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What Are The Most Interesting Things About Working In Private Equity?

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What's the most interesting thing about private equity? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by Peter Lynch, Private Equity Investor, formerly at JPMorgan & Rabobank, on Quora:

I have spent the majority of my career working in private equity focused on the lower middle market, which can be defined as the universe of businesses with revenue between $20 million and $200 million. What I love about this space is that it is frequently where founder CEOs interact with institutional capital for the first time.

The characters you encounter visiting bootstrapped startups that have evolved into thriving businesses entirely under the venture capital and private equity radar are without mold. There is no archetype for success in this space, and it makes for some unique interactions. Anecdotally…

One individual told us that he purchased a tent to start his business because he could not afford rent without a salaried job. He camped outside a public library (pre internet) to learn about high octane fuels before starting a sports enthusiast company, which is today a global brand.
I walked through several hundred square feet of warehouse space to a small office where the CEO sat between his parents. He had started the business when he was 14, and approximately 10 years later had grown it significantly.
Another unique office encounter: I walked in to find several shotguns leaning against the desk. This was not an intimidation tactic; that's just where the CEO kept his guns.
One founder CEO took us to a burger joint to negotiate a potential transaction because he and his wife could not afford to eat there for several years after starting their business. At the time he was earning ~$7 million a year and owned nearly 100% of the business.

The common trait is that all of these founders live and breathe to build their businesses. To make my point, I once asked a founder what he did with the excess cash that was not reinvested in the business each year. His answer was that he enjoyed acquiring the rarest automobiles on the planet. If a company ever only made one prototype, he would hunt it down and buy it. Naturally I followed up asking what he did with all of those cars. The answer: "Drive them to and from work."

The opportunity to partner with such relentless individuals and help their businesses continue to thrive has been my favorite aspect of the job. I particularly enjoy the challenge when the data is lacking to properly evaluate the company. In one such instance we visited a brilliant individual that was running his (rather large and profitable) business without ever preparing detailed financials. When I asked if he had any information we could use he chuckled and mentioned that all of his purchase orders ran through an MS-DOS system. I asked if he would not mind providing the last three years (~2,100 pages), flew home with the files, and returned a week later with detailed financial information broken down by SKU. It turned out that 90% of his profitability was derivative of a handful of SKUs (he sold hundreds). We told him the risk was too great for us, but showed him how profitability would explode if he cut the SKU tail.

If it has taught me anything it's that there are many paths to success. Some of the wealthiest individuals I have met work quietly in smaller cities building companies in industries rarely contemplated. I like to joke with people in my industry that we kid ourselves into believing we're on the best path to success when really we are just competing to meet and partner with the founder CEOs that have already pulled it off.

This question originally appeared on Quora - the place to gain and share knowledge, empowering people to learn from others and better understand the world. You can follow Quora on Twitter, Facebook, and Google+. More questions:

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