Nomura, as part of an excellent report looking at various aspects of active versus passive investment management, have considered Warren Buffett’s famous bet that an index fund will beat a fund of hedge funds over ten years.
Buffett is winning, and the bank’s conclusion is that this is very far from a fluke:
In our view, alternative assets as a group show consistently poor performance. Beta is high. Alpha is near zero, if not negative. Correlation with standard asset classes is high. Return and diversification benefits are negligible.
More on that below, but first note the proportion of pension fund fees going to the alternative investment fund managers. Never have so few been paid so much by so many for doing so little. Read more
Pets at Home is the latest addition to the pipeline of high-quality initial public offerings set to greet the Great British investing public, according to the FT:
It plans to raise £275m from the offering, which it will use to pay down debt. It will also use £325m from new banking facilities to cut debt. The group plans to have net borrowings of £275m when it comes to market. Read more
A particular kind of buyer, at any rate. Talk of corporate cash piles has become cliché, while private equity has been turning a corner for so long it has entered some sort of fee-paying mobius strip. But it remains the case that stock markets have gone up without many purchases of companies in their entirety.
As Liberum Capital see it, everything is in place for private equity to flourish — except for the small matter of deals.
Companies have lots of cash, debt is cheap, the market for secondary deals between private equity groups is healthy, and the number of buyout-backed initial public offerings is well on track to beat last year.
Fundraising also pulled in $204bn globally in the first half of this year, versus $170bn in the same period in both 2011 and 2012.
David Swensen is an investing superman. His pioneering use of alternative investments after he took over the Yale endowment in 1985 prompted a thousand imitators and created an industry.
Indeed, the Yale model became the endowment model, so widely was it embraced. Then, with alternative investments legitimised as suitable for big investors, pension funds began to follow his lead, albeit tentatively. Read more
Scrooge McDuck once said: “There’s only one thing that’s better than owning a vault full of cold, hard cash, and that’s swimming in it! I love to dive around in it like a porpoise and burrow through it like a gopher and toss it up and let it hit me on the head.”
Protesting private equity monster points menacingly at Alphavillain. The scene at Bain Capital’s NY outpost, Madison Ave and 57th, ahead of tonight’s starring role for the firm in Romney’s convention speech.
Gawker on Thursday unloaded some 950 pages of filings from Bain Capital-affiliated offshore funds in which Mitt Romney has invested his fortunes over the years. We’re still reading through the docs, though Dan Primack (who’s already read through them) thinks there’s not much to the issue. Read more
It’s a big, big China leveraged buyout — the biggest ever, in fact. Advertising company Focus Media, which is listed in the US, said it has received a $3.5bn takeover offer from its chief executive who is backed by a number of private equity groups, including Carlyle.
It’s gained attention in part because the offer (in the form of a non-binding proposal letter) of $27 per share is higher than the level the shares closed on the last day before the short seller Muddy Waters published the first of several reports criticising the company. Read more
From the New York Times, a Gretchen Morgenson report into an apparently widespread practice of Wall Street analysts giving private equity clients and hedge funds a heads up into their thinking, via the hedgies’ monthly or quarterly “questionnaires”:
The funds say they ask only for public information, but in at least four cases, documents from Barclays Global Investors, now a unit of BlackRock, state the goal is to receive nonpublic information. Two documents state that the surveys allow for front-running analyst recommendations. Read more
[Update: the offer has been withdrawn..."recent publicity around the proposal has made it difficult to proceed".]
… and you’re an established but struggling department store operator (think a rubbish John Lewis) and obvious bid target. You’ve never heard of this bidder, but they insist they’re for real. What do you do? Read more
It takes time, money and commitment to take on the dogs of the investment company sector. Colin Kingsnorth has all three, which is perhaps why he’s picked fights with its two biggest canines. On the one hand, here is 3i, a perfectly decent business wrecked by the o’ervaulting ambition of the previous management under its chairman Sarah Hogg. She is old enough to remember it as the Industrial and Commercial Finance Corporation, a decently dull business providing long-term equity finance to small businesses – rather what’s needed today, in fact.
Its management had craved the excitement of big-ticket private equity, and got it, though not in a way the shareholders would appreciate. 3i piled into dot-com just in time for the millennium bust, and Baroness Hogg’s reign that followed culminated in the unedifying spectacle of an investment company forced into an emergency rights issue at a massive discount to net asset value (NAV). Even that did not mark any sort of turning point, and the discount widened to 40 percent. Last week the chief executive resigned. Read more
Terra Firma Capital Partners has dropped plans to start fundraising this spring and is seeking instead to collect about €1bn from a single sovereign wealth fund to keep doing deals, the FT reports, citing people familiar with its plans. The group, which is run by British financier Guy Hands, is delaying the start of its next fundraising effort for at least another few months. The sources also said that Mr Hands wants to wait for further recovery of Terra Firma’s third fund portfolio before asking investors to commit fresh capital.
Blackstone co-founder Stephen Schwarzman got about $213.5m in salary, share of profits and cash distributions from his holdings in the world’s largest private equity firm in 2011, up 33 percent from the previous year, reports Reuters. Mr Schwarzman, 65, who co-founded Blackstone in 1985, got most of his payout from dividends on his 21 per cent ownership of the private equity firm and realized investments from funds predating the company’s IPO in 2007. Mr Schwarzman’s salary was only $350,000, unchanged from last year, and he has not taken any bonuses since the company went public, according to a regulatory filing on Tuesday.
Michael Douglas is playing a new and unlikely role as spokesman for the US Federal Bureau of Investigation in its war against corruption on Wall Street, the FT reports. The Hollywood actor – famous for his line “greed is good” in the 1987 film Wall Street – is sending a new message in a public service announcement, telling traders and brokers that insider trading is a serious crime. The FBI’s New York office, which prioritises white-collar crime, hopes the 60-second segment will reach traders and hedge fund portfolio managers who might be tempted to cross the line between trading on legal stock research and trading illegally on secretive non-public information. The WSJ reports that federal authorities are currently pursuing insider trading cases against 120 individuals. Since late 2009, prosecutors have won 57 convictions or guilty pleas out of the 66 individuals that have had cases bought against them.
Henry Kravis and George Roberts each took home a pay-out of around $94m last year from KKR, the private equity group they helped to found, the latest sign of the riches available to industry executives at a sensitive time in the US presidential election, the FT says. Private equity has faced intense scrutiny in the US for the way executives, including Mitt Romney, the former head of Bain Capital who faces a tight vote in the Michigan primary election on Tuesday, have built fortunes aided by beneficial tax treatment. In addition to dividend payments totalling $64.2m each, the two cousins were paid around $30m each, mostly from the share of investment profits from private equity funds managed by KKR. So-called carried interest is usually taxed as a capital gain, which is levied at a 15 per cent rate, rather than the 35 per cent paid on ordinary income.
President Barack Obama and Mitt Romney, his most likely Republican rival in this year’s election, battled for the mantle of tax reformer as they released competing visions for comprehensive reform, the FT reports. Mr Obama set out a plan that could change where global companies choose to invest by cutting the US corporate tax rate from 35 to 28 per cent, imposing a minimum tax on profits US companies earn in offshore tax havens, and eliminating tax breaks except for manufacturing and research. He also wants to raise billions of dollars via a “Buffett rule” that would mean people making more than $1m a year have to pay a minimum of 30 per cent of their income in tax, but he has not set out a detailed plan for personal tax reform. In a move that may increase his appeal to conservative Republican primary voters, Mr Romney proposed aggressive cuts to personal income tax rates, calling for a one-fifth reduction in each of today’s marginal rates. The new rates would range from 8 to 28 per cent.
A US private equity group has made a rival £1.2bn offer for Misys, the banking software company which this month agreed a merger deal with Switzerland’s Temenos, says the FT, citing people close to the deal. Vista Equity Partners is putting forward an indicative offer of about 360p for every Misys share, a 16 per cent premium over Friday’s closing price of 309.6p. The offer is considerably lower than the £1.4bn offer Misys is thought to have received from Fidelity National Information Services, the US banking technology company, last summer.
For this, our final post covering FT Alphaville’s meeting with Yves Smith of Naked Capitalism, we asked her about the regulations that have arisen from the ashes of the financial crisis. Not wanting to leave the series on a depressing note, we (gently) prodded Ms Smith to also share with us something to be optimistic about.
AV: What do you think some of the biggest pitfalls/missteps have been since the crisis in terms of regulation?Read more
John Paulson, the billionaire investor, has taken public his efforts to get The Hartford Financial Services Group to split into two companies, says the FT. The Hartford, like other insurers, has been under pressure in its life insurance business as interest rates hover near zero, making it difficult to generate the income to cover pay-outs on products like annuities. At the same time, it has participated in an industry-wide increase in pricing in its separate property and casualty business to make up for disaster-related losses last year. Mr Paulson, the largest shareholder in The Hartford with an 8.4 per cent stake, published a letter to the company on Tuesdayblaming its underperformance on the combination of its two businesses. He said it is too complex for analysts to properly value and that most other insurers have chosen to focus on one or the other business. Meanwhile Bloomberg reports Mr Paulson sold his entire stakes in Citigroup and Bank of America in the fourth quarter before the shares rallied. Paulson & Co, which owned $643m worth of Citigroup at the end of the third quarter, had sold its entire 25.1m shares as of December 31, the firm said on Tuesday in a filing with the SEC. He also sold $394m worth of Bank of America, or 64.3m shares. It also sold its 998,900 shares of BlackRock valued at $146m.
The shale gas and fracking boom in America’s oil industry is attracting ever more private equity money, with funds signing three times the value of energy deals in 2011 compared to 2010, the WSJ reports. Overall deal-making in the sector rose seventeen per cent in 2011, by contrast. Oil & gas explorers need ever more capital for complicated drilling techniques to open up shale fields, offering handsome windfalls to PE investors along the way. However, the risks of entering the industry in the late stages of its boom, and amid a trough in gas prices, may store up trouble for funds.
The SEC has begun a broad examination of the private equity industry, says NYT DealBook, citing two people with direct knowledge of the matter. The regulator’s enforcement unit sent a letter late last year to several private equity funds as part of what it called an “informal inquiry” into the industry, according to the sources, but the blog said it was not clear which firms received the letter. While the SEC. emphasised that the request should not be construed as an indication that it suspected any wrongdoing, its goal in gathering information was to investigate possible violations of securities laws, the sources said. The way private equity firms value their investments and report performance was said to be one aspect of the investigation.
Ducati is set to change hands this year after its private equity owner said it aimed to make three times its initial investment by selling or listing the producer of top-end Italian motorcycles. Investindustrial, the Italian private equity group backed by the Bonomi family, is looking to dispose of the motorbike brand in a deal worth up to €1bn. “Ducati is now a perfect company but the further growth it requires needs the support of a world-class industrial partner,” Andrea Bonomi, Investindustrial’s chairman – and a Ducati driver as well as speedboat owner – told the FT. “This year, we will work towards that partner.” Last year Investindustrial, one of the biggest private equity investors in southern Europe, mandated Deutsche Bank and Goldman Sachs to sound out a public listing for Ducati in Hong Kong. But a sale to a rival or to a large car group is now seen as the more likely way to internationalise the brand further.
The big leveraged buy-out groups of the credit boom have gained renewed access to funds as the junk bond market has rallied and buyers have flocked to the highest-yielding assets, says the FT. Energy Future Holdings, Realogy and Caesars Entertainment, formerly Harrah’s, are among those groups controlled by private equity funds that have sold junk bonds in recent weeks as they seek to manage their overburdened balance sheets. The capital markets have reopened to highly indebted companies after central banks moved to keep official rates low and sentiment in US and European markets has improved. The renewed appetite for risk has given a partial reprieve to some private equity-owned companies from looming debt repayments.
Caesars Entertainment, the casino chain carrying more than $22bn in debt, completed an initial public offering that gives the company a market value of $1.13bn, Bloomberg reports. Las Vegas-based Caesars, taken private in a $30.7bn buyout by Apollo Global Management and TPG Capital in 2008, raised $16.3m selling 1.81m shares at $9 each, the company said in a statement. The stock, which was offered for $8 to $10 apiece, will start trading on the Nasdaq Stock Market on Wednesday under the symbol CZR. The $16.3m raised is a fraction of what it was hoping to muster two years ago. Reuters says the deal is often referred to as an example of how the credit bubble that preceded the financial crisis of 2008 led to overleveraged deals that have left their private equity investors with a Herculean challenge of getting their money back. Caesars’ earnings before interest, tax, depreciation and amortization (EBITDA) were $1.8bn in the 12 months ending September 30 on interest expenses of $1.93bn, according to its IPO document.