In recent years, Tech has become a black hole that sucks in talent from all fields, but traditionally, finance has been a relatively popular and competitive industry due to the importance of human resources and the fact that talented individuals can leverage the assets of others to pursue great wealth.

So what is the most preferred path for the smartest and most successful friends in the financial industry? Of course, there will be variations depending on the individual, but generally the starting point is often Investment Bank. So where is the endpoint? This varies somewhat depending on the asset class. For marketable assets such as listed stocks? Everyone's familiar hedge funds? Of course, some people end up in hedge funds, but life is so intense and difficult that there are many more in the middle ground than at the end. In most cases, pension funds, endowment funds, or family offices are preferred as the final destination.

What about non-marketable assets like unlisted stocks? Most of them would probably be Private Equity. Unlike marketable assets that are secretly(?) invested in the market, non-marketable assets require a much more complex and sophisticated process due to the nature of large sums of money being invested at once. It is a basic requirement for the personnel of Private Equity, which is operated by a select few, to be both smart and hard-working, and in addition to this, they receive assistance from various experts. We call that due diligence, and law firms provide legal due diligence (LDD), accounting firms provide financial due diligence (FDD), and consulting firms provide commercial due diligence (CDD).

This is not the end. In order to prevent the major shareholder from hitting the back of the head, which often happens in the K-stock market, the contract contains all sorts of clauses. They also appoint inside directors within the company, and if you sell your stock, you have to sell mine too (Tag-along), or if you sell your stock, I have to sell yours too (Drag-along), and if you intentionally avoid IPO, which is an important exit method, you will be penalized and I will buy your stock (Put-option), the major shareholder is also prohibited from engaging in secondary employment and limited in selling shares, and key personnel within the company cannot leave, etc. All sorts of things are strung together. Also, the network of partners, who are the core management team leading this Private Equity, spreads widely, both domestically and internationally, regardless of large corporations.

Looking at it this way, Private Equity investments should naturally be successful. It's because smart people with good networks gather together, invest without sparing money, and even get expert help to execute investments. However, it is not always the case.

In reality, MBK Partners' Homeplus and IMM PE's Hanssem, which are representative of Private Equity in Korea, are in quite difficult situations. Of course, these are just representative examples, but there are more portfolios that are problematic. Is it because it's Korea? Then do global Private Equities like Blackstone, KKR, and Carlyle have no black history? Of course they do.

Of course, even the most brilliant investors cannot succeed in every deal. However, in some cases, you definitely wonder why they made that deal. Why is this happening? I think the biggest reason is that this problem is more likely to occur when Private Equity is anxious to use the fund commitment as quickly and as much as possible.In other words, there are cases where they rush into deals that are not well thought out in order to quickly use up the money in the fund commitment that is not being invested (this is called Dry Powder).

Private Equity funds can be broadly classified into two types: funds with a specific investment target (Project Fund) and funds without a specific investment target (Blind Fund). Which is better from Private Equity's point of view? Obviously, Blind Fund. This is because Project Fund has to create a fund for each deal and go on sales to raise funds. On the other hand, what about the people who commit (LP)? Generally, it is a Project Fund where there is information to judge the deal. However, if it's a reliable operator (GP), it may be more convenient to just trust them and entrust them with a Blind Fund, as they'll obviously do a better job than you. Therefore, although the ranking of Private Equity is usually based on the total assets under management (AUM), it doesn't make much difference if you simply evaluate 1) whether or not there is a Blind Fund, 2) how large is the Blind Fund.

The important thing is that whether it's Project or Blind, the basis for GPs to receive performance fees is not simple return, but internal rate of return (IRR), and IRR is sensitive to the time value of money. Therefore, to increase IRR, you need to recover the same amount of money as quickly as possible. But to recover, you have to invest first, right? That's why you have to invest as much as possible in the front of the fund management period.

Since IRR, the key performance indicator for Private Equity, depends on quick fund recovery, they use various shareholder return methods such as dividends, share capital reduction, or capital restructuring (Recap) when they acquire controlling interests (Buy-out). These shareholder return funds are cash flows, so they consider EBITDA to be important. Some Berkshire believers completely ignore EBITDA, saying that Charlie Munger called it garbage, but are countless people in Private Equity so stupid that they use EBITDA when doing valuations? It's just that different parts of the business are more important depending on the nature of the business.

Compared to Private Equity, which is a group of professionals, individual investors are at a disadvantage in almost every aspect, including their capabilities, networks, and expert assistance. But there is one big advantage: since I am investing with my own money, I don't need to work hard to get performance fees. In other words, you don't have to rush to invest as quickly and as much as possible.

I think a desirable mindset for individual investors is to basically avoid short selling, but to be flexible about their cash holdings. In other words, there may be times when the cash holding ratio is 40% or 50%.

Of course, this doesn't mean that you should be holding a lot of cash at any time. When there are few companies you like or when the surrounding environment is difficult for you to do well, you can boldly increase your cash holdings. Some ants feel uncomfortable about increasing their cash holdings, saying it's an attempt to pick market timing. Setting strict criteria for cash holdings is giving up the greatest advantage individual investors have. Don't lose your strengths in a place that's not easy to begin with.