On Wall Street, So Much Cash, So Little Time

[interestrateripoff]

http://www.nytimes.com/2010/06/24/business/24private.html?ref=business

Only on Wall Street, in the rarefied realm of buyout moguls, could you actually have too much money.

Private equity firms, where corporate takeovers are planned and plotted, today sit atop an estimated $500 billion. But the deal makers are desperate to find deals worth doing, and the clock is ticking.

The stores of money inside the private equity industry have ramifications far beyond the bid-’em-up crowd on Wall Street. Millions of Americans — investors, employees, retirees — have a stake in the game too.

Corporate buyout specialists generally raise money from big investors and then buy undervalued or underappreciated companies. To maximize investment returns, they typically leverage their cash with loans from banks or bond investors.

In recent years, private investment firms have amassed business empires rivaling the mightiest public corporations, buying up household names like Hilton Hotels, Dunkin’ Donuts and Neiman Marcus.

Critics contend that leveraged buyouts can saddle takeover targets with dangerous levels of debt. But unlike indebted homeowners, highly leveraged companies under the care of private equity have so far dodged the big bust many have predicted. After an unprecedented burst of buyouts during the boom leading up to 2008, a vast majority of these companies are hanging on. Whether they will avoid a reckoning is uncertain.

So for now buyout artists are searching for their next act. Public pension funds, university endowments, insurance companies and other institutions have pledged to invest many billions with them — provided the deal makers can find companies to buy. If they fail, investors can walk away, taking lucrative business with them.

Private equity funds generally tie up investors’ money for 10 years. But they typically must invest all the money within the first three to five years of the funds’ life. For giant buyout funds raised in 2006 and 2007, at the height of the bubble, time is short. They must invest their money soon or return it to clients — presumably along with some of the management fees the firms have already collected. Some of the industry’s biggest players, like David M. Rubenstein of the Carlyle Group, Henry Kravis of Kohlberg Kravis Roberts and David Bonderman of TPG, have more than $10 billion apiece in uncommitted capital — what is known as “dry powder” — according to Preqin, an industry research firm.

Some buyout firms are asking their clients for more time to search for companies to buy. Many more are rushing to invest their cash as quickly as possible, whatever the price.

Many in the industry are getting caught in bidding wars. Firms are assigning surprisingly high valuations to companies they are acquiring, even though the lofty prices will in all likelihood reduce profits for their investors. A big drop in returns would be particularly vexing for pension funds, which are counting on private equity, hedge funds and other so-called alternative investments to help them meet their mounting liabilities.

Excellent a huge ticking timebomb as private equity just buy anything to secure the management fees.

Another bubble about to go bust, the problem is everyone will feel this as pension funds are going to lose a lot of money.

Still leverage is the way to wealth............

The private equity model has had it's day, the pass the parcel game appears to be dead.

[aa3]

Part of the continuing story of too much savings, too little opportunity for return. Where can you go where there isn't already overcapacity?

This is why 10 year treasuries at 3.23% looks good to more and more people.

Edit: update 10 year treasuries now down to 3.115%.. another .1% off since I last checked.

Edited June 24, 2010 by aa3

[azogar]

can you hear that in the background?

the distant thud of the commodities super bull charging at the paper castle gates?

[LuckyOne]

Part of the continuing story of too much savings, too little opportunity for return. Where can you go where there isn't already overcapacity?

This is why 10 year treasuries at 3.23% looks good to more and more people.

Edit: update 10 year treasuries now down to 3.115%.. another .1% off since I last checked.

How far out in the term structure does one have to go to earn non-negative real returns in most markets?

Part of the problem is that rates are too low given current inflation which results in a lot of very bad investment decisions being taken by "yield pigs" who worry about current carry rather than value across most of the risk spectrum.

Things tend to end very badly for the "yield pigs" over time.

[porca misèria]

Too much money sloshing around ... check.

What's the opposite of quantitative easing, and when can we have some?

[JustYield]

It is not TOO MUCH SAVINGS !!

Rather, it is that interest RATES ARE TOO LOW.

This is leading to MAL-INVESTMENT : ie. a mis-allocation of capital,

in ways that will impair future returns.

Raise rates, crash the markets (including property) and the money would be better invested.

Yep. A re-evaluation of the risk premium is due, especially when the normal exit (stuffing the investment back into the stock market) is closed. When these PE firms started to seek listings you knew the game was coming to an end. Public private equity indeed.

Edited June 24, 2010 by JustYield

[porca misèria]

Yep. A re-evaluation of the risk premium is due, especially when the normal exit (stuffing the investment back into the stock market) is closed. When these PE firms started to seek listings you knew the game was coming to an end. Public private equity indeed.

Public private equity has been around for years. I've got small stakes in a number of funds myself.

But these aren't the meeja-stereotype of high leverage: rather they're funds that invest in unlisted companies - the original meaning of private equity.

[R K]

No honey, no money.

Peak piggies.

[scepticus]

But these aren't the meeja-stereotype of high leverage: rather they're funds that invest in unlisted companies - the original meaning of private equity.

you mean venture capital. A rather different beast to private equity as it currently is practised.

[scepticus]

It is not TOO MUCH SAVINGS !!

Rather, it is that interest RATES ARE TOO LOW.

This is leading to MAL-INVESTMENT : ie. a mis-allocation of capital,

in ways that will impair future returns.

Raise rates, crash the markets (including property) and the money would be better invested.

no. the excess savings problem is structural like the deficit.

until the required changes are made that problem will persist no matter how many times the market crashes. interest rates have declined steadily since the end of the war because of this structural problem.

in any case, it is not possible in a democracy to dictate that the economy should be crashed and what rates should be.

[Executive Sadman]

Ha, theyve finally run out of companies to asset strip, raid pensions, load with debt and sell on?

Doesnt this mean some sort of carry trade, or are there no investment oppurtunities on planet earth now?

[DeepLurker]

Too much money sloshing around ... check.

What's the opposite of quantitative easing, and when can we have some?

Surely the number of magic money tokens in circulation is of no importance? What matters is the % of production surplus (or whatever 'proper' economists call it).

[fluffy666]

Ha, theyve finally run out of companies to asset strip, raid pensions, load with debt and sell on?

Doesnt this mean some sort of carry trade, or are there no investment opportunities on planet earth now?

This is, of course, the problem - once you possess all the money in the world, it is impossible to achieve real returns..

OK, that's probably rubbish.. but I think that the problem is that the financial sector so totally dominates in terms of funds and credit that the 'real economy' is just swamped.

[frugalboy]

http://www.nytimes.com/2010/06/24/business/24private.html?ref=business

Excellent a huge ticking timebomb as private equity just buy anything to secure the management fees.

Another bubble about to go bust, the problem is everyone will feel this as pension funds are going to lose a lot of money.

Still leverage is the way to wealth............

The private equity model has had it's day, the pass the parcel game appears to be dead.

One of the things they're spending the cash on is buying up Miami condos in bulk:

http://www.miamiherald.com/2010/06/22/1695151/buying-in-bulk-shows-new-taste.html

" Backed by a multibillion-dollar private equity firm in New York, a team of Miami investors and strategists launched Lionheart Capital this year looking to scoop up choice South Florida condos at rock-bottom prices.

In its first deal, the firm plunked down $120 million this month to buy up 146 units at the 2700 North Ocean Drive towers on Singer Island in Palm Beach County.

It marked the 50th bulk condo purchase in South Florida in the last two years, according to analysis by Peter Zalewski, a principal of the real estate consultancy Condo Vultures."

But these people are supposed to be smart. The prices of these condos aren't going anywhere for a while (due to massive oversupply) and in the meantime these bulk purchasers are stuck with exorbitant maintenance fees and property taxes making the investment a small negative cashflow drain at best (after allowing for a bit of rent). I wonder if the investors know how their money is being "invested"?

[dissident junk]

the real estate consultancy Condo Vultures."

Well, at least the name's accurate.

[Guest sillybear2]

Maybe they could create synthetic derivatives of third world peasants selling their kidneys? That's only mildly more unpleasant than carbon trading.

What's the answer, restoring the capital v. labour imbalance and increasing consumption? Paying younger workers enough to actually purchase all those empty homes and unsold inventories?

Lots of cheap money but nobody is going to take a bite on housing given the valuations :-

http://www.bankrate.com/finance/mortgages/mortgage-rates-at-all-time-low.aspx

Edited June 24, 2010 by sillybear2

[Guest sillybear2]

Part of the continuing story of too much savings, too little opportunity for return. Where can you go where there isn't already overcapacity?

This is why 10 year treasuries at 3.23% looks good to more and more people.

Edit: update 10 year treasuries now down to 3.115%.. another .1% off since I last checked.

So a negative real return after inflation, part of the reason these groups are bidding for companies and assets is not for the yield or cash flow but they're simply betting on inflation, they know valuations will automatically rise as the currency is made increasingly worthless.

[interestrateripoff]

Ha, theyve finally run out of companies to asset strip, raid pensions, load with debt and sell on?

Doesnt this mean some sort of carry trade, or are there no investment oppurtunities on planet earth now?

They haven't run out of companies to do this too, it's just now buying companies at insane prices, holding then then selling in a few years time for even more to another PE firm funded by pension companies isn't going to work.

Looks like they might have to do some real management rather then simply loading firms with debt and saying how brilliant they are.

[fluffy666]

They haven't run out of companies to do this too, it's just now buying companies at insane prices, holding then then selling in a few years time for even more to another PE firm funded by pension companies isn't going to work.

Looks like they might have to do some real management rather then simply loading firms with debt and saying how brilliant they are.

Funny thing is, I've had personal experience of a couple of takeovers that ended up basically destroying the business. Never even heard of one that made things better..

[Guest sillybear2]

They haven't run out of companies to do this too, it's just now buying companies at insane prices, holding then then selling in a few years time for even more to another PE firm funded by pension companies isn't going to work.

Looks like they might have to do some real management rather then simply loading firms with debt and saying how brilliant they are.

Yup, traditionally PE used to actually have to Do Shit like look for small growing companies, install new management, undertake capital investment, and bring collapsing companies back from the brink, then they realised they could just buy huge healthy companies, sit on them and trade them like casino chips, and leverage up with loans from bankers looking for fodder for their CLO's, then pay themselves lightly taxed special dividends, then dump the mess back onto the public markets. i.e. the rape and pillage model, it's not much different to Property Ladder, the 'investors' thought that painting everything yellow added value, it was actually just a way of passing time whilst the bubble inflated further.

Edited June 24, 2010 by sillybear2

[Executive Sadman]

looking to scoop up choice South Florida condos at rock-bottom prices.

"choice"

isnt that what scousers used to say on Brookside

"choice kaaahh mate"

[Guest sillybear2]

"choice"

isnt that what scousers used to say on Brookside

"choice kaaahh mate"

I think it's :-

"choice kaaahh mate, shame about the wheeels"

[Executive Sadman]

Funny thing is, I've had personal experience of a couple of takeovers that ended up basically destroying the business. Never even heard of one that made things better..

Malcolm Glazer begs to differ. Its made his life infinetely better.

[fluffy666]

Yup, traditionally PE used to actually have to Do Shit like look for small growing companies, install new management, undertake capital investment, and bring collapsing companies back from the brink, then they realised they could just buy huge healthy companies, sit on them and trade them like casino chips, and leverage up with loans from bankers looking for fodder for their CLO's, then pay themselves a lightly taxed special dividends, then dump the mess back onto the public markets. i.e. the rape and pillage model, it's not much different to Property Ladder, the 'investors' thought that painting everything yellow added value, it was actually just a way of passing time whilst the bubble inflated further.

It's worse than property ladder. After all, if I buy a house, remortgage, pay myself a 'special dividend' greater than the deposit and costs, trouser all of the rent and then hand the keys back when there is no more cash to be obtained, then I'd be committing fraud. But if I did it through PE I'd be a 'financial innovator'.