Rethinking Private Equity: The Case for Forever Assets

"Man may never step into the same river twice" –Heraclitus 6th Century BC

"Our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds."– 1988 BRK Letter to Shareholders

The "Forever" Paradox

Warren Buffett hasn't literally held every asset forever. He's sold Dempster Mill after turnaround, liquidated partnership assets, and regularly adjusts Berkshire's stock portfolio.

So what does "holding forever" really mean? It's both an aspirational goal and practical underwriting criteria.

If you can hold an asset forever, it means:

• Your investment pays for itself
• You've acquired a business with durable competitive advantages
• The company provides fundamental goods or services that grow with the economy
• You avoid transaction costs and reinvestment risks
• You benefit from compounding and tax advantages that come with time

Such "Golden Geese" are rare but exist and can be invaluable.

The Problem with Modern Private Equity

Private equity has exploded in recent decades. The industry has become highly professionalized, with specialized brokers and investment banks efficiently marketing assets to achieve maximum selling prices. The internet has enabled virtually free distribution of deal information, benefiting sellers tremendously.

Despite this sophistication, private equity often creates less value than possible because:

1. Most PE firms use fixed-life vehicles requiring eventual exits
2. They rely heavily on debt to generate returns, not operational improvements
3. Enterprise values have benefited from falling interest rates over the last decade, but this wont continue
4. The majority of private equity transactions generate no actual cashflow for investors - instead, debt paydown creates equity value
5. The focus on eventual sale discourages truly long-term investments

The Critical Questions

Consider these questions about the debt-driven PE model:

• Is repeatedly loading a company with debt more expensive for shareholders than taking dividends or buying back shares?
• Does debt increase vulnerability to market shocks?
• Does debt make a company more or less competitive?
• Can debt-laden companies take meaningful long-term risks or pursue "bet the farm" thinking?
• What does debt do to incentives long term?
• Does repeatedly flipping assets allow cash to be reallocated to highest and best use within the company?
• Do early investors capture the long-term benefits when assets are sold?
• Will companies destined for sale make the investments needed to protect their competitive moat or invest in their people?

The answers seem obvious, yet the industry continues its cycle.

Real Value Creation vs. Paper Trading

Does a nation grow wealthier by trading pieces of paper back and forth? Do investors? Or does real value come from technical innovation and growing profits by making people more productive and satisfied?

Traditional private equity—passing assets back and forthwith heavy debt loads—rarely allows companies to make the difficult decisions needed for long-term success. The construct of buying assets to sell them for EV appreciation generally falls short of what's possible in the long term.

Recognizing Different Asset Classes

To be fair, not all assets should be held forever. Some industries change rapidly. Some companies can't grow faster than GDP. For these, financial engineering may extract maximum remaining value.

These companies parallel Buffett's "cigar butts" for private markets—using financial instruments and debt to create equity value. In a diversified portfolio where wins can outweigh losses, this may be a legitimate use of capital and present arbitrage opportunities.

The problem arises when this arbitrage approach is applied structurally within funds that impose artificial limits on holding periods. A parent saving for their child's future wouldn't set aside money to be liquidated at arbitrary dates again and again.

A Better Approach

Investors should seek private equity managers and structures who:

• Can hold great assets for the long haul
• Are less concerned with excessive personal compensation
• Are aligned with creating long-term value
• Reduce fees to investors over time as assets scale
• Avoid unnecessary buying and selling
• Only sell when a company's economic characteristics deteriorate or when alternatives offer significantly higher returns

The Investor's Role

Investors hold the key to changing this system. By demanding and supporting investment structures that allow for truly long-term holdings, they can reshape the industry. Investment managers must be willing to make money more slowly, focusing on the compounding value that comes with time.

Private companies can be purchased with the ability to convert them into long term holds that allow for (A) share buybacks, (B) dividends (C) deeper reinvestment into the company and timeframes for (D) more rational timeframes for acquisition of other companies when compared to rollups. Control acquisitions for the long term create better direction over their cashflows. These cashflows can also be leveraged at the onset, but should be with the goal of debt paydown and without the structural constraints of traditional PE funds. Time arbitrage should be allowed to exist.

The ideal long-term vehicle reduces fees over time, doesn't engage in unnecessary transactions, and holds winners as long as practical—selling only when fundamentals deteriorate or alternatives offer significantly higher returns.

As the opening Heraclitus quote suggests, you can't step into the same river twice. But if you own the land the river runs through, you can charge a toll to those who need to cross it for more than change if you are the only game in town.

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