" You never know who is swimming naked until the tide goes out."
Warren Buffett
"Governance shortcomings in private equity, overlooked in the cheap money bonanza, now look pressing as institutional investors query the values private equity managers put on portfolio companies. The valuation issue has been acute since the return of more normal interest rates. Private equity managers have tended to write down their assets’ value by far less than the falls in public markets. This is a nonsense given the higher leverage and illiquidity of the asset category. The writedowns should be far greater than for public equity."
#Privateequity#PE#Privatemarkets#Alternativeassetshttps://lnkd.in/eyMzjGcK
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Private Equity - something doesn't smell right...
A simple observation in this FT article by John Plender - here's the crux for me:
"Governance shortcomings in private equity, overlooked in the cheap money bonanza, now look pressing as institutional investors query the values private equity managers put on portfolio companies. The valuation issue has been acute since the return of more normal interest rates. Private equity managers have tended to write down their assets’ value by far less than the falls in public markets. This is a nonsense given the higher leverage and illiquidity of the asset category. The writedowns should be far greater than for public equity."
Delighted to discuss with Christian MayesPortfolio Advisers Limited on why we like global small caps. An asset class that has been in the shadows of the mega caps (especially Magnificent 7) for some time, but where valuations are attractive and underlying operations on the cusp of improvement as peak interest rates are past and cyclical activity shows signs of potential recovery.
https://lnkd.in/dxe32Czy#SmallCap#CyclicalRecovery#Diversification
For professional investors only
Private equity faces criticism for its high fees, reliance on cheap debt, and questionable practices. The typical fee model of 2% management fees and 20% of profits above an 8% return erodes investor returns compared to cheaper passive investments. Firms have profited more from leveraging and selling at inflated values rather than improving businesses. With higher financing costs and lower market multiples, the flaws in this model are evident.
Valuation practices are also dubious, with firms slow to mark down asset values despite market declines, revealing governance issues and conflicts of interest. The rejection of the SEC’s transparency rules heightens concerns about opaque fees and performance metrics.
Despite these issues, private markets still attract investment due to diversification and opportunities in sectors like infrastructure and technology. However, with uncertain returns and significant undeployed capital, the high fees and increased financial risks make private equity a more complex and risky investment.
#pe#vc#investment#privatemarkets#money#sec#fee#model#business#blackrock#statest#blackstone#wsj#ft#nytimes
Private Credit Won't Cause the Next Financial Crisis : Stephen Schwarzman CEO of Blackstone Group has pushed his firm into a sector minting new billionaires, private credit : hottest thing in finance could burn some investors, but it shouldn’t spark financial infernos : sector has minted fresh billionaires : high-yield, high-risk debt : fears that private credit could threaten the financial system should be more soberly assessed : Total assets under management in the sector have nearly doubled since 2019 to more than $1.6 trillion : private credit managers have been able to offer more certainty to private equity firms trying to finance takeovers because they set the price themselves and keep the loans rather than trying to sell them later : The funds can take a longer view partly because of how they raise their money. Most private credit is backed by big institutional investors, like insurers or pension providers, which agree to lock up their money for years at a time : If there is a panic, they can’t just ask for their cash back like depositors in a bank. That means the fund won’t need to try to pull the rug from under its borrowers or sell their loans quickly, and it won’t collapse if it suddenly became unable to refund investors
ICG Enterprise Trust is identified as one of two private equity trusts said to be exemplifying high-quality proven performance. The article was published last week in The Telegraph. Capital at risk*.
Read the full article by Jonathan Davis here: https://lnkd.in/ejRxY4YV#PrivateEquity#PrivateMarkets#InvestmentTrusts#ListedPE#Investing
* Investments involve risks, including the risk of capital loss. Past performance is not a reliable indicator of future results.
Private equity companies boast that the high fees they charge clients are worth it, because they generate above-average returns in exchange. But several studies have cast doubt on that confident assertion. Notably, a 2016 paper found "no significant outperformance of buyout fund investments versus the public market equivalent on a dollar-weighted basis."
The Financial Times' columnist Robin Wigglesworth has a highly readable, thorough analysis of private equity returns and how they compare to investments in public markets. In it, he reviews several studies that have examined this question. Not all of those studies suggest private equity's claims are wrong, but at least a couple papers that adjust for factors such as amount of leverage and the benchmark used does seem to suggest that private equity returns are somewhat comparable to public investments.
#privateequity#debt#privatecredit#finance
Highlighting this excerpt from the FT article below, which begs the question, "If Private Equity will look different over the next 10 years than it looked over the past 10 years [absent "falling interest rates" and "a low cost of capital"], is not the same true of Public Equity?
***Begin Excerpt***
Private equity can no longer rely on borrowing cheap money to fuel returns, and will have to go back to its roots of sourcing good deals and making operational improvements, according to the head of Goldman Sachs’s investment business.
“Private equity will look different over the next 10 years than it looked over the past 10 years,” said Marc Nachmann, global head of asset and wealth management at the US bank, in an interview.
“It will be a little bit back to the future in a sense.” The decade and a half of low interest rates that followed the 2008-2009 financial crisis heralded a boom in private equity, as managers made use of cheap and plentiful debt to embark on acquisition sprees. Falling interest rates raised asset values and cut the cost of capital.
“Over the past 10 years you could rely on lots of leverage, cheap cost of capital and multiple expansion, and you made your returns that way,” said Nachmann. “That will be harder to do going forward.”
***End Excerpt***
Another interesting article from the FT. This time from a long term sceptic of Private Equity who has now turned positive. The following is his rationale:
“First, I reckon borrowing costs will decline from here — and that’s good for an industry that generates much of its returns from leverage. But if they don’t, I’m not too worried either. Higher rates mean a stronger economy. And I believe the more onerous the debt repayments, the more focused PE managers will be on operational returns.
Likewise, I’m comfortable regardless of asset values rising or falling. The former would boost liquidity and performance. If the latter, an estimated $2.6tn of so-called dry powder can be put to work at more sensible valuations.
Indeed, this optionality is a genuine plus, versus listed equity portfolios, which tend to be fully invested. PE funds with the best returns are the vintages launched during a downward correction in prices. It’s an inbuilt contrariness that appeals.”
Couldn’t agree more…
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What is Preferred Equity?
I want to be clear: I’m not saying we’re in a financial free fall. This is not 2008. But recent real estate and financial market news points to a downturn we haven’t seen since that era. A significant amount of carnage is already unfolding, and many commercial real estate deals are heading south.
This is not a rosy moment in real estate paradise. We’ve all seen some of the worst deals done in the best of times. Now, we’re watching for some of the best deals to surface in some of the worst of times.
So, what types of deals are available right now? Honestly, they’re not that great—unless you know where to look.
The types of deals formerly penciling internal rates of return (IRRs) in the mid-to-high teens are now coming in at about 11% to 13% or less. That’s if you can find them.
And economic uncertainties are causing some to sit this round out. While that’s an option, we hate to see investors sitting on cash or Treasuries and breaking even or losing money to ravaging inflation.
If Buffett’s actions in this downturn are a repeat of what happened last time, we expect to see him making similar moves to what he did in 2008.
So what did Buffett do then, anyway? He hedged his portfolio by changing his position in the capital stack. Berkshire Hathaway acquired $5 billion of Goldman Sachs stocks when most wouldn’t touch them with a 39-and-a-half-foot pole.
But Buffett didn’t take the risk other investors took. Instead, he dramatically lowered his risk by buying preferred equity shares on Sept. 23, 2008.
And we believe you should do the same thing right now—if you can get access to it.
Why We Love Preferred Equity?
Preferred equity is a hot topic right now. My investment firm, Wellings Capital, is pursuing preferred equity deals to add to our fund. We believe the current financial situation creates a unique window of opportunity.
So, what do we like about preferred equity? While there is no lien, preferred equity may provide more upside and tax benefits than senior or mezzanine debt. Preferred equity sits between debt (first lien position) and common equity (which has no lien but most of the upside profit—or potential loss). It has some of the advantages of both equity and debt.
Like debt, preferred ongoing equity payments are established in advance, and all, or a portion of, these are paid before common equity distributions. At the time of sale or refinance, preferred equity holders are typically caught up (if behind) before common equity holders receive distributions.
Buffett invested in preferred equity when times were rocky. Likewise, we believe this is a uniquely strategic time to hedge some of our investments by adding preferred equity to our portfolio.
