Finance is the wrong business for people committed to the idea of objective truth.
No asset is inherently worth anything, just some multiple of the income you think it will produce over time. Both the earnings forecast and the multiple can change at a moment’s notice — sometimes because the outlook for the future has genuinely changed, but often for other reasons. Read more
Private equity firms eager for allocations sometimes argue they can make money by buying unloved assets at distressed prices, fixing them up, and selling them off to big companies looking to make “strategic” acquisitions. So it’s interesting to read a new paper from a pair of professors at the University of St Gallen, which attempts to answer whether PE firms or corporates get better deals when they buy assets.
The short answer: PE firms generally buy targets at lower earnings multiples than strategic acquirers — but much of the effect, which has diminished significantly since the mid-1990s, comes from purchases of smaller targets on public markets by smaller funds, often in coalition with other PE firms. Moreover, the biggest discounts are mostly captured by PE firms that do relatively few deals. Read more
Or, a coda to our recent post on hacking the world’s most expensive asset class.
If investors locking up their money in leveraged buyout funds really could have gotten the same aggregate return all along simply by buying the right, leveraged stocks in the public market — then there’s an interesting implication.
It’s dumb to pay people a lot of money to do something you can easily do yourself. Unfortunately, many investors make this mistake with their investments in private equity. A new paper by Brian Chingono and Dan Rasmussen suggests you can do significantly better than the average private equity firm by buying shares in certain kinds of public companies — and that’s before fees.
The best private equity managers buy mismanaged companies, fix them, and then cash out after a few years with a handsome profit. Limited partners get high returns determined largely by the general partners’ skill at selecting and restructuring buyout targets, rather than the macro factors that drive the performance of the other assets in a typical portfolio. That valuable combination is well worth the fees and extreme illiquidity. Read more
Well, shouldn’t buyout firms be a little perturbed by things like this?
PITTSBURGH and NORTHFIELD, Ill., March 25, 2015 /PRNewswire/ — H.J. Heinz Company and Kraft Foods Group, Inc. (NASDAQ: KRFT) today announced that they have entered into a definitive merger agreement to create The Kraft Heinz Company, forming the third largest food and beverage company in North America with an unparalleled portfolio of iconic brands… Read more
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.
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.
[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