QE’s Greatest Beneficiaries

Quantitative easing “worked” for all of us, but it worked much better for some than for others. Its greatest beneficiaries have been, perversely, those who’ve needed its help the very least.

Let’s say, for example, your business model involves borrowing as much money as possible as cheaply as possible to put to work. If this the case, then QE was magnificent for you – it kept rates disturbingly low and capital became historically easy to come by for just about any high-end borrower. Concurrently, liquid assets were at a premium and illiquid assets couldn’t get arrested for much of the recent cycle – which meant massive opportunities for those with a secure base of capital that wasn’t going anywhere.

Now let’s say that, in addition to borrowing cheaply, the other half of your business model involves selling off assets at high valuations into frothy public markets and “feeding the ducks” while they’re quacking…Well, in this case, QE was also a wonderful tailwind for you, nothing makes the initial public offering game pop like an equity-scarce, liquidity-rich environment.

What I’ve described above is essentially the private equity model. The unlimited QE regime of the last two years has been outrageously good to the industry, more so, perhaps, than it has been to anyone else in America.

Will Alden at DealBook:

Mr. Schwarzman, the co-founder and chief executive of Blackstone, personally made a total of $374.5 million in 2013, according to a regulatory filing on Friday. Most of that haul came from cash dividends he received on his partnership units, reflecting the profitability of the alternative investment firm.

The eye-popping compensation underscored yet again how lucrative the private equity business model was last year, as firms were able to reap big gains from selling their holdings into a soaring stock market. Blackstone, which made money selling shares in companies like Hilton Worldwide Holdings and Merlin Entertainments, also benefited from its growing real estate business…

One main rival, Carlyle, reported this week that its three founders collectively made $750 million in 2013, benefiting from a banner year. Another, Kohlberg Kravis Roberts, said its two co-founders each earned more than $160 million.

Blackstone is the ultimate cyclical business, despite whatever nonsense a UBS “wealth manager” may put into a proposal to an ultra-high net worth investor about it being “non-correlated.” Private equity is correlated as hell when it really counts – they’re even publicly traded these days! Its returns as an asset class are frequently indistinct from a small cap value index and they are inferior over many timeframes – especially once fees are taken into account. Between 1992 and 2012, for example, private equity funds had a correlation of .80 vs US equities and exhibited volatility (standard deviation) of 15.4% vs the only slightly-higher 18.6% of traditional public stocks (data via Morningstar).

Firms like Blackstone – an exceptional player in the space and amazing allocator of capital – are still going to be susceptible to the vicissitudes of the cycle, even if the assets they’re invested in don’t have ticker symbols and a daily closing price

And so it’s good to see them capitalizing in a boom year like 2013.  With so many buybacks and so few shares of public companies to go around (see: Ladies and Gentlemen, the Stock Market is Shrinking), you can offload dogs like SeaWorld and Merlin Entertainment at will. Last year’s multiple IPO exits and large profits are what makes riding through the down-years worthwhile. Blackstone lost over a billion dollars in 2008, saw the assets on its books marked down by more than 30% and its stock price decline by 70% – twice as bad as the S&P’s drop and on a par with most other public financial firms.

Private equity is the economy-on-steroids and benefits immensely from an easy Fed. This means that in boom times there’s huge money to be made. These days, private equity is the lone area within finance (outside of a handful of hedge fund captains) where one can still make the kind of money that Silicon Valley execs and founders won’t laugh at. The rest of The Street is downright moribund in comparison to Googlers and Facebookers, but the PE guys can still walk into any room with their heads held high.

Thanks, in no small part, to the monetary policy that’s supposed to be “creating jobs”. LOL


Schwarzman of Blackstone Made $375 Million in 2013 (DealBook)


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