I will give you a present for your trade: Take a look at Riverstone when it got into trouble. Google "Riverstone, clawback", they had to sell part of the GP to Goldman Sach's Petershill fund. Here's the present. You are looking for PE funds that take American style carry. When the markdowns in assets start, the funds with American style carry will be left with in the real financing death spiral.
An added bonus, but don't have a specific fund to point to; if a non-SEC compliant investment manager is running a Ponzi scheme, the beneficiaries of the fraud, even if they didn't know there was a fraud have to pay back the proceeds of the fraud. Madoff investors who had redeemed 10-20 years BEFORE the ponzi scheme was discovered had to give the money back to the liquidators so it could be distributed back to investors.
Thank you so much for writing in. I think we are half a cycle away from those kind of fireworks, but once we are through this latest pause sugar rush, the Big PE complex starts to properly underperform.
Forget underperform. If Riverstone had faced its problems during a normal interest rate environment it would have gone bankrupt. The bonds on several portfolio companies were trading at 10 cents on the dollar, even though the equity was marked at cost.... for two years.
You guys have a big short trade on your hands, but you have to look at who the weakest players are. I doubt it will be Blackstone. GP Leverage on company leverage with fund leverage against good compaies to finance bad companies plus a clawback provision and American style carry where GPs took their carry per investment hitting its IRR, not the fund hitting IRR, which was then recycled into the next investments is a deadly combination. In Riverstone's case the GP had to sell 12% or so of the management company to Petershill Fund (Goldman Sachs); the Partners also had to pledge personal collateral, including the whole of Switchback Ranch (one of the largest ranches in Wyoming/Montana). But that was in 2017 when interest rates were near zero... in 2023 this picture doesn't look pretty.
One thought, do not expect that only the Democrats will be favorable to labor, both sides of the aisle have become far more populist lately, especially with Trump, and it would not be hard to believe that carried interest, which does not help the ordinary citizen, is an easy target for the fiscal conservatives
Excellent stuff 🐿️ as usual! I agree with everything you’ve written, but a couple of thoughts:
- I agree the gating situation is scandalous, but unfortunately it can continue for far longer than one can imagine. In the UK in particular there are a number of similar vehicles which gated when the Brexit result came in, but have been gating on a consistent basis since then - it’s very much been normalised. I don’t know that would be the case for BX but worth considering
- As you note, BX is an AUM machine and I agree their AUMs will take an absolute beating, but that’s also a second derivative trade - why not just go short the assets themselves? I.e. short listed real estate?
- Whilst the chart you showed from Phil Bak was absolutely fantastic, I’d note that all of the assets in the BREIT that I am familiar with have super strong rental fundamentals. It’s not crazy to think they will have an average 3% rental growth even in a soft market (recession continues to be pushed back...), and whilst initial yields are still low and will go out further, when they’re up off the absolute lows, when you’re at 4.5%, 3% rental growth for 5 years gets your running yield moving in a hurry so makes those values look a lot more sensible. If there was no rental growth it would be a different story.
All that being said I don’t disagree, just a note of caution. Godspeed!
Thanks Mahalo! Those closed end funds in the UK still being gated is an outrage. Open-ended vehicles do not mix with illiquid assets (and were probably mis-marketed). For me, BREIT is more of a poster child for the story rather than the central thesis for the short. I get a sense that the theme of 'my assets are better than everyone else's' permeates through the whole AUM.
If you go to the site, it’s much easier. Www.blindsquirrelmacro.com. Substack are trying to avoid App Store and Google store tolls. Monopolists everywhere!!!
Delighted to. I am based in Australia so can usually do something post US close. Ping me an email at acorn@blindsquirrelmacro.com and we can jump on a call.
I will give you a present for your trade: Take a look at Riverstone when it got into trouble. Google "Riverstone, clawback", they had to sell part of the GP to Goldman Sach's Petershill fund. Here's the present. You are looking for PE funds that take American style carry. When the markdowns in assets start, the funds with American style carry will be left with in the real financing death spiral.
An added bonus, but don't have a specific fund to point to; if a non-SEC compliant investment manager is running a Ponzi scheme, the beneficiaries of the fraud, even if they didn't know there was a fraud have to pay back the proceeds of the fraud. Madoff investors who had redeemed 10-20 years BEFORE the ponzi scheme was discovered had to give the money back to the liquidators so it could be distributed back to investors.
https://en.wikipedia.org/wiki/Recovery_of_funds_from_the_Madoff_investment_scandal
Thank you so much for writing in. I think we are half a cycle away from those kind of fireworks, but once we are through this latest pause sugar rush, the Big PE complex starts to properly underperform.
Forget underperform. If Riverstone had faced its problems during a normal interest rate environment it would have gone bankrupt. The bonds on several portfolio companies were trading at 10 cents on the dollar, even though the equity was marked at cost.... for two years.
You guys have a big short trade on your hands, but you have to look at who the weakest players are. I doubt it will be Blackstone. GP Leverage on company leverage with fund leverage against good compaies to finance bad companies plus a clawback provision and American style carry where GPs took their carry per investment hitting its IRR, not the fund hitting IRR, which was then recycled into the next investments is a deadly combination. In Riverstone's case the GP had to sell 12% or so of the management company to Petershill Fund (Goldman Sachs); the Partners also had to pledge personal collateral, including the whole of Switchback Ranch (one of the largest ranches in Wyoming/Montana). But that was in 2017 when interest rates were near zero... in 2023 this picture doesn't look pretty.
One thought, do not expect that only the Democrats will be favorable to labor, both sides of the aisle have become far more populist lately, especially with Trump, and it would not be hard to believe that carried interest, which does not help the ordinary citizen, is an easy target for the fiscal conservatives
I would tend to agree until I remember that Trump is a property developer. They luurrve their carry too.
fair point, but I believe that there is ample opportunity for that populism to wreak havoc on all unearned income
I am very much in that camp (in terms of the populist direction of travel) Andy.
Great article. Now I just want to look up all the Omar Little quotes, such a great character.
There are acres of the internet devoted to the topic. Don’t get lost!!
Excellent stuff 🐿️ as usual! I agree with everything you’ve written, but a couple of thoughts:
- I agree the gating situation is scandalous, but unfortunately it can continue for far longer than one can imagine. In the UK in particular there are a number of similar vehicles which gated when the Brexit result came in, but have been gating on a consistent basis since then - it’s very much been normalised. I don’t know that would be the case for BX but worth considering
- As you note, BX is an AUM machine and I agree their AUMs will take an absolute beating, but that’s also a second derivative trade - why not just go short the assets themselves? I.e. short listed real estate?
- Whilst the chart you showed from Phil Bak was absolutely fantastic, I’d note that all of the assets in the BREIT that I am familiar with have super strong rental fundamentals. It’s not crazy to think they will have an average 3% rental growth even in a soft market (recession continues to be pushed back...), and whilst initial yields are still low and will go out further, when they’re up off the absolute lows, when you’re at 4.5%, 3% rental growth for 5 years gets your running yield moving in a hurry so makes those values look a lot more sensible. If there was no rental growth it would be a different story.
All that being said I don’t disagree, just a note of caution. Godspeed!
Thanks Mahalo! Those closed end funds in the UK still being gated is an outrage. Open-ended vehicles do not mix with illiquid assets (and were probably mis-marketed). For me, BREIT is more of a poster child for the story rather than the central thesis for the short. I get a sense that the theme of 'my assets are better than everyone else's' permeates through the whole AUM.
If you go to the site, it’s much easier. Www.blindsquirrelmacro.com. Substack are trying to avoid App Store and Google store tolls. Monopolists everywhere!!!
Sure. What are you keen to explore?
Delighted to. I am based in Australia so can usually do something post US close. Ping me an email at acorn@blindsquirrelmacro.com and we can jump on a call.