BEYOND THE STREETLIGHT: Illuminating True Value in Private Equity’s Shadows
“TO SEE WHAT OTHERS DO NOT, THAT IS TRUE GENIUS.”
— Morten J. Sørensen
It’s a familiar story: a man is frantically searching for his keys under a streetlight. A policeman asks if he’s sure he lost them there. “No,” the man replies, “I lost them in the park.” The bewildered policeman asks, “Then why are you looking here?” “Because,” the man says, “this is where the light is.”
In the complex, high-stakes world of Private Equity, are we too often found searching for the answers, for alpha, for assurance, only under the most convenient lights? Are we drawn to the readily available data, the polished pitch decks, and the compelling narratives, while the real keys to value creation—or critical risk—lie waiting silently in the shadows? The truth is that virtually anything and everything is measurable and, therefore, can be verified. It simply comes down to how and where you look and possessing the right mindset to illuminate what’s hidden. This is the core of the Strategic Bloodhound approach—a relentless pursuit of ground truth by bringing light to those dark, hard-to-see areas.
The Seductive Glow: Narratives, Opacity, and the Streetlight Effect in PE
Even for sophisticated investors, the lure of the streetlight is incredibly strong because the alternative requires challenging, compelling stories and navigating deliberate or unintentional obscurity. The Private Equity industry, at times, can reward masterful storytelling. General Partners (GPs) craft powerful narratives of value creation, unique “playbooks,” and future success. But how often do these narratives withstand rigorous, independent verification of the underlying operational health or sustainable performance drivers? Narrative can, and often does, triumph over ground truth.
Complex financial structures, instruments, and leverage can also create an illusion of alpha that might not be purely derived from operational improvement. Are we verifying the source of returns, or are we mesmerised by the engineered outcome under the easy light of headline numbers? Furthermore, the ‘Opaque Black Box’ nature inherent in many fund structures can make it incredibly difficult for Limited Partners (LPs) to verify Net Asset Value (NAV) drivers or distinguish skill from luck until it’s too late. This isn’t always nefarious, but complexity can serve to obscure. Reported NAVs and Internal Rates of Return (IRRs) can sometimes be gamed or selectively presented. Fee structures and the pressure to deploy capital can also lead to decisions prioritising GPs’ timelines over the long-term health of assets or LP interests. The core message is clear: compelling narratives and complex structures can make the ‘easy light’ seem sufficient, discouraging deeper, more arduous verification in the ‘dark’.
When the Darkness is Illuminated: A Case Study – Hindenburg vs. Icahn Enterprises
This isn’t mere theory. The consequences of superficial analysis—of staying under the streetlight—play out dramatically in the public markets, offering stark lessons for private equity. A prime example is the Hindenburg Research versus Carl Icahn’s Icahn Enterprises (IEP) reports from May 2023.
Here was IEP, linked to an “American icon” of investing, Carl Icahn, boasting a dividend yield of over 15%. The ‘streetlight’ shone brightly on these facts: invest with a legend, get a fantastic payout. This was the readily available story. But Hindenburg Research ventured beyond that easy light, publishing detailed reports that alleged a very different reality in the less illuminated corners:
An Unsustainable Dividend: Hindenburg argued the eye-watering dividend was “unsupported by IEP’s cash flow and investment performance,” citing that IEP’s portfolio had lost approximately 53% since 2014. The company had cumulatively burned through roughly $4.9 billion in free cash flow. They alleged the dividend was funded by “regular open market sales of IEP units, totalling $1.7 billion since 2019,” describing it as a “‘Ponzi-like’ economic structure.” Lesson for PE: Always verify returns’ true source and sustainability, not just the headline number. Is it generated from actual earnings or financial engineering?
Questionable Valuations (NAV): IEP traded at a hefty premium to its NAV. Hindenburg didn’t just question the premium; they estimated IEP’s reported year-end NAV of $5.6 billion was inflated by at least 22%. They cited “questionable value marking practices,” including IEP reportedly valuing a meatpacking company stake at $243 million when its public market capitalisation was only $89 million and marking an “Automotive Parts” division at $381 million, only for a key subsidiary to declare bankruptcy a month later. Lesson for PE: Rigorously verify asset marks, especially for illiquids and controlled companies. Are valuations reflecting verifiable market realities or optimistic internal assessments?
Conflicts of Interest & Facilitators: Hindenburg highlighted that Jefferies was the “only large investment bank with research coverage on IEP,” continuously placing a “buy” rating while reportedly running all of IEP’s $1.7 billion in ATM offerings. Lesson for PE: Verify independence and scrutinise relationships between companies, their advisors, and research providers. Whose interests are truly being served?
Debt & Key Man Risk: Hindenburg pointed to Carl Icahn pledging approximately 60% of his substantial IEP holdings (181.4 million units) for personal margin loans, with a lack of disclosed basic metrics around these loans. Lesson for PE: In PE, verifying the financial health and potential personal leverage of key principals is crucial, as it can create unseen risks for the entire enterprise.
These red flags were often overlooked due to the halo effect of Icahn’s reputation, the allure of the high dividend, and the acknowledged complexity of analysing holding companies. Many stayed under the existing streetlight, looking where it was easiest, not necessarily where the fuller truth might lie.
The Strategic Bloodhound in Action: Illuminating Value in Private Equity
The Icahn case starkly underscores the critical need for a Strategic Bloodhound investigative approach in private equity due diligence and portfolio oversight. It’s about proactively seeking out the information that isn’t readily presented. It means venturing into the perceived darkness where the real work of verification lies.
This demands a desire to ‘look inside’ the PE’s Opaque Black Boxes. Applying independent forensics and diagnostics—an Organisational CT Scan, if you will (like the Private Equity Asset Efficiency Score (PEAES) diagnostic)—to show the truths as they truly are. It’s about moving beyond trusting the narrative to rigorously testing it against quantifiable, evidence-based operational health metrics. This approach uncovers the hidden risks, identifies operational friction, and challenges the conventional ‘playbooks’.
This isn’t just about avoiding the next IEP-like situation. It’s about fostering and reaching for genuine transparency and accountability. More importantly, by illuminating these less-scrutinised areas, we can uncover sources of extraordinary, sustainable value creation invisible to those who only operate under the familiar glow of standard reporting or persuasive pitches.
The Immunity Dividend and a Path to Shared Success
For LPs, GPs, and investors alike, cultivating this deep verification mindset yields an ‘immunity dividend’, building resilience against seductive but unsubstantiated narratives and allowing for decisions based on verifiable substance, not just compelling stories that glitter under the lamppost. This journey into the ‘dark’ doesn’t mean there has to be only one winner. True transparency and a focus on genuine, verifiable value creation benefit everyone: investors, LPs, skilled GPs, and portfolio companies. It elevates the entire ecosystem and industry by moving beyond perception to provable, unquestioned performance.
Your Call to Action: Stepping Beyond the Lamppost
Look at your current pipeline, your portfolio, and your trusted relationships. Where are the ‘streetlights’ shining brightest? And more importantly, what crucial aspects might lie beyond their reach in the unexamined shadows? What’s one core assumption, one key claim, that you haven’t seen independently and rigorously verified recently? Could a commitment to deeper inquiry—to becoming your own ‘Strategic Bloodhound’—change your perspective or outcomes? The most significant opportunities and critical risks often lie not where the light is easiest but where the truth is the fullest. It’s time to start looking there. I still find it profound after all the years; once you learn to see something, it is incredibly difficult to unsee it again. Yet, it is virtually impossible to share that same vision. But I try every day.
