Private Equity/Credit: The Bubble and its Implications

My last few blog articles have been on the private equity industry, and further digging in recent days led me to the discovery of Dan Rasmussen. He has some excellent insights on private equity and has made a number of useful podcast appearances outlining his thoughts on the subject (available on YouTube), which I have spent the past day or so devouring. They come highly recommend.

His conclusions broadly mirror my own more intuitive conclusions, but he is in possession of more hard facts and data; has first-hand experience working in the industry (at Bain); and was able to put some extra nuance around various issues I was previously lacking. I appreciate his important contributions. I have incorporated many of his insights with my own into this narrative take on where we are, and how we got here, and what the future may hold for the PE/PC industry. I hope you enjoy!

Tertiary PE LP buyout funds scale new heights of absurdity

In a recent post (as well as some from yesteryear), I discussed how many private equity (PE) funds have been systematically overvaluing their assets/NAVs, and that this is the real reason why they are struggling to realize assets (including via IPOs) and deliver cash distributions to their LPs (limited partners aka investors).

Where are all the IPOs? The great private equity ruse

Consider that both of the following claims appear to be simultaneously true:
*Stock markets are expensive and therefore ought to be receptive to IPOs, and yet there are relatively few.
*Private equity funds (including venture capital) are struggling to achieve "exits" and return meaningful capital to their increasingly-impatient investors - to such a degree they are resorting to shuffling assets into "continuation funds" and taking on margin loans to fund distributions.

Artificial Intelligence or Authentic Stupidity?

Over the past three years, the AI/LLM boom and its associated capex supercycle has been having a profound effect on the economy, financial markets, and society (though not on corporate productivity, as we’ll discuss). However, as unrestrained AI optimism and its financial market manifestations have continued to mushroom, evidence has been quietly mounting that many of the boom’s foundational assumptions are starting to buckle. The divergence between the two has become so stark that there is a strong case to be made that the boom has now morphed into a fully-fledged bubble, and of a size that makes the dot.com bubble look positively quaint.

What is really going on in Georgia

As you'll be aware, I haven't posted in a while. I've been busy managing my fund and attending to other priorities. I didn't/don't have any explicit plan to reboot the blog near term. I have, however, been doing some research on Georgia of late, and felt passionately enough about my ideas and the potential contribution I could make to the issue (and its importance), that I started to pen a twitter thread about it. That thread inadvertently grew into a long blog-worthy essay (brevity is not one of my attributes), so I thought I might as well post it on my blog as well, for what it's worth. Thanks to all my readers, and keep a look out as I may be back one day! LT3000

Russia update - the road to war

I thought it would be worth penning a few further thoughts on the current Russo-Ukrainian situation, as my thoughts have evolved somewhat in recent days, coincident with recent events which are changing rapidly. While the situation in the Donbass has now been (somewhat) resolved - though the potential for disputes about the resultant borders remain a potential source of near term conflict - the longer term issues have not yet been resolved, and indeed there is a growing risk of an escalation into an all out Russo-NATO hot war. These issues may or may not lead to a major short term escalation extending up to the point of a nationwide Ukrainian invasion, but irrespective of that, they will continue to linger and lead to potentially longer term escalation and conflict. Given the graveness of the situation, it believe it is important the issues are properly understood. (please read footnote)* 

Neil Young vs. Rogan/Spotify, Meta Values, and Pluralistic vs. Authoritarian Societies

This will not be a long blog article, as I only wish to make one simple point, and doing so does not require a long exposition. However, I believe the point to be of absolutely vital importance, and is too frequently overlooked in today's tortured political discourse and latest skirmish de jour. And its import extends well beyond the proximate instantiation at hand. 

Demystifying Putin: US vs. Russia geopolitics - the real story

In recent months, Russia has once again been in the headlines for all the wrong reasons, with the US and Western media loudly proclaiming (since November) that Russia is planning an imminent invasion of the Ukraine, though Russia has repeatedly denied that fact and it's not exactly clear what Russia is waiting for, or what advantage it could expect to derive from lying about its intentions at this point (the whole Western world expects an invasion and the US has pulled embassy staff from Kiev). 

Taking (slight) issue with Graham's "weighing machine"; and unpacking "intrinsic value"

In this post, I thought I'd kick off the new year with some minor sacrilege, by taking slight issue with some of Ben Graham's most-quoted ideas. Ben Graham very famously asserted that "in the short run, the stock market is a voting machine, but in the long run, it is a weighing machine". However, when subsequently asked what the specific mechanism was by which stocks were, in time, pushed towards their fair, weighted value, Graham was unable to specify one (though a quick Google for the specific quote did not yield a source I can supply here).1 He also advocated for the disposition of positions after a specified holding period, should the said appropriate re-weighting fail to transpire (2-3 years from memory).2 As I will discuss, this is not a policy/framework I agree with. 

Tech, inflation, and the tyranny of the numerator

Over the last three months, market inflation fears have increased - and not without good cause, given the increasing number of companies reporting supply shortages, cost pressures, and price increase, and the recent US CPI print coming in at 4.2% - which has pressured the share prices of tech/growth stocks in particular (and to a lesser degree, the broader market). US 10 year treasury yields have risen from 0.9% to 1.7% this year, in fits and starts, and tech and other narrative-driven growth stocks have come under pressure with sell-offs correlating with higher inflation concerns and rising treasury yields.

Elon Musk; Simulated Universes; Moore's Curse; The Fermi Paradox; Mars colonization; and Technological Hubris

Overall, I'm a fan of Elon Musk. He is smart; articulate; a great innovator, engineer, and entrepreneur; an incredibly hard worker; and in many ways a very inspirational figure - someone willing to try bold new things and tackle difficult problems. Oftentimes controversial, to be sure, but a net force for good in the world. The world needs more people like Elon Musk. As I've commented in the past, Musk is the virtual embodiment of George Bernard Shaw's quote: "The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man". Musk is the paradigmatic unreasonable man.

Crypto-mania is back: Crypto vs. Fiat, and why newer isn't always better

After a multi-year hiatus, cryptocurrency has recently stormed back to the fore, with Bitcoin breaching new highs above US$60k, along with a resurgence in a multitude of other crypto currencies, whose aggregated market capitalization has now run up to some US$2tr.

Unravelling value's decade-long underperformance (and imminent resurgence)

In a recent (generally excellent) podcast with Inside the Rope with David Clark (#78), John Hempton discussed (amongst other things) value's past decade of underperformance, and opined that the primary driver was the fact that the pace of technological change had accelerated, such that we have seen an unprecedented level of disruption to traditional business models. Value investors have apparently spent a decade naively riding doomed low-multiple companies like the Myers of this world into oblivion. 

Market inefficiency, liquidity flywheels, asset class arbitrage, and Hong Kong Land

Conventional economic theory holds that the marketplace in financial assets ought to be 'efficient'. Large numbers of intelligent and diligent investors have access to largely the same pool of information, and are highly motivated to root out and exploit any underpricings that exist. It is believed this competitive process will inevitably drive assets to their fair value - i.e. those that accurately reflect their risk and reward characteristics, and also price assets correctly relative to one another.

Coronavirus update: From an unknown unknown to a known unknown

On March 17th, I blogged some thoughts on the coronavirus outbreak; its significance; and how I was seeing the outlook. While we are still far from the end of this crisis, at this stage events appear to be playing out largely in line with the analysis and predictions outlined in that article, so I haven't felt much need to pen an update. My views were generally considered wildly optimistic at the time, but recent events suggest it was more a case of investor sentiment being unreasonably bearish than my views being unreasonably optimistic.

Coronapocalypse - some thoughts

Over the past few weeks, markets have witnessed a legitimate 'black swan' event with the emergence of the covid-19 pandemic, which has resulted in a catastrophic collapse in global equity markets of a speed and severity that has rivaled - if not exceeded - that seen during the GFC panic.

Dynamic vs. static analysis, and what the US shale and technology sectors have in common

Over the past decade, few industries have incinerated as much shareholder capital as the US shale oil and gas (O&G) sector. Attracted by the substantial technology-driven structural growth opportunity the sector promised, and its putatively low costs and attractive well-level IRRs much-touted by management, investors initially flocked to the sector, but have since been badly burned, as losses have mounted; debt levels skyrocketed; and share prices plummeted.

Afterpay Touch: a more expensive solution to an existing, solved problem

Afterpay Touch (APT AU) is a stock that has acquired a cult following in recent years. The shares have risen spectacularly, and catapulted the company's market capitalisation to an astonishing A$10bn - almost 40 times trailing revenues (there are no earnings - the company lost about A$40m last year on revenue of $260m).*

Facebook - the bear case

Facebook is currently a stock beloved by both growth and value investors alike. It is an esteemed member of the FANG club - an aristocrat of the modern digital era. Everyone seems to own it. I don't like it. I think the stock is much riskier than most investors appreciate - particularly at this point in the cycle. (I am a day late in publishing this article, as the stock is down 6% to US$210 post its 4Q19 results - albeit this is small fry compared to the aggregate potential downside; I tweeted the WSJ Casper article referenced below over the weekend, and in related comments referenced the risks to Facebook, and began writing this post on Sunday. Unfortunately I was too slow to complete it).

Learning the wrong lessons; style drift; and why smart value investors underperform

There are many things that separate the great value investors from the poor to mediocre, but aside from simply being better or worse at valuing companies (table stakes for a good value investor), one of the most important is that the former tend to reason from first principles - i.e. from things that are true by definition in the long term - and implement a disciplined and consistent process informed by those principles; whereas poor to mediocre value investors attempt to draw far too many 'lessons' about how to invest from recent market experience/outcomes. Quite often, the belated incorporation of these 'lessons' into investment decisions results in untimely 'style drift', with a shift towards strategies/sectors/stocks that have worked well in the recent past, rather than those that are most likely to work in the future. This untimely vacillation all but ensures long term underperformance.