What was once an anchor of U.S. capitalism is now on life support. Find out why here…
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Wednesday: The Independent Investor |
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Every Wednesday, I talk about various tips and topics about investing with hopes to help you boost your investment portfolio. My goal in these articles is to encourage you to apply these strategies so you can achieve financial stability in the long run. Ready for today’s topic? Continue reading the article to find out.
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What was once an anchor of U.S. capitalism is now on life support. Find out why here… Did you know that private equity (PE) firms were once dubbed as “corporate raiders?” They were known for swooping into companies, cutting costs, and doing whatever they could to increase cash flows. The narrative around PE firms has since evolved, especially now that investors are growing wary. They’re beginning to question whether these firms are truly adding GENUINE VALUE or merely extracting as much money as possible. Take a look at this company…
For almost 40 years, Blackstone has made its mark in the world of private equity. While it diversified into new areas, PE remained at its core. The company uses financial tools such as margin loans to boost returns and return money to investors. However, investors are not convinced these tactics are sustainable, especially with fewer chances to make deals. In today’s article, we’ll discuss how investors are becoming less inclined to give PE companies their hard-earned cash. According to Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, this trend could disrupt a business that has been a big tenet of U.S. capitalism for the past 40 years. Private Equity: A financial engineering game? It’s no surprise that PE firms have taken dubious strategies to increase their returns. For instance: It’s common for them to borrow money specifically to pay off investors. … but here’s the thing: Such a strategy has gotten so bad that the Institutional Limited Partners Association, which represents PE investors, has started examining ways to push back on some classic PE tactics. The reason for this is many PE investors aren’t happy that their payouts seem to be coming from loans rather than more traditional sources like cash flows or proceeds of recently sold businesses. … and the more investors question tools or loans used by these firms, the worse off private equity looks. This explains why the mood in the PE sector nowadays is predominantly bearish. In fact, according to a survey from asset manager State Street, only 68% of asset owners and managers expect to continue working with private equity. Tougher Times are Coming for PE Investors have to keep their money in for a set period of time, often ranging from 10 to 15 years. However, once that window is over, PE firms could lose money hand over fist. Public investors in Blackstone don’t seem wise in tackling this concerning setup. Let’s take a look at Altimetry’s Embedded Expectations Analysis (EEA) to gauge investor sentiment about this company… [The EEA starts by looking at a company’s current stock price. From there, analysts calculate what the market expects from the company’s future cash flows. Analysts then compare that with their own cash-flow projections. Simply said, the EEA tells how well a company has to perform in the future to be worth what the market is paying for it today.] Aside from the occasional good year, like in 2021, Blackstone’s Uniform return on assets (ROA) has been hovering around the 12% corporate average. The market doesn’t expect that to change.
Investors seem to be missing the bigger picture here. PE companies thrived on low interest rates that lasted from the end of the Great Recession until early 2022. With high rates nowadays, PE firms won’t be able to maintain strong returns, especially when coupled with investors starting to put their money elsewhere. — For around 40 years, people have long seen the PE sector as a good source of financial growth, and that has kept investors coming back. … but now, the times have changed. Many more investors are getting concerned about the tactics PE firms use, and mind you: The high-rate environment also poses a challenge to the PE business model. Blackstone has its tentacles wrapped around the PE treasure chest… and so do the other PE companies. Such businesses AND the entire sector could face serious challenges as investors rethink where they put their money. That is why PE firms nowadays must realign their tactics if they want to stay afloat. Hope you’ve found this week’s insights interesting and helpful. EVENT ALERT: AI has ushered in the biggest tech mania since the 1990s and has created 500,000 new millionaires—roughly 587 per day—since the launch of ChatGPT in late 2022. In fact, Nvidia is already up more than 783% in the past two years and just last week, the S&P 500 made a new all-time high, driven mostly by AI stocks. While this may sound like good news, the world elite are already preparing for an AI crisis that could trigger a major catastrophe in the stock market. When this crisis happens, it could impact your money—whether you own AI stocks or not. If you want to protect yourself from this impending crisis, it is crucial that you join Professor Joel Litman on Thursday, July 18, at 1:00 p.m. Eastern time in an urgent AI stock summit. During this AI Panic Summit, Professor Litman will tell you everything you need to know about the impending turmoil on AI stocks and what you can do to avoid massive losses and seize huge gains. Register now through this link to secure your spot at the summit. This event is completely free of charge, all you need to do is confirm your attendance. See you there! Stay tuned for next Wednesday’s The Independent Investor! For a better part of the decade, businesses gathered as much cheap credit as they could due to low interest rates. Learn more about why nobody is safe from a “zombie” bloodbath in next week’s article! |
