PrefBlog

So it seems that money managers aren’t the only ones who appreciate the benefits of lying to their clients with the opacity of private equity valuations: large institutional investors want to get in on the action too:

Speaking at a panel discussion held by the Ontario Securities Commission debating the question “do public markets matter any more?” Mr. Flatt said public and private markets are symbiotic and that Brookfield operates in both. However, he also predicted that within the next 10 years, more than 30 institutional investors around the world – each with more than US$1-trillion in assets – will prefer private markets.

“They have to have things in the public markets, but the sums are so vast that they don’t want the distractions of the public markets on a day-to-day basis for all their capital, they just want to buy businesses,” Mr. Flatt said. “Public markets is just the ownership of a fractionalization of a business, but most people get confused because they think it is a casino.”

“That is why the private markets continue to grow, because these large funds have US$200-billion or US$500-billion or a trillion or two trillion, don’t want to have the distractions of the public markets for everything they own in their portfolio and be at the vagaries of the markets that go up and down on a daily basis,” he said.

Distractions? Distractions to whom? An actual investor will see opportunity in the chaos, distinguishing fundamental risk from emotion-driven price risk and profitting from the gaps.

By the size of the Assets Under Management that Mr. Flatt mentioned, it’s pretty clear that by “institutional investors” he means “Sovereign Wealth Funds”; and here I want to point out that there are two kinds of investment shops operating under the “single captive client” regime that I think is so superior (in general) to the alternatives.

The first kind does all their investment management in-house. The second kind farms out their investment management to third party firms. My admiration extends only to the former group; with the latter group, what you actually get is not performance driven management from people who know what they’re doing – the farming-out consists of one set of salesmen talking to another set of salesmen about things they don’t understand and writing each other cheques. There are a lot of firms who do some of both, of course; but Sovereign Wealth Funds, especially those who consider nepotism and cronyism as integral elements of Human Resource management, will not send their top guys to negotiate and monitor third party management.

[Law professor at Boston College Renee] Jones said public markets are shrinking and private markets are growing very rapidly, and the biggest concern that raises is about transparency.

“We are seeing more instances of mismanagement and misconduct and even fraud at these unicorns,” she said, using the term for private companies valued at more than US$1-billion. “That doesn’t just impact investors – it also impacts employees and even broader society.”

Indeed. I’m eagerly awaiting a massive report on the Thames Water fiasco and those of us with long memories will think back to the Alberta Heritage Fund, or whatever it was called, and its habit of recording spending on hospitals and their equipment as an investment and keeping it on the balance sheet. My God, imagine what they would have done with private equity!

PerpetualDiscounts now yield 6.55%, equivalent to 8.52% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.19% on 2024-5-10 and since then the closing price of ZLC has changed from 14.76 to 14.94, an increase of 122bp in price, implying a decrease of yields of 10bp (BMO reports a duration of 12.32, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 5.09%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 345bp from the 335bp reported May 15.

This entry was posted on Wednesday, May 22nd, 2024 at 9:44 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.