Greed — A Primary Pitfall in the Investment World

October 14, 2022

Table of Contents

This is a cautionary tale of what to be aware of in the investment world. Once upon a time in the early 1990s, my energy team was involved in a nice oil and gas production property with a top five private equity firm from Houston as the financier. We arranged the purchase of the property and they put up the capital to acquire the property. Since it was their capital, the equity firm wanted to manage the asset and make the purchase/sale decisions. They borrowed money to finance the property (generally a poor decision in the volatile oil and gas business).

We rock along for a couple years, making nice returns (north of 18% annually) when a buyer approaches the firm wanting the property. They negotiated a generous price of $81 million. That would have generated a 27% IRR for the financier and done much better for us. However, things didn’t go as planned. The private equity team got greedy with the investment.  The fund managers had a bonus structure that was not enhanced by the 27% IRR we had negotiated. If they took the $81 million offer, their bonuses would only be $2.5 million, if they could get $85 million for the property, their bonuses would be $4.5 million for the 4 man team.  As a result, they DECLINED the 27% purchase. Needless to say, within a month after the scheduled closing date, the price of oil collapsed, the lender called the note and we were left holding an empty sack with a $30 million loss to the PE firm.

TAKE AWAY: Under no circumstance do you want to be in bed with a GREEDY manager that is motivated by his own pocketbook. You want a manager whose experience overrides greed and a partner that puts your well-being ahead of his own at all cost.

Custom Private Equity has the experience and knowledge to help you secure your future. Invest safely without the greed. Contact us here or call at (325) 695-1329.

Related Articles