Because of the Memorial Day Holiday, our studying week included only 4 days, but the program was saturated, and it included a lot of company visits and class sessions. During this week, we could look at NYC from a different angle. We saw NYC as a world’s business capital with numerous consulting companies, investment banks and private equity funds.
For me, the most interesting thing of this week was the visit of two private equity firms – General Atlantic and Zephyr Management – that do the same work; however, the principles of their work are quite different. I would like to elaborate further on similarities and differences between General Atlantic and Zephyr Management.
Both private equity companies use a typical funds-fee structure of 2-20, which means that the management fee is 20% and the success fee is 20%. Expected IRR for portfolio is around 20-25% for both companies and they prefer to acquire minority stake (General Atlantic in the range 20%-40%, Zephyr Management usually less than 20%). Certainly, both General Atlantic and Zephyr Management have a clear exit strategy through IPO or private placement. However, there are a lot of distinguishing features between General Atlantic and Zephyr Management
From my point of view, one of the main differences in their business is the size of assets under management that in turn determines the strategy of funds. For instance, General Atlantic has more than US$17 billion under management and invests annually in the US$2 billion range. As a result, an average investment size for General Atlantic is over US$200 million. General Atlantic seeks opportunities for investments in the U.S., but also outside the U.S., and around 50% of its investments now are outside the U.S. It was also interesting to know GA’s approach to hiring new employees. General Atlantic has 200 employees all over the world and the company hires only 2-3 people annually. Matt Nimetz, advisory director of GA, mentioned that the company usually hires employees form consultant companies and investment banks because GA is more interested in highly accomplished professionals than in graduates of business school.
Zephyr Management is interested in emerging markets and its portfolio includes companies from India and Sri Lanka. Zephyr prefers SMEs that concentrate on local markets and usually the size of their investments does not exceed US$5 million. Zephyr’s decisions about the markets to invest in are predetermined by the size of assets under management. Therefore, they cannot compete with large private equity firms as General Atlantic. As a result, Zephyr Management avoids to investing in China.
Managers of both companies say that finding good targets is one of the main challenges for them because it requires combination of different skills – analytical skills and soft skills such as using connections and meeting with people. However, an approach that Zephyr Management uses is quite different. The main idea of Thomas C. Barry, CEO & Founder, that his firm should use relative advantages. This idea was also one of his notes of advice to us: we should use our relative advantages when we create our own career.