I moved to the US about 20 years ago, I started working for a big Wall Street firm, and I was more of an academic. I published a book with Italian Publishing Company of Bloomberg. And I was working with universities, I was very involved in the fixed income space. And then I transitioned more to the venture capital and private equity space. And in 2004, I was hired to run the asset management of a Swiss private bank here in the United States. And after several years of being involved with wealth individuals in the asset management industry, I decided to start my own firm with some partners, but large caliber large family offices. And that’s how I got started. The idea was to create an innovative business that caters to the needs or modern needs of wealthy families and business owners. And since then it’s been a phenomenal journey journey.

Cliff Locks 2:34
Fantastic. I’m glad you’re helping a lot of family offices to be able to help their high net worth individuals that are part of their team. So I’m assuming you’re also doing multifamily offices, and then single family offices.

Michael Livian 2:48
Among others. Yes, so multifamily offices, single family offices, that large wealth individuals, that that’s my basic client,

Cliff Locks 2:59
How do you help your clients achieve combining investing with purpose and fulfillment?

Michael Livian 3:05
It’s I think, understanding what wealth is for for a wealthy individual or for wealthy family is it’s a multi pronged exercise. It’s it’s not only about the money and your returns, think the wealthier people get, and the more complex needs become. And the larger the families, the discourse is elevated more to what the values are, what the purpose of that family or that individual is in life, what the legacy that they want to leave behind them is. So we work through several assessments, and help our clients, not every client is a good candidate, but many clients, they really want to address those type of issues. And more and more what we are seeing is there is an alignment between the value values and purpose in life and also the way they want to invest their funds. And the So in other words, ESG is playing a role now.

Yeah, yes, g i think ESG is, it’s definitely I think it’s an acronym that has a big appeal on people, I think that it’s aligning the value. So ESG, it may be everything and nothing. It depends what you include and how you define history. But it’s really determining defining what the purpose is, you know, for that family or that individual and investing in a way that is consistent with that. So it’s different families have different views and different interests. And it’s a transition not everybody is like that some people are still really looking just at at rates of return. They’re not making an impact. But I think that the way I will look at this when we’ve been doing a lot of work and Following the research of fidelity and Beynon company, and having been discussing this for many years with a lot of professionals, what we see changing is it’s for those people that actually started the business in school. And if you think of the Mazda three, turn, you know that there’s a pyramid and the base of the pyramid are really basic needs, you know, shelter food, as you get more comfortable, and you fulfill and meet those needs, your your needs evolve, and there are different things that you’re looking for in life. And the same applies to wealth. And I think that the as we change what we do, as generations changing, what we’ve seen is that that if you survey, a baby boomer, or for those participants, so that the podcast that did not know that those individuals that were born right after World War Two, their needs are very different their views their values than the Gen Xers and Gen Y, or millennials, you know, or generations that were born after 1960, they, they have a different view of the world, they are more or less worried about their their basic needs.

They’re specially among wealthy people, that our clients, they’re more interested about finding purpose, having more balance in their life and worker and retiring and having plans in place and, and doing things that are meaningful in their life. So I think, as we evolve, you know, as a society, as an affluent society, these topics are going to become more and more relevant.

Cliff Locks 6:50
That’s very interesting. In other words, when you look at the, we have parents, they’ve been successful at this point, they have the next generations, which is their children. So if you look at the time and the quality that can be put together, where they’re spinning knowledge and education together between the parents and the children at this point, to understand their responsibilities, and the wealth that’s within the family that will continue as a legacy to go forward to be able to do good, and also to support, you know, the next generations at this point. So us actually spend time with the other generations, I mean, the children have that wealthy family at this point to help them carve a plan together and be part of the fabric of what makes the family. Yes,

Michael Livian 7:36
yes, yes, yes. Yes, a lot of the research that that that we have been reading is that that there is a positive correlation between happiness of individuals and the next generation, and having a sense of the history of the family and the heritage and the legacy and creating that bridge. It’s also a way to make everybody happier, you know, it’s like,

Cliff Locks 8:03
so the family dynamics, when they work together with one of your team members is actually addressed at that point, it actually becomes a healthier and happier ecosystem, let’s say within the family at that point. Quick question, what are some of the biggest challenges your clients are facing now?

Michael Livian 8:20
I mean, I think that at this specific point in time, obviously COVID as the gigantic challenge, I would say, for some people financially, I think even very wealthy individuals that are heavily exposed to certain areas of the real estate market, I think they are a little challenge. But for most people, I think it’s not even financial, it’s really the level of anxiety and fear, fear of the future and the, you know, questioning, you know, their their lifestyles, and where they’re gonna live, if they want to stay. I mean, we’ve seen a lot of people move around in the last year or so it’s like, people that were very deeply rooted in in a location, and they just overnight are uprooted. And they move to different states or, and so there is a lot of anxiety yet not. And, and I think that that’s probably today that the biggest issue, but I do anticipate that with the rollout of the vaccines, these will actually pass and I think we’ll hopefully we’re closer to the end than the beginning of this problem. And so that is kind of one of the main issue specific to the current circumstances. And then you have general issues, I think, our clientele there prime, they’re mostly professional business owners and entrepreneurs. And I think that the speed of the change that technology is bringing About his displacing a lot of people, a lot of it’s, it’s it has become increasingly more challenging whatever industry you’re in, to deal with the disruption that technology is bringing about. So that is also a big area of concern for our clients, the lifecycle of products, the life cycle of their specific industry is changing. And, and they need to adapt. And it’s, I don’t think that previous generations were faced with this issue. And then that’s another area where we actually converse with the, with our clients, very smart people, business owners, but that they’d like to hear from us what what we see in the marketplace, you know, we were deeply involved with the companies of all kinds and all sides, and we listen to their management calls and participate, you know, to a lot of conferences and get to know really what is happening in a lot of like, the most successful firms and we share some of the findings with our business and our owner clients

Cliff Locks 11:08
are very good. I sit on the board of directors of five companies on finding the same type of disruption that takes place at this point. Most of the companies are more entrepreneurial in their understanding is we have to disrupt ourselves at this point, before you get disrupted. What we’re finding some of the technology that’s out there in hydrogen, some medical appliances, like some of its, you know, many decades old, the technology, it’s had incremental increases, but not exponential type of increase in renewing what that engineering looks like inside those products. And we’re finding it’s the entrepreneurs that are disrupting these these organizations. But you brought up something very, very important, the conferences, maybe the zoom calls that are out there at this point in time is a way to get educated. And I think, to be proactive at this point.

Michael Livian 12:00
Yeah, I’m very optimistic about the future, I think, I do think that whatever is going on today, in the world, and with technology and digitization of almost every process offers an opportunity for people to improve and not to be displaced by technology, because I think that that, as humans, we’re always going to be superior and, and

Cliff Locks 12:29
so it’s just about educating ourselves and upgrading our knowledge and our skills. I think you’re brilliant, I think you laid that out very, very nicely the idea of the individual, and those that own the companies need to take the initiative to understand we’re going to need to re educate the workforce. Some of the manufacturing may have something called a kobach, meaning there’s a robot but the individuals working next to it, the robots doing a lot of the menial, repeatable tasks, but they can coexist together and someone’s going to have to program and keep an eye on in run those robots at that point, it’s probably a technician at that point, which will get paid more than somebody, you know, running on the line. So let me ask you, what does the growth of the alternative investment industry look like from your perspective?

Michael Livian 13:20
It’s a very, very, very good, an interesting question. First of all, I think that it is important to define the alternative investment space. I think that that. Again, I think it’s easy to put like a label on something. But what is an alternative? Is it real estate, venture capital, private equity, hedge funds, commodities? cryptocurrency, what what is it? That is included in in the definition? And I think that each subcategory of what you may define alternative investments, they have, certainly different paths in their evolution. I think that first of all, the fact that you’re in an environment where structurally interest rates are low, despite the short term gyrations that you may have had recently with the 10 year Treasury, you are still in a low interest rate environment and you are in an environment where valuations in the public markets are pretty high. So there is a very large demand for alternative assets in general. And I think that’s going to continue and I think it is going to evolve Having said that, I do believe that within the asset, alternative asset space, there are a lot of players that don’t really deserve to be there. In the end there are there’s going to be a pretty stronger so say Natural selection and evolution. And I think that that, specifically, let’s say, any person can start a hedge fund, you know, it’s like, but there’s not that many great hedge fund managers. I mean, it’s really very few are very large. So I do think that that the the compensation structure in some of the hedge funds is going to change. Okay, it has started to change, I think there’s gonna be more consolidation. And, and I think that there’s always going to be a big appeal. But I think it’s gonna look very hedge fund industry is gonna look very different in the future. I do think in the private capital markets, both private equity and private credit, you still have tremendous opportunities, in a way becoming also more liquid. You know, there are marketplaces where you can exchange physicians and loans and you have a lot of participants. And you may get higher rates still very highly of sub sectors of the alternative space. And then I can go on, but I think probably these are the broadest categories are solid ation in the hedge fund world. Still expansion in private equity, VC, private credit, as long as credit remains cheap and available, you’re not gonna have a lot of hiccups there. But again, private markets are heavily dependent on credit. And we are, I would say, in the expansionary phase for credit, but this is not going to last forever. So I think it’s important to be very wise, as an investor, where you’re when you’re approached the space,

Cliff Locks 16:36
recognizing there’s a pressure to put money to work in the five year private equity cycle, what industries or strategies do you think make the most sense right now,

Michael Livian 16:46
clearly, I think what we have seen in the last year is a strong demonstration healthcare, biotech and Life Sciences space. There are phenomenal opportunities, it’s, it’s an industry that still offers a lot of opportunities for extra returns or additional returns, because it’s a little bit behind the other industries, when it comes to de innovation other than the pharmaceutical sector in particular, or the life science or the biotech, but the healthcare sector as a whole, because it is heavily regulated. So it has not evolved as fast as a lot of other areas. So the technology there can really create a lot of incremental returns. And there’s a lot of opportunities there. I think that’s certainly a very important area. So if you think of the two areas that you have a lot of regulation that kind of slows down the evolution of an industry, there’s these two giant areas of healthcare and the financial sector. So I think they both are probably in the early cycles of a massive evolution. And in that offers, obviously opportunities for returns for investors. So it’s, it’s, I would say probably a little bit more between the VC and the private equity, not your classic private equity, leveraged buyout, I do think also, when it comes to the private equity, space, logistic and infrastructure space offers incredible opportunities. I think, again, in the US, the percentage of ecommerce in retail sales is still pretty small, compared to the entire pool of retail sales that are happening. And in I do think that the backbone of e commerce is really the logistic that’s so you know, storage facilities, and transportation. So those are kind of assets generally offer good cash flows, and they’re pretty stable, and they have potential good growth rates. And I think those are private equity investors, the ideal candidates, you know, you can level them up and increase your rates of return. So those are the main things that come to mind. But there’s obviously a lot of other areas of interest. I think it depends also on the on the style and appetite of the private equity operator.

Cliff Locks 19:09
Tell me a little bit, what credit ratios do you look at when assessing the financial health of a borrower.

Michael Livian 19:17
This plays an area of great interest for us, we look combination of purely quantitative metrics that we can pull from the balance sheets. And I think we have a very close relationship with the NYU professor or former professor at Altman, that is a dear personal friend of mine and developed the z score model. So we use his model with many other evolutions. There’s another academic by the name of Campbell, that has developed other tools. So they they give us a little bit a more holistic sense of the health of firm then obviously alongside those, those are, I think they give you a much better probability of default. But alongside those, what we use are more traditional metrics. So we use will be data ratios, that to EBIT ratios, debt to assets, debts to capital, obviously we normalize the cash flows, we look at the kind of averages over time we look at peers. So there’s a number of things that go into that. And most recently, we have not employed utilize this tools, yet, but we are working closely with some FinTech companies, they are doing a lot of interesting work, I think that they are providing their accounting solutions to companies. And they pull the data almost instantaneously from their accounting systems and from their bank accounts. And they can actually, in real time, look at the evolution and credit worthiness of the borrower. And they even lend to borrowers based on those metrics. And so there’s a lot of old school classic stuff that goes into the analysis of the credit analysis for a borrower or issuer. But there’s more and more exciting stuff that is also coming online now.

Cliff Locks 21:23
Very, very positive. And I’ve seen one of my companies is utilizing those lines of credit. In other words, we’re on, they’re doing hundreds of 1000s of dollars a week in that line of credit was very, very important to be able to allow the continual growth in that particular market. So when Yes, they have access to our bank accounts, and they understand the cash flow that’s coming from Walmart into our accounts, and they lend against it. So it maps up very, very nicely. Michael, what are some of the red flags you would look out for when assessing a potential investment opportunity?

Michael Livian 21:56
red flags, I think that, first of all, what, what we have learned in after many years of dealing with borrowers companies and management and investments, is that probably the most important aspect that you want to look at when you evaluate a business or an opportunity is actually the industry and the industry dynamics. It’s not focusing on the specific product, or the management of the company. But the first thing that we would do to identify if there are red flags, we’re just going to look at the industry dynamic. How does this industry look like? in which direction? Is it going? Is it growing? I mean, how many participants are here? Is it prone to changes and disruptions are the companies that we’re looking at the re on top of their game, or they’re behind? So it’s not really a red flag, but that’s contextual, I mean, if an industry is going in the wrong direction, we’re not going to put money behind it. Now red flags is, first you start with the management. I mean, you want to have credible management that is honest, transparent, has the right incentives, communicates with investors, you know, sets proper goals and shows a track record of achievement when they fail to do that, or they’re not transparent, that is already too. And then you have a number of accounting metrics. You know, if you have big discrepancies between earnings and cash flows, that is typically a red flag for you. So I think it’s a, it’s not that difficult, but that, you know, there are tools that we have available at our disposal, when we look at the accounts, to see if things are off, you know, revenue recognition, discrepancy between cash flow and earnings ending on the specific industry, the working capital cycle starts to look off menu, you can start to pinpoint, but I think that that, before you look at the financials, you want to look at the business and the management. The financials are a consequence of what the management is in the business. It’s if you have poor management, low quality management. For us, it’s an awful red flag

Cliff Locks 24:10
for a very good, well seasoned team is very, very important to have consistent results and maybe serial exits, maybe they’ve built and sold a few companies. Let’s look at some of the value your fine team brings forth. In other words, we’ve got a high net worth individual, they probably have a business that they’re running at this point, you know, they are starting to get into their 50s 60s you know, they need to look at succession planning. You know, do I continue to prepare, you know, the company to be able to be sold? Am I going to turn the business over to maybe one of my children? Am I going to bring somebody from the outside to run the company. Tell me more about your process to be able to help these high net worth individuals make the strategic decisions they need to make.

Michael Livian 24:55
Look, I think this is a topic again that I have very close to my heart. Cause approached by some strategic buyers. And you know, we are in the business that generates a nice steady cash flow. And we go and ask the same questions to myself. I said, you know, what? Where do I stand? I mean, do I want to build this business for my children? Do I want to pass it on to them? I mean, what’s the endgame and it’s a in I got involved institute that is known as the exit planning Institute. And I found out there is a science behind exit planning, building value for a firm for business owners, me it is medium sized, small sized business owners. And and I came to the realization a very, very large chunk of the businesses in the United States are owned by by private individuals, and that they are in their early 60s, almost, I would say, 75 80%, I don’t remember exactly the statistics, they expressed an interest to retire within the next 10 years. But if you ask them, if they do have a plan, or a written plan, again, 80% of them, they don’t have a plan, they just have an idea and the goal. And also, what were the statistics show is, most of those businesses, they end up not consuming a real transition, you know, they actually have problems before either there’s a disability, there’s some Distress, there’s an issue with the family, they, so they never, the transition does not come to fruition, we really prepared ourselves to work with clients using the science behind the transition planning, and that the numbers and the methodology to make this successful, and to also make it an enjoyable experience for the business owner, because also i’m quoting, Price Waterhouse, they did a survey of business owners that sold their business within 12 months of the sale. And a very large number of those business owners, they say they profoundly regret selling that regret selling the business, transitioning out of the business, whether it’s an external transition, it’s a sale or pass it on passing the business on to a partner or to the children, it requires three things requires emotional preparation, right? I think people do not realize that you know, what, you spend a lifetime building a business, and you’re been running every day, and you know, getting excited dealing with problems, clients making money, and all of a sudden you sell this I mean, your purpose is gone. You are your business if you’re a business owner. So there is some preparation that goes into that, you know, the financial component. I think that that many business owners are not aware of the structure of the transactions, how much they may get out of the transaction, the tax implications, the state implications. So all of these things need to be handled and prepared before you transition not while you’re transitioning. And lastly, I think the majority of business owners don’t really know what that they have an idea of what the value of their businesses, right, but they do not know really how much they can increase the value of their business and how much they can get in a transaction. So these three prongs are the foundations of a plan.

Cliff Locks 28:23
I think that’s very, very important. I mean, I’ve had the privilege of building three companies with successful exits, and it was a plan and there were advisors involved, find folks like yourself that helped guide me through that process. And it was a privilege to work with them. It was emotional. My last transaction, I sold the company to KKR, which is a large venture company company and became part of a fortune 500 Company, which was something new to me versus being entrepreneurial. And then we had the ability to add additional assets. And when we sold the company, again for 1.2 billion in cash. So when you look at things, it’s a process for the entrepreneur, and then the opportunity to do you want to stay with the acquiring company for a period of time. In my case, I stayed for 18 months contractually, and then go on and do something different the tax implications. Those were very, very large checks that had to get written and they need to get planned for.

Michael Livian 29:10
Absolutely, you’re absolutely right. 100%. Right. I think that what typically happens is that when you come to the deal table, the seller just feels very frustrated and pulls out because they just didn’t realize that most transactions, you have an urn out, you have sellers financing, you have taxes, you have commissions, if you do acid sale, you may be penalized and they get very frustrated and they boys up to the point that they may go to the table when they need to sign and you just decide to take a walk and live the negotiation in the deal. So

Cliff Locks 29:46
very interesting. Yeah, I’m on the nother one. Now I’m working with young people and we’re doing the acquiring side and we’re finding ability to stay very friendly with the seller and understand what their needs are. You bring up Something very, very important. See this on your website, know your gaps, you know, the three numbers you should know and manage to achieve your goal that lays out a very positive scenario. And I’d like to go into depth with a little bit from yourself, where this conversation really needs to happen with the seller at this point, because you don’t want buyer, you know, remorse, let’s say, and the seller remorse you don’t want having these conversations where the funds are going to go and understanding the period of time for the transition between the seller and the buyer. And maybe the seller becomes one of the board members, maybe they leave some equity in the company, understanding each other’s needs, I think can allow that transaction to flourish. So tell me more about that. No, you get

Michael Livian 30:43
I think, as a very successful business person yourself, you know, how the mind of, of a business owner works, I think that you need to always simplify things have clear numbers, clear things in your mind, that’s really how we need to have, we cannot deal with that with uncertainty and confusion, our mind always wants to have certainty, even if it’s the wrong certainty, facilitate the process of a business owner transitioning, I think there are three fundamental gaps that they should really have straight in front of their eyes all the time than they can be numerically calculated. They’re extremely important. The first one is what we call the wealth gap. So the wealth gap is essentially what financial planners use all the time is, how much money do I need to live my life the way I want to live it pretty easy to calculate with some trial simulations.

The second component of that calculation is how much do I have today that is liquid and investable, that can get me there, the vast majority of the times there’s a giant gap between the two specially for business owners element that was going to fill in that gap is the value of the business. So essentially, if you want to get to a point where you’re comfortable, and you know that you can really go on with your life and do whatever you want in peace, you need to make sure that that gap is filled by the value of your business after tax after transaction costs, if you do an exit, and that’s really what you are working towards. Now, this leads to the second part, which is what is the value of the business? Is it sufficient? Can they grow it enough to act as a plug to kind of close that wealth gap? So there’s two components that you want to evaluate? One is a profit gap. And then if you have a value gap, so what are these gaps? Today?

Luckily, we have a lot of tools and technology in databases, also in the private markets, as opposed to the public markets, where you can benchmark your business. So the income gap, essentially, is a measure of the difference between if you take the best in class company in your specific sector, and yourself, what is your EBITDA margin, or adjusted or recast the beta, you want to make sure that in the private business world that you need to make some adjustments is not like in the public markets. So you need to add back certain numbers remove them, so you need to fix calculation for your EBITDA. But what you’re looking at is, what is my EBITDA margin on the revenues that they have? And what is the EBITDA margin of the best in class company. And then I think part of the exercise is to see what levers Do I have to increase the profitability of my business, that’s kind of part of the exercise of accelerating buildup in value in your business. But it’s, it’s a number that you should know as, as I think that that when you have numbers in front of you, it gives you a different motivation. It’s not an idea, it’s not a concept, you can compare. So you know what my EBITDA margin is, like 15% the best in class companies, their EBITDA is 25%, maybe I can increase my profitability by 5% By doing this, this this this And lastly, is your your value gap is essentially the value of the best in class company in the same sector. Same type of business, if you apply a multiple to their EBITDA. And if you apply a multiple to your EBITDA, you can calculate the difference using the same level of sales. So if you have best in class margins, and best in class multiples, and you have your multiple and your margins, that gives you an idea of how much value creation you could aspire to achieve. get to that point, ultimately, if there’s sufficient money to close your wealth gap.

So this these three elements together, they work as a foundation to make to build a plan. They give you the right motivation, but also the Right tools, then to go deeper into some assessment and analysis at the business level as a personal finance level, and see, you know how you can adjust, I think it’s very important to start with simple, clean, good numbers. I think when business owners see these things, they’re Wow. Alright, now, I know what I need to do. And let’s work on this. And let’s work and there’s a whole process behind this, build all the different plans to close those value gaps and those income gaps and those wealth gaps.

Cliff Locks 35:32
Very, very comprehensive. I mean, you bring forth a lot of wealth of knowledge for that high net worth individual to really understand a vision of what success looks like, you know, as they continue to age and they got to make some decisions with their business, it would be very, very positive for our listeners to partner with you, Michael, what do you love about what you do? And what do you find most rewarding? personally?

Michael Livian 35:54
It’s a very good question. There’s two things that they’re always loved. And they think that’s why I went into this profession, I have a deeper intellectual curiosity. I like numbers, I like concepts, ideas, businesses, I like studying and researching. If I if my, my family makes fun of me, they say should be an academic, you know, it’s I should be teaching stuff. Because I really love learning. And I think being in the finance sector, it allows me to learn everyday more. I mean, there’s so much we can learn on the quantitative side, on the analytical side, and the research side, on the tax side, there’s so much you continuously learn and learn and learn. And I really enjoyed and I can share it obviously, with with my clients. So this is one thing that I like, really makes me happy that because of person I am, I really get enormous satisfaction when I can help people and I do something meaningful for them that and we have all sorts of people, all sorts of clients, we do get the often people will make a big change in their life very happy. And they’re very grateful. The reward that they get from that is priceless. It’s not a monetary reward. It’s like, you know, I feel like I really did accomplish something, you know, somebody that had some issues, and they need to fix things. And they had that. And they’re just grateful, you know, that I help them out, or we help them out as a team. I’m

Cliff Locks 37:12
not alone. I see you and your team cares about their investor. Now with COVID-19. Some of the economic disruptions tell our listeners about the program that provides an objective second opinion, from your trusted and professional team are hurt. There’s no fees, no stress, no obligations,

Michael Livian 37:28
things now are a little bit better. And obviously, I’m very happy that got out of the stressful times that we experienced at the beginning of COVID. For many people, this was just the catastrophic event that came out of nowhere, I think it was the economy was doing perfectly fine. Everything was doing perfectly fine. All of a sudden, you are faced with issues and problems that seem insurmountable. You cannot walk out of your house, you cannot walk out of your apartment, you think you’re extremely wealthy, because you you own a nice office building downtown, and all of a sudden you don’t have tenants. You have a hotel, and you know, they forced you to shut it down. A lot of people, their life changed overnight. We offered early days, our services for free to not all our services, but at least an initial review and assessment and financial situation of some of our clients. We offer them a free consultation to see where they stood, how they were invested if they had the proper investment plans, who are benefiting from all of the things that our government has been extending to people. So we just wanted to assist people.

Cliff Locks 38:40
I truly appreciate you spending this quality educational time with our listeners today. Michael, it is my pleasure, Cliff. Michael, can I share your contact information with our listeners, please? Yeah, absolutely. You can reach Michael Levin. His email is at m Levin at Levin Lubin co comm is spelled Li ve i a n m that’s Li ve i a n and you can also reach Michael at 212-319-8900. Again, Michael’s phone number is 212-319-8900 Thank you to our listeners. I look forward to being back with you shortly for another episode of the private equity profits podcast. The show has been produced by market domination LLC. I’ll see you next time. This is Cliff Fox