Displaying items by tag: private equity

(New York)

In a topic that wreaks of moral hazard, private equity firms are increasingly the beneficiaries of government bailout funds. The situation is similar to the Crisis-era bailout of Chrysler, which was owned by Cerberus Capital Management. The Financial Times summed up the situation best, saying “Should they use government money to support companies whose deep-pocketed private equity owners have often thinned out their balance sheets and left the slimmest financial cushion?”, continuing with a quote from a professor at Oxford, “We cannot have a world in which one can borrow to earn more and pay little taxes if things go up and when things go down then the taxpayer comes to the rescue”.

FINSUM: Private equity will probably get more bailout money as this lockdown rolls on, but the Democrats will surely attach a lot of strings to it.

(New York)

Financial advisors often wonder about the best way to get client money into private equity. The industry has long had very high hurdles for investing directly in funds, and publicly traded funds that try to replicate private equity returns are still nascent. However, there is another good way to get PE like returns by proxy—buy publicly traded private equity company stocks. KKR is a very well known firm that is currently trading very cheaply and seems like a good buy. The stock rose 50% last year but badly trailed its rivals in a year that saw many PE companies double in value as they shifted from partnerships to corporations.

FINSUM: The market seems to be underpricing KKR’s ability to create management fees based on its dry powder, which is causing the weaker valuation.

(New York)

There is a new big asset class getting very popular on Wall Street. You may think it is some new esoteric structured credit or volatility product. But guess what, it is just about the oldest product in the world—business lending, or “direct-lending” as it is being called. It has been increasingly apparent on the fringes that big Wall Street players, like Goldman Sachs, have recently taken an interest in direct lending. Now, the whole Street is getting in on the action. Major private shops like KKR and others have started direct lending funds, and the area has returned handsomely, up over 20% this year. The idea of the funds is to lend to businesses and whose credit excludes them from the usual channels.

FINSUM: These funds seem likely to do well until a recession or period of deleveraging occurs, at which time they are likely to see high levels of defaults.

(New York)

Every investor and advisor knows the mantra: past success does not predict future performance, or some iteration thereof. Countless market studies have proven the mantra. However, what about areas where the saying does not hold true? In private, non-liquid markets, studies actually show the opposite—that past performance actually does a good job predicting future success. For instance, in private equity and venture capital, funds with performance in the top and bottom quartile are very likely to continue in that quartile time and again.

FINSUM: So this is quite an interesting finding, but one with an equally curious subplot. It is not actually the funds that are predictive of the performance, instead it is the individual dealmakers in the funds, the study found. All these results make sense to us because VC and PE are not like large liquid markets, a lot of who gets access to the best deals depends on reputation, which allows winners to keep thriving.

(New York)

One of the things the growing ETF markets lacks is many options regarding private equity, and with good reason. The returns of the sector are hard to reproduce with publicly traded stocks. But getting private equity returns can be difficult to attain anyway because of the challenges of investing in the sector, especially for investors who are not at the wealthiest end of the spectrum. However, there are two newish ETFs on the market, BUYN and BUY, which use an investing methodology developed at Harvard to try to replicate the returns of the private equity sector. The provider is SummerHaven, who comments about their funds that “We believe that these ETFs based on our private equity strategy indexes will provide investors with an opportunity to access returns comparable to an asset class that has traditionally only been available through private markets, with the added benefit of liquidity and transparent and without lockups, vintage risk, investment minimums or takeover premiums. These ETFs will allow both retail and institutional investors an opportunity to access private equity strategy returns at substantially lower fees”.

FINSUM: On paper these sound like an interesting option, but only time will tell if the strategy actually achieves what it says. The ETFs are especially unproven because the Harvard paper which underpins the strategy was only published last year.