Media Review: Private Capital
My final textbook at Chicago Booth
On Thursday afternoon, I heard the last lecture of the last course of my MBA.
This class was Institutional Private Capital Investing, and was taught by Stefan Hepp. Hepp required us to purchase his book Private Capital: The Complete Guide to Private Markets Investing as the course textbook.
Typically I’m less than impressed when instructors require students to buy their book, but I think the decision was reasonable here. This book was both interesting and approachable. It was also fundamental to the course; readings from it were assigned every single week.
Content
The book presents the history of private markets investing, trying to ultimately answer the question of “why are private capital markets structured like they are today?”.
In answering this question, he looks back to the Age of Exploration, but rightfully has a recency bias; Hepp spends the overwhelming majority of the text looking at post-WWII history. He covers buyouts, VC, growth equity, private credit (debt), infrastructure, natural resources, as well as intermediaries that provide access to investors in these asset classes.
He also makes excellent use of data — most of which is impossible for the general public to get at directly — to tell these stories. The book does a great job synthesizing a wealth of information sources about the performance of private investments into an easy-to-understand narrative. It also does quite well at documenting the sources through copious footnotes and a comprehensive index at the back.
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Organization
This text is laid out as a chronological history of private capital investing. It starts at the Age of Exploration, and runs all the way to the post-pandemic investing environment in 2023. The book is organized into three parts and ten chapters:
Part I, “The Beginning”, covers from the Age of Exploration through the 1970s.
Chapter 1, “Funding Private Enterprise”, looks at financing high-risk ventures pre-WWII, the development of intellectual property rights, and the emergence of different types of equity.
Chapter 2, “Enterprise Financing in the USA from WWII to the 1960s” looks at early Cold War-era financing. It focuses on the development of private approaches to financing innovation, as well as the emergence of the Small Business Investment Corporation. This is the shortest chapter, at 10 pages.
Chapter 3, “How Silicon Valley Came to Be”, is a fairly tightly focused history of early Silicon Valley.
Chapter 4, “US Private Equity during the 1960s and 1970s”, describes the asset class during these economic eras.
Part II, “Booms and Busts”, studies the behavior of private markets investors during the pronounced economic cycles that characterized the late 1900s.
Chapter 5, “Private Equity during the 1908s”, describes the asset classes during the economic era.
Chapter 6, “The 1990s: Dotcom Boom and Bust”, looks at the emergence of the internet and how private markets investors engaged with it.
Chapter 7, “A Private Markets Boom Between Two Crises”, looks at the behavior of private markets investors between the Dotcom Bust and the Global Financial Crisis (GFC) that kicked off in 2007.
Part III, “Becoming Indispensable”, looks at the role of private markets investing in the near past.
Chapter 8, “GFC and the Surge of Private Markets”, looks at how private markets responded to the GFC.
Chapter 9, “Responding to Shifting Dynamics: Intermediaries, VC, and Growth Financing”, looks at recent development within these sectors of the private markets.
Chapter 10, “Buyouts, Private Debt, and Real Assets during the Post-GFC Boom”, looks at recent developments within these sectors of the private markets.
The choice to structure the text historically creates a smoother experience for a reader going through the whole text. However, it makes the text more unwieldy for general reference, as a reader has to jump between and within chapters to connect the dots on any particular approach to investing, such as natural resources.
Geography
The focus of this book is primarily on US investing. This reflects the outsize role the American economy played during the era in which private asset classes developed as modern, mature tools for investment.
There is some coverage of international private capital markets on an asset class-by-asset class basis. Particular attention is given to European buyout funds, including the UK. Venture Capital is explored in notable depth in China, and discussed on some level in Europe as well. Australia pops up in the section about infrastructure investing.
This reflects the author’s multinational experiences, as well as the historical realities of private markets’ development.
Prior Knowledge
This book assumes some background in financial mathematics. While it’s quite accessible to anybody willing to learn, grokking the text (as Heinlein uses the term) requires real engagement with the mathematics of investing.
For example, IRR (Internal Rate of Return) appears more than 70 times in the text. Key concepts like this are explained very briefly when they first appear, but understanding these concepts is very much a prerequisite to getting the most possible benefit from the text.
The book also requires some willingness to learn visually. There are images of important events and people. There are also quite a lot of figures, which is unusual for a history book — though common for textbooks.
Figures allow for a more dense visualization of data, and Hepp makes good use of them. His figures, as well as tables and images, make it easier to understand his points.
What’s missing?
This is not a short book — it’s 606 pages long, not counting references or an index. However, it could have been significantly longer.
Two chapters were cut from the corpus. There was a chapter about issues and challenges facing private markets investing today. There was also a chapter on ESG (Environmental, Social, and Governance) approaches to private markets investing.
Both chapters were provided as part of course materials and are not part of the book, so it would not be fair to include that content in this review.
However, their existence is important. Topics were de-scoped in such a way that the text became more of a history book, as opposed to more of a textbook or handbook.
I really wish there had been a more detailed table of contents. Each chapter has a number of sub-headings, most of which relate to specific events or asset classes. Since this feels half way between a history book and a textbook, I think the book would have benefitted from either a more detailed table of contents listing those subheadings, or a list of subheadings by topic in an appendix. That’d make it far easier to use the book as a resource to do things like trace the development of European buyout firms, or look at the history of natural resources investing, in isolation.
Comps
In a review of an investing book, it feels appropriate to evaluate it by comparison to similar works. After all, the decision to buy a book about finance occurs in the context of a market environment. The easiest thing to compare it to is Money of the Mind.
In terms of content, there is significant overlap. Both tell a history of American investing, and do it more-or-less chronologically. However, they aren’t telling the same story. Money of the Mind is about American investments in public and private debt, while Private Capital is interested in private debt and private equity investing around the world.
Furthermore, Money of the Mind is a narrative history at many points. Grant tells stories with characters, and he does not present them (at least the important ones) as one-dimensional. On the other hand, Private Capital is written in a style that absolutely privileges the topics under consideration over the people. People are mentioned only to the extent that they support the author’s points. This isn’t unreasonable given the broader scope of his work, but it does make for a different reading experience.
How well does this book achieve its stated objectives?
In the introduction, Hepp lays out his goals for the book. His top-level objective is to provide “an objective perspective as the first compendium that provides an in-depth overview of the full spectrum of private markets investing” (3). I’m not sure that nobody else has done it first, but he’s presumably done a literature review, so I’m happy to take his word for it. It is certainly an excellent overview of the topic.
He intends to explain why this part of the financial sector exists in its present form. This includes tracing economic and legal developments that create opportunities for deal-making and value creation. His view is that this is fundamental to the decision to invest (or not) in privately held assets. He does an excellent job connecting critical events to regulatory developments, which explains the present structure of the sector.
In a broader economic sense, Hepp attempts to show why private markets investing, which is characterized by temporary ownership, leverage, and management incentives, continues to function well in spite of criticism. Having read the book, I see why it still works well clearly.
This informs his approach to discussing investment policies at a national level, and the effects they have on society. I thought this goal was achieved.
His view is that all of this is essential knowledge for professionals in the financial sector. Specifically for this audience, he gets into the role of intermediaries and risk/return profiles. I thought his approach here was excellent.
Final Thoughts
Private Capital was assigned to me as a financial textbook, but that’s not what this is. Rather, this is a book of financial history for the quantitatively literate reader.
Private Capital was the final textbook of my MBA. It’s not a manual of how to do private investing, though it does explain some elements of it. It’s also not purely a history book, though it explains the historical maturation of private capital investing as a singular industry. It’s not a truly “popular” book as academics might use the term, but rather it popularizes information from academic literature. The things it discusses are worth knowing for investors who have allocations to private markets, both directly and indirectly. It cuts across genres as much as it touches the different types of private capital investing.
Private Capital was also my favorite textbook of my MBA. In this I mean that of all the books I encountered first for a course, I thought it was the most interesting and covered the most information that I anticipate will be useful to me in the future (which is not necessarily the most useful information). At the same time, it was approachable, and pleasant to read. When the author made a claim with data or references, he provided citations so I could go and attempt to find it myself. On multiple occasions, I did and was successful. The book covers up to 2023, so the points it makes are very much still relevant.
Private Capital: The Complete Guide to Private Markets Investing will have a place on my professional bookshelf.