The Bull Market in Private Equity

29 ביולי

The other day I was scanning for stocks hitting 52-week highs (or in other words, their highest price in 12 months' time) and noticed that several private equity stocks appeared on this custom scan that I was performing. The stocks were KKR, Blackstone, and Apollo Global. I found a few things interesting about this that are worth discussing and looking into more detail:

The Trend is Your Friend?

Foremost, the question is whether or not these are a trend play and a way to play a rising trend. Oftentimes, trend followers love nothing more than getting behind a tidal wave in a new thriving industry or market or process. It’s shown quite a bit to be an effective strategy. However, always do your own research. But that’s the first question - will this trend last another 5+ years? Private equity firms have been making headlines with their strategic acquisitions and impressive returns. But can they maintain this momentum?

Private Equity Bull Market, Possibly Explained

Private Equity firms like KKR, Blackstone, and Apollo Global operate by raising funds from investors, which they then use to acquire, manage, and eventually sell companies at a profit. They focus on improving the operational efficiencies and financial performance of these companies. Some notable examples include:

KKR: Known for its leverage buyouts and investments in various sectors such as technology, healthcare, and energy.
Blackstone: A diversified investment firm with holdings in real estate, private equity, hedge fund solutions, and credit.
Apollo Global: Specializes in private equity, credit, and real estate investing, with a strong focus on distressed assets and value investing.

They Are Flush With Cash & Assets

As of the latest data, Blackstone manages over $900 billion in assets, making it the largest private equity firm globally.
KKR has approximately $500 billion in assets under management.
Apollo Global oversees around $550 billion in assets.
Cash Reserves and Interest Earnings

Private Equity currently has quite a bit of cash and investments under management. They are earning interest on this cash on Treasuries up to 5%. For instance, with the Federal Reserve's interest rate hikes, these firms are leveraging their cash reserves to earn substantial returns on relatively risk-free investments like U.S. Treasuries. This provides a steady income stream and enhances their financial stability, enabling them to pursue larger and more lucrative deals.

Cautionary Note on Illiquid Assets

Lastly, I do want to share a cautionary note as these firms also hold a lot of illiquid assets. What would happen if those assets got marked lower? For example, some of them own quite a bit of real estate. What's the plan here? Have they marked them down accordingly?

The real estate market is one area of concern. If property values decline significantly, these firms could face substantial write-downs on their balance sheets, affecting their overall financial health. It's crucial to monitor how these firms manage their illiquid assets and whether they have adequately adjusted their valuations in line with current market conditions.

So What Are My Final Thoughts?

This is a fascinating story to be unfolding in markets and I am watching closely. I think there are two ways to watch this:

A - They are in a trend. Uptrend. Bull market.

B - They may offer an intriguing short position at a later stage!

More on this later and read my idea below to better understand what I am looking at.