The private capital industry has grown to more than $7tn thanks to demand for high returns, inflating the values of the biggest private capital firms and prompting other financial services companies to launch new divisions. This huge growth has led some business schools to launch a slew of executive courses in private equity and venture capital, which can help professionals navigate the pitfalls of these fields.
On the supply side, the main drivers of the appetite for private capital investments are the low interest rate environment and lofty stock market valuations, which have crimped returns from those asset classes. At the same time, private markets are less volatile as they trade rarely and valuations are more subjective, boosting their luster to many investors.
On the demand side, there has been a radical shift in capital markets as fewer companies launch on public markets and low borrowing costs increase the appeal of debt financing for companies that may have previously decided to raise money by selling equity.
As the number and size of investment funds is increasing, so is competition for top quality deals. “Private equity investors expect a high return from their portfolio companies, and so entrepreneurs now increasingly expect to receive value-added from their investors in return,” says Miguel Meuleman, professor of entrepreneurship at Vlerick Business School in Ghent, Belgium.
“We now see a new opportunity in educating limited partners in private equity funds,” he says. “We will launch a new course on private equity as an asset class in the Spring of 2022, focusing on the challenges and opportunities that investing in private equity funds entails.”
Other challenges include high valuations, which will make it much more challenging for private equity firms to exit their investments. “If history is a guidance in current times, we may expect lower returns from private equity in the years to come,” says Sophie Manigart, professor of corporate finance at Vlerick.
In addition, competition is driving private equity investors towards taking minority stakes, rather than fully acquiring a company in a traditional leveraged buy-out deal. “This implies that they have less control over the company, potentially leading to sub-optimal value creation and lower returns,” says Manigart.
Helping professionals develop a deeper understanding
In the Venture Capital and Private Equity course at Vlerick, participants learn how entrepreneurs develop a financing strategy. In the school’s Private Equity as an Asset Class course, institutional investors learn how PE may provide diversification in their portfolio, and how to select the best performing funds.
“Pension funds are in search of asset classes that yield better returns – more capital is being committed to private equity,” says Florin Vasvari, academic director of the Institute of Entrepreneurship and Private Capital at London Business School.
As competition in the market grows, private equity professionals are having to prove their non-financial track record to secure deals. “Professionals need to pay more attention to social and environmental matters that impact long-term relationships with investors as well as their reputation in the market,” Vasvari says.
London Business School’s Masterclass in Private Equity attracts private equity professionals, pension fund trustees, private investors and investment consultants, among others. Participants develop a deep understanding of how private equity funds are structured, how they operate, and govern portfolio companies.
“Participants discover how to analyze assets, investigate selection and acquisition processes, and consider final disposal and capital realization,” says David Ratcliffe, client relationship manager at LBS. “They also have an opportunity to bring what they have learned to life, by reviewing and debating real-world examples of the challenging decisions private equity experts have made.”
Yet if business schools are to cater to the increasing demand for training in private capital investments, they will need to overcome a number of hurdles. “I am not sure it is easy to find lecturers who have both the industry knowledge and the combined technical skills: strategic, financial, negotiation, governance,” says Marc Kitten, visiting professor in finance at Imperial College Business School in London. “Academics are typically too specialized and practitioners may not have the necessary academic bases.”
In his course, Private Equity, participants gain an exposure to the entire industry. It’s an interactive class with the executives leveraging their individual experiences in team work and case studies.
Upon finishing the program, participants are able to understand the nature and role in the economy of the various segments of private equity financing, and distinguish the many drivers of value creation.
New York’s Columbia Business School offers a course solely focused on venture capital. Demand for the program is rising exponentially, says Angela Lee, faculty director of the Lang Center for Entrepreneurship. “We have gone from offering the course once a year to three times a year. Also, we are launching a new VC course this year (Building Your VC Investment Thesis).”
Lee says the sheer number of players in the VC space has exploded. “Last year, a couple of new laws were passed that unlocked new angel investors. Individuals can now invest in private companies through their 401ks, and the SEC expanded the definition of an accredited investor.”
But this means that it’s getting increasingly competitive for investors to source good deals. “The hardest thing as an investor is differentiation,” says Lee. “How to make yourself stand out to founders? As an investor, you need to figure out your special sauce.
The key learning outcomes from Columbia’s course include how to navigate the VC deal process from sourcing to exit. The course is very experiential, Lee adds. “First, you learn a proven framework, then you apply it to real startups who are actively fundraising. I bring in real companies to pitch to the students. In addition, we bring in speakers from leading VC firms like Greycroft, Bessemer, and RRE.”