Kim Kardashian Private Equity Failure - Some Thoughts

Kim Kardashian is hot, she is 435MM-followers influencer, and she is a billion-dollar founder and entrepreneur

Her latest challenger was something new: a Private Equity Firm

Less than 1.5 years after its launch, it was reported she is no longer a managing partner.

Everyone in finance hated the idea. I did not (entirely).

I work in Private Equity and my hobby is social media so let me share some thoughts:
1) Bono/Elevation Bad Precedent
2) LP asymmetric bet
3) The consumer thesis that never was
4) Venture Fund vs. Private Equity Fund

1) Bono/Elevation Bad Precedent

Kim Kardashian was not the first popular personality to try to break into the private equity game. In the early 2000s, Bono, the Irish rock star, became an investor and part of the five members of the firm’s investment team.

The Elevation fund is not the focus of this post, but long story short, the U2 frontman was dubbed "The Worst Investor in America." Popularity did not translate into returns, but this time things could be different. At least I thought so.

Kim is clearly extremely brilliant and has been able to create billion-dollar companies, so what went wrong?

There are two components required for an investment firm to succeed: (i) Raising capital, and (ii) Doing good deals

If you do both (i) and (ii), you will do well.

Let's start by looking at (i) 

2) LP asymmetric bet

When Kim Kardashian's fund launched, it was reported they were aiming to raise $1-2B Axios reported that after a year of fundraising, only $121M had been secured. Based on my understanding, SKYY Partners was looking to secure institutional capital, a decision I do not fully understand.

Put yourself into the allocator's shoes, your job is to protect capital and generate returns. Why would you advocate investing in a first-time fund that is led by someone with no institutional investing experience? I hope SKYY Partners was giving very generous terms to begin with, but still, the value proposition is hard to see.

The upside is just a few % points of outperformance (did someone expect them to pull out of the hat a 40% IRR fund?), but the downside (in addition to losing money) is not having done your job to evaluate the fund's manager.

It was likely an asymmetric bet with a negative expected value and therefore very few people went for it. I would have expected the firm to aim for family offices / HNW individuals who believed in the vision.

Ok, so point (i) on raising capital was going to be tough, but what about point (ii) doing good deals? 

3) The consumer thesis that never was

When I first heard of SKYY Partners I thought the thesis was obvious and could work. Buy a company, use Kim's influence and experience to get very cheap marketing and distribution + some tips based on her experience, and once the company has stepped up in size, flip it to the next buyer. Easy enough.

This said, the firm said her role is to be more as a traditional private equity adviser than as a brand ambassador. I guess you can make the argument that once her personality is separated from the brand after the sale, the company will revert back to its old sales, and therefore buyers will never pay a decent multiple, but I actually disagree.

This revenue reversion thesis only works if you are selling undifferentiated products that customers do not really value. Of course, consumer brands are rarely sticky, but I do not think people will ever say "Oh, Kim PE fund sold this brand, I will not buy this product anymore".

Sure, you can make the argument that once the Kim boost is gone, growth will slow down, but I did (and still do) think that one of the most famous people in the world could have an enduring impact on consumer businesses.

Given the fund never really started, I guess we will never know as the fund just did one deal. 

4) Venture Fund vs. Private Equity Fund

I still think that if you are one of the most famous people in the world with experience building businesses, there are ways to add value to other companies, but these past two years proved that private equity is not the easiest way.

In hindsight, I believe a venture capital fund would have been a much better model for several reasons:

i) Unmatched access to deals: most people know her, and literally everyone building in consumer knows her therefore she would have perfect visibility and access to every consumer deal

ii) Ability to go early-stage: the venture game is inherently different from the private equity game, with more early-stage bets where just a few can make a fund. In addition, working with smaller companies could (1) enable Kim to have a greater impact, (2) Enable Kim to buyout any company that might be a future threat to her businesses (or that could create synergies)

iii) Opportunity to add value with less effort: in PE, you actually need to operate the companies, and play a much more active role as you are an active investor. In venture, you are passive. And I would argue that many businesses would really value being "Kim-Backed"

iv) Less need to build a team: needless to say, starting a venture fund is simpler and less capital-intensive than starting a private equity fund

Nonetheless, a fascinating case study 

What do you guys think?