Good Timing?

I admit it: sometimes a logical old guy like me can't quite figure out what investors are thinking when they do the things they do.

Why, for example, did so many people believe it was a good idea to take the other side of the trade -- literally and figuratively -- when legendary real estate investor Sam Zell, the "grave dancer," decided to unload his Equity Office Properties Trust in a $39 billion buyout deal earlier this year (more-or-less at the top of the market)?

And why were investors so keen to lap up the shares of buyout firms and hedge funds when they decided to go public? In other words, the crowd was betting on these operators because they allegedly know what they are doing; yet by buying what they were selling, investors were effectively saying that the "smart money" is pretty dumb. Hmmm.

Anyway, in "Wall St. Way: Smart People Seeking Dumb Money," the New York Times' Eric Dash goes some way towards explaining the mystery.

On Wall Street, buyout professionals are seen as the smart money. But their new shareholders are starting to look like the dumb money.

The gilded realm of private equity — in which moguls use private money to buy stockholder-owned companies — has turned into dross for everyday investors this year. And hedge funds, those secretive investment pools for the rich and, increasingly, the not-so-rich, have been losers for the investing public as well.

The Blackstone Group, the private equity powerhouse lead by Stephen A. Schwarzman, has lost a quarter of its value since it went public in June. Fortress Investment Group, a diversified alternative asset management company, and Och-Ziff Capital Management, a hedge fund run by Daniel Och, a former Goldman Sachs trader, have also stumbled after initial public offerings.

As the financial markets brace for another wave of large losses at Wall Street banks, the outlook for these newly public firms and their as-yet-private brethren has darkened starkly. The tightening credit squeeze has sent the buyout industry into a funk and left some hedge funds with steep losses.

Kohlberg Kravis Roberts & Company, which invented the modern buyout industry, is now struggling to get its own I.P.O. off the ground. AQR Capital Management, a $38 billion hedge fund, has suspended its plans for an offering. Citigroup, which helped take Och-Ziff public in November, recently warned that Och-Ziff is likely to face headwinds for the foreseeable future.

Mr. Schwarzman, by contrast, cashed out in June, a few weeks after he said that public markets were “overrated.” He and his partner, Peter Peterson, sold while business was still booming.

“These are sophisticated investors, and they certainly know how to time their own exits,” said Adam Zoia, managing partner and founder of Glocap, an executive search firm focusing on the alternative asset industry.

Blackstone’s shareholders — among them Fidelity Investments, the mutual fund giant, and the Ohio Public Employees Retirement System — have not been so fortunate. They would have made more money this year investing in an old-fashioned index fund that tracks the S.& P. 500-stock index, which is up 4.24 percent.

For now, Henry Kravis, a founder of K.K.R., is pressing ahead with plans to take it public. But selling stock may not be easy given the turmoil in the financial markets. Deals, and the cheap money that private equity firms have come to depend on to pay for them, have grown increasingly scarce.

After the credit markets became unhinged at midyear, United States merger activity fell 46 percent during the second half, according to Thomson Financial, the research firm. Merger volume in 2007 still hit a record $1.57 trillion in the United States, thanks to all the deal-making early in the year.

Life may not get easier for the buyout crowd any time soon. Weakened by mounting losses on mortgage-related investments, big banks are reluctant to risk capital on leveraged buyouts. Many are still struggling to sell the loans and bonds used to finance previous deals.

According to a recent report by PricewaterhouseCoopers, banks are sitting on about $245 billion of buyout-related debt, a backlog that could take months to clear. The likelihood that rising financing costs will pinch private equity returns, coupled with the possibility that Congress may eliminate a tax loophole enjoyed by buyout funds, adds to the gloom hanging over the industry.

Blackstone’s sinking stock price will not help other alternative investment firms looking to tap stock market investors, said John E. Fitzgibbon, the publisher of IPOScoop.com, an online newsletter. “When the leader of the group goes public and hits the wall, the rest don’t go out the door,” he said.

While many on Wall Street have focused on Blackstone’s slump, several large hedge funds have also disappointed new shareholders. Brevan Howard Asset Management, a British investment firm, raised only $1 billion in an initial public offering in March, half as much as it had hoped. New shares of GLG Partners, one of Europe’s biggest hedge fund managers, and of Third Point Offshore, a public offshoot of the New York hedge fund run by Daniel Loeb, have fallen too.

Despite all the gloom, more private equity and hedge fund firms are likely to go public once the markets stabilize, said Mr. Zoia of Glocap. But these latecomers may have to accept lower valuations, he said.

“This is the tip of the iceberg,” he said.

Wall Street, after all, adheres to theory that you can always make money trading in securities, whether they are overvalued or not, because there will always be someone willing to pay more for them than you did.

As Mr. Fitzgibbon put it: “What Wall Street is about is smart guys thinking about ways to make money from dumb ones.”

Comments

[farang]

"These are sophisticated investors..." so, that's what they are called these days? Huh.

[farang]

"These are sophisticated investors..." so, that's what they are called these days? Huh.

[SteveInChicago]

Obviously, it isn't the time to get into any of these with the market looking like it's about to take a swan dive and liquidity tight. Here's my thought on this -- we're likely to head into a downturn, and these companies will be prepared to do some good old-fashioned, Buffett-class bottom fishing in two years or so.

My bet would still be with Buffett, who looks more like a genious than ever for hoarding cash, but these companies could be attractive when the spigot opens.

Any thoughts on when these might become attractive? About the same time as small caps become attractive again?

[Vio]

Sean Olender, an attorney from SFGate seems to be looking at a possible fraud case against the big banks,

“MORTGAGE MELTDOWN Interest rate ‘freeze’ - the real story is fraud

Bankers pay lip service to families while scurrying to avert suits, prison”

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/12/09/IN5BTNJ2V.DTL&type=printable

The problem is, if the lawyers go after the bankers, the entire house of cards will collapse.

[Leon W. Fainstadt]

Michael Panzer - HAPPY NEW YEAR. I keep telling people to keep their heads down and most just laugh. I hear the piper and I
believe Michael Panzer has done everything he could to warn them that the piper wants to get paid. The Piper wants money from those foolish enough not to have studied history. Ask Mike he will tell you. Wow 2008! It's not too late to wake up America.