I have two blizzards to tell you about. One is the one we are having here in Walker; a real white out.
The other blizzard is the hype about private equity. These funds have access to mountains of capital and they are going after businesses in an effort to make a profit for their investors. That sentence is not much different than a description of venture capital which was the hot hot thing a few years ago.
It got to the point where venture had too much money, funded tons of deals, took them public, even the ones that shouldn't have been public. VC drew new people, new money and mistakes were made. Can private equity be much different? It is already drawing more people (both investors and workers).
Is it a stretch to think really bad PE deals will get done by people with maybe a little less experience? I am not an expert in VC or PE but it is easy to see that there is a tremendous amount of capital looking to participate. I do not know if this will end badly or not but the potential is there.
My clients can reach their financial goals without this, how about you?
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16 comments:
More hedge fund collapses coming too I suspect. The VC pattern will likely repeat in both PE and hedge fund categories with the ratio between capable hands and hot money (credit) getting worse and worse until multiple blow-ups bring things back into line. Might as well add sub-prime mortgage lenders to the 'at risk' list while we're at it: Won't be nearly as many of those around a year from now I bet.
Given the growing diversity and sophistication of investment vehicles, even investors with sufficient capital won't really need to fool with esoterica like PE unless they personally prefer and have experience with the approach.
i agree with your hedge fund notion, i think i read somewhere that a few have closed? may mena nothing for now and I may be wrong, just a recollection.
Roger,
Is there really much of a difference between venture capitalists and private equity? I'm not sure how one would distinguish VC's from the PE folks except for time frame. VC was so 80's!!
big picture probably not, they manage pools of capital.
the details are, I think, different.
What is your thoughts on buying stocks during earning season. It seems to add a factor which would increase volatility. thanks
Sorry what "are" your thoughts...
Roger, your comments about Enron in the prior post apply here. You do not mind owning an individual stock as a 3% position in your client portfolios because even a 100% loss on that stock does minimal impact to the portfolio. Well managed Private Equity and Venture Capital funds operate the same way. Those managers do multiple deals with the expectation that one or two may turn out to be busts, but the others will be highly successful.
Looking back at the VC surge, where you say mistakes were made, most of those mistakes yielded very good returns to the VC investors. The ones who got hurt were the stock investors who bought in after the VC guys sold.
The current surge in Private Equity is similar to the VC situation in that too much capital chasing the same deals will likely result in some notable stinkers. But diversified, well-managed PE funds should still be successful.
As RW noted, more hedge fund failures are likely. A couple of recent ones have hit home here in Georgia. But in the big picture, the case for hedge funds remains strong, for certain investors.
The take aways on these private investment deals are simple. The largest, best-run firms will be successful as they have proven to provide positive returns with little correlation to traditional assets. The fact that the best and brightest of the institutional world use these funds goes a long way toward validating their utility.
These investments are private for a reason. If you cannot gain access to the best funds and managers, you should pass on this asset class. They have little place in a retail portfolio, with investors that cannot afford to lose 100% of their investment.
Lastly, don't ignore one additional factor in the current PE surge: SARBOX. Regulation is driving many firms into the arms of willing PE money funds.
Russ
What is so complicated about this?
Never invest in anything you 1. do not understand and 2. do not know when and/or how you will exit before you buy it.
W.C. Fields was correct. "Never give a sucker an even break".
There is a difference between VC and PE. The VC bubble was caused my multiplr VC chasing "me too" ideas over and over again and pouring $10s of millions into each concept many of which came up as $0 return at the end of the day. PE can certainly come out with poor returns like VC did, but in my opinion will not be as dramatic. PE firms may be over paying and putting on to much leverage, but they are buying real companies and real cashflows unlike VCs in the bubble.
Jed, aren't some PE's just swapping out one sin (the VC investing in speculative organizations with unsustainable business model--growth with no income) for another (PE's taking on greater risk to generate above market returns through massive leverage?)
And for the companies that they buy--they pay themselves, load the company of with debt and then go away. They are enriched, but the poor company is a plundered wasteland.
I don't agree that PE is any more wholesome than VC. As my Armenian grandmother said--you cannot cover $hit with snow. The snow melted on the VC's, I'll wager that it will melt on the PE's as well.
My point was not that PE will go unscathed, but that when things do fall it will not be as dramatic as what happened to VCs in the bubble. Your comment about PEs leaving companies loaded with debt doesn't really make sense to me. Remember PE's have their equity underneath the debt so they would be slitting their own throats. Whether PC and PE are wholesome I don't know, but I do know they have net net created great returns, economic growth and job creation in this county. We should be glad these industries exist in the US because they have created a lot of value.
Jed, one PE model is to create for themselves is by taking the company private, taking cash out and then taking it public again loaded with debt.
Not to sound too curmudgeonly, but I'm not sure that I would pin the white badge on private equity. It's ultimately a company's business model and sound management practices that create long term value. Equity if fungible--it can come from either public or private sectors. I'm not sure one is any better than the other if the underlying foundation is not sound.
Sound let's presume the business foundation is sound. Cash has accumulated because for whatever reason there are not any compelling new investments to bring additional return. Much of this has to do the maturity of the industry that the company operates in. So what is PE really bringing to the table?
Quite simply a motive. Company is reconfigured to have higher debt because the cash dividend paid to the PE firm is supplanted with debt. What do you have? An organization with a less solid balance sheet and higher debt costs.
In my world, that doesn't strike me as very successful model for creating long term value. I'm not arguing that in your county that has not been a helpful impetus, and to be fair to your point, I'm railing against the business model of swapping cash for debt rather than trying to be a generalized comment. I hope that makes sense.
Sell the popular.
But the unpopular.
I agree that some private equity folks will make mistakes. But most of the experienced big boys will do pretty well -- they always have. The Pritzkers, Kochs, and Carlyles of the world know a good business from a bad one.
Some of the move to private equity is SOX driven -- some is to escape the tyranny of the quarterly earnings dance -- and at least some is due to the fact that long term debt is very cheap, so borrowing at 7% to buy a business that makes 15% (or more) is like a printing press for money.
I'm sorry (I'm really not!), but this is a capitalist world. No one forces the public to buy securities of a private company that has been leveraged up by a PE. I can show you numerous examples where more leverage or structural changes at a company (Value add) to accomodate more debt have been the right thing for a company. I'm not saying that mistakes are not made by PEs, but net net PEs benefit the economy by what they do.
we can take ourselves private again later. Only way to get proprietary dealflow.We urgently need a public market currency. To
short sell our Los Angeles private equity.It is our master plan.
Take everyone else private while we go public and the passive index trackers will only be able to buy us.Permanent capital -
10 year lockups just don't cut it anymore.Future fee monetization,getting out while we can...anything else plausible
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