Bronte Media

I am a card carrying member of the investment lore that if you aren’t working full time in the finance industry then you should place all your money in low-fee index funds. Like at the poker table, if you can’t identify anyone dumber than yourself then by definition you are the dumbest person there.

A trend last year was the public listing of various private equity funds and private equity management companies. Everything was going fantastically well and so the firms decided to take money off the table in their management vehicles and list funds on the public markets. You don’t need a hearing aid to pick up on the humongous signal the firms were sending: what the public is willing to pay, we are willing to sell for.

When companies sell to the public they naturally are going to do so for an outsized premium to what they are actually worth. It is a greatly easier process to sell to other larger and private investors. Others don’t get to scour your financial reports. Management doesn’t have to remind that dim bulb from Morgan Stanley that seasonality effects the business in the second and third quarters. They don’t have to travel to scores of investment conferences touting themselves as ‘undervalued’ and comment on every news meme du jour and how it’s not really effecting them. You don’t have to pay huge compliance fees and sign oaths that you’re not lying. In short, it’s a lot easier to be private than public.

So there would have to be a pretty good reason why private equity firms would want to sell themselves to the public? That reason is price. Whether it is the public willing to pay a much higher amount, or an amount at all.

Which brings us to private equity IPOs. There is nothing wrong with the private equity industry. But you would have to be a raging lunatic not to know that the top of the cycle was when they decided to list to the public. They deal with institutional investors, rich guys in Arabia and filthy rich individuals. All of whom are lower maintenance than schmucks like you and me. Do you think they saved their best investments for us? For the bright sparks in the back, that was a rhetorical question.

From today’s journal:
“Carlyle Capital Corp. Friday said lenders were liquidating some of its mortgage securities, painting an even bleaker picture of its already perilous situation.”

When Carlyle Capital listed it’s price was nearly $20. It’s now an even $5.

Here are some more examples:

Fotress Investment Group was one of the first private equity groups to publicly list. It has gone from $31 a year ago to $13 now.

The highest profile public listing of private equity is the Blackstone Group, which has gone from $35 in June of last year to under $15 today.

Now I know what you are saying. The credit environment has made it difficult for these guys to do what they did before. But you would have to be a few beers short of a six pack if you thought that last year was normal. For those not listening, corporations could borrow at the same interest rate as the american government. Even lowly me, wanted to short corporate debt back in June of last year.

Is private equity doomed? Of course not. They just sold stakes at higher prices than they thought they were worth. What every rational, smart person should have done.

Do I feel sorry for folks who invested in the above stocks in the past year? No. I don’t have a shred of empathy for them. They made a conscious choice to make those investments. Let the suckers feel the pain.

Excluding the bubble, it took Goldman Sachs nearly four years after it initially listed on the stock exchange to appreciate from its levels it listed at. The folks at Goldman were willing to sell but only for a price that factored in four years of the future. It’s now a great long term investment but jumping in too early has its consequences.

As Kenny said: Know when to walk away, know when to run.