Founder of PE firm gives word of advice to private market investors

This article is part of Rebel One’s “Investor & Founder Series”, a series of recorded interviews with CEOs and investors recently launched by RBL1, a leading venture capital firm and investor network based in New York City. You can view RBL1’s investor training programs and additional content here.

In a recent 48-minute LIVE session, Emanuel Pleitez, founder of a new private equity fund called East Los Capital, shares his insight and advice about his experiences as an investor in the PE space with the Rebel One network. In addition to starting his own tech-focused private equity fund, Pleitez has extensive experience in public office and consulting while being an angel investor in numerous private companies.

During the interview, Pleitez dives into his personal journey from growing up in inner city Los Angeles to running for mayor to serving in the military, and how these experiences led him to his founding of East Los Capital today.

Rebel One Managing Partner, Sergio Marrero (left), Emanuel Pleitez (right)

Here are some of my major takeaways from the interview (not direct quotes):

Q: Can you shed some more color on PE for those who might not be super familiar with the space?

A: At the end of the day, whether you’re doing VC or you’re competing with Blackstone and KKR at the big billion dollar buyout, you’re trying to optimize for returns. Too many people think of the two spaces as too different. The reality is you want to build a company that’s here to last, not just a company that is only growing because it’s reliant on the next round of capital funding.

What I always tell people is figure out what is the right way for YOU to invest, because it’s your money and you don’t have to invest it however everyone else is investing.

Q: Can you share a little more about what East Los Capital looks for in an investment?

A: For East Los Capital in particular, I like companies that are profitable already. If the company is profitable and has a minimum $5M trailing revenue and there’s an opportunity for them to become more tech-enabled, meaning they can build better software for themselves or they’re selling some kind of technology service, we’re interested.

I personally don’t care if the management team is good or not. It’s a bit controversial, but our whole strategy is predicated on the fact that we can invest if it is a good business that is not reliant on one or a couple individuals. It just has to be in a good market, and that they’ve built something that’s good enough to get to where they are at that moment.

One of the biggest detriments to value creation for an investor is when the company can’t put the right person in the right seat within the company. One of those detriments is when a mid-manager role is left open for too long, because investors only want to think about the CEO or the CFO. In fact, the research has shown that even when you put someone who’s not the best qualified but just fills the role, they can actually help in the value-creation over time.

Q: How did you come to be a private market investor?

A: From running political campaigns to serving in the military, I began realizing the importance of fundraising and allocating resources effectively. One thing I learned from being the personal assistant to the former Mayor of LA is that at the top, all the worlds collide. The politicians, the private equity professionals, the movie stars, the billionaires, the kings and queens all talk to each other.

It is very difficult to get into the investment industry. If you don’t follow a certain path from your sophomore year in college, it’s really hard for you to ever become an investment professional at an institutional private equity firm. It’s not just about making a lot of money for myself or for my investors. If I make a lot of money and treat people right, over time, people will continue wanting to be involved with you and you’ll continue building a stronger and better firm. If I could be independently wealthy and help other people enter this industry, understand capital allocation, and enable them to make an impact in their communities, I guess that would be my way of making an impact.

Q: What have been some of the challenges you faced along the way?

A: For private equity, fundraising is tough for anyone. But in my personal journey, you know, almost nothing in life is going to just be given to you, you gotta take it. I’ve learned enough to have the confidence and the knowledge base to take it and to take it now.

My mom, who crossed the border while being pregnant with me, made it here without an education. For me it’s kind of like, she did it and I have no excuse. She gave me everything she could to give me the better life so I gotta do it.

There’s other people that just didn’t have it, and I still do. I’m still healthy, I still got my limbs, I can still run, so I gotta push myself because there are others who would take better advantage of the opportunities that I have, but they just don’t have them.

Q: What role does private equity play in these times (COVID-19)?

A: Dry powder is not cash, dry powder is committed capital that has not been called. An investment firm could call the capital, but that means it is being sold from somewhere else which applies downward pressure to those assets while bidding up the new assets. So in net, it [PE] doesn’t make much of an impact on the economy.

As a private equity investor, we’re in the big leagues. We should be making institutional type investment decisions and planning for tough times. You shouldn’t be crying that you’re not getting help from the government because there are so many other ways you can get help. Meanwhile for the small business on the corner, the government made the program for them, not for the big portfolio companies or PE firms.

Q: How do you think the pandemic will impact PE from an investor’s standpoint?

A: I actually think it is an amazing time, if you have cash or dry powder, this is beautiful. It is time for you to invest because the price just went down. If you were willing to invest in something 3 months ago, you should be willing to pay now for the same asset.

I am in the more bearish camp from the recovery standpoint because before COVID-19, we [the U.S.] were already over-levered and artificially bringing down rates and pumping money into the economy. We were already afraid. The U.S. debt has grown faster than the U.S. GDP since 2009. And that was without COVID-19. However, will society change drastically? I don’t think so. The moment we can go back to work, people want to get back in the office and with their colleagues. There might be more remote employees, but that was happening already.

Right now we are being massively held up by the federal reserve. I think we’re going to fall again given we were already at historic highs in terms of leveraged loans and consumer credit card debits. It’s natural for economies to contract based on credit cycles. Right now we’re kind of living in this artificially lifted up world for the next 3–6 months, but the next 9 months will not be easy.

Businesses need capital to grow but they need an economy to grow. The best capital you raise is a new customer. When customers aren’t there, it affects the whole economy. When you think of the basics of capital allocation, if now most of my profitability is going to pay down debt, I have less to invest in R&D and less to invest in my company to grow. If I used to think I could grow 30–40% YoY, now I’m only able to grow 15% YoY because I need to meet my debt service. If your company didn’t raise money in the last 3–6 months, I say your new budget needs to think about the next 18–24 months without raising capital and focusing on survival.

Q: What can we do as individuals in this time to survive and thrive?

A: If I’m a small business owner, I want to have as much of a cash cushion as possible. I would borrow it just to keep as cash. As an individual who’s not in a good shape financially, if you have a job save as much money as you can, if you don’t have a job try and find a job or learn new skills. The more technical your job is the more likely your job is gonna stay. This is the time for you to upskill and gain more skills so you can be in a better place in the job market in the future. For an investor, even if the economy goes sideways for a while, if you can buy a good business right now don’t be afraid of deploying capital. You might just make the best investment decision you’ll ever make.

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If you’re interested in learning more about Pleitez’s experiences, you can watch the full interview here. If you are a motivated investor or young professional like me, I would highly recommend checking out RBL1’s Youtube channel for more videos on how entrepreneurs and investors are changing the world.

Thank you for reading and stay safe!

Written by Brian Ou

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