What are you buying today?

[crs223]

21 hours ago, RedLion said:

Bought a little bit of BX with the small amount of cash I had in retirement account. This is essentially a full position for me at about 5% of my liquid portfolio, but I added 20 basis points, I think it's a real bargain here. 

 

Why is the market offering such a bargain?  Why isn’t BRK buying? What’s the risk?

[n.r98]

16 minutes ago, crs223 said:

 

Why is the market offering such a bargain?  Why isn’t BRK buying? What’s the risk?

 

interested to hear the bull case and risks as well. Is the rise in interest rates not a headwind for PE?

Edited December 30, 2022 by n.r98

[hasilp89]

1 hour ago, n.r98 said:

 

interested to hear the bull case and risks as well. Is the rise in interest rates not a headwind for PE?

my layman view (no position but interested) is that the rise in rates is a headwind for everyone - the PE masters of the universe will be best positioned of everyone to snap up assets / take advantage of distressed situations. they've lived with 5% rates for much of their lives. they'll know what to do. 

[Red Lion]

1 hour ago, crs223 said:

 

Why is the market offering such a bargain?  Why isn’t BRK buying? What’s the risk?

 

I'll keep it short, there's a lot more analysis on this and similar companies in the Brookfield thread and there's also a Blackstone thread lurking out there somewhere. Obviously this is all my point of view and maybe I'm totally wrong, wouldn't be the first time, that's why I set 5% position sizes. 

 

BX is the leading alternative asset manager. It was founded in 1985 with $800,000 according to Schwarzman's autobiography and has been one of the great success stories of the last 40 years. The business model is that Blackstone is the general partner to myriad limited partnerships. The GP typically gets paid management fees and carried interest on the different funds. The management fees are incredibly sticky, predictably, and as long as BX continues to start new strategies and grow its existing strategies, the management fees will continue to grow at a healthy pace even if there's a downturn in the markets. 

 

BX is well diversified, so it's not just PE, it also has the biggest real estate business in the world which is mostly focused on industrial and multifamily. It also has huge credit and infrastructure businesses. BX has just under $1 trillion in fee paying AUM which is about 2X the size of its biggest competitor. 

 

Will 5 or 6% interest rates be a drag on BX compared to ZIRP? Sure, I admit that. Will 5 or 6% interest rates kill fundraising in its tracks? I think not. BX is adding new strategies, and has had enormous success with fundraising in real estate from retail investors. This fundraising (BREIT-retail) has slowed, but only after an amazing run. This same strategy can be rolled out with other products. 

 

BX is asset lite and earns an insane ROE, doesn't need its own capital to grow. It has a net cash balance sheet. BX pays out 85% of its Distributable Earnings as a variable dividend. DE = FRE + carried interest + disposition gains. Carried interest and disposition gains will likely be down for the short-intermediate term while rates rise, but as long as BX continues to raise AUM, it has more and more carry eligible capital which is setting us up for record carried interest on the other side of this cycle. More importantly, BX can be purchased today for less than the value of its FRE, and you get carry and disposition gains for free. 

 

BX did $4.29 per share of FRE in the last twelve months and is trading around $75. So this means BX trades at 17.5X its Fee Related Earnings. FRE will almost certainly continue to grow at high single digits or faster with an 85% payout ratio. Then you get the carried interest and disposition gains which will likely be substantial on the other side of this business cycle. 

 

 https://www.blackstone.com/wp-content/uploads/sites/2/2022/10/Blackstone3Q22EarningsPressRelease.pdf

[Dinar]

Blackstone and its ilk will be materially less profitable on a going forward basis.  Here is why:

 

a) Less demand for their services.  At zero interest rates, people have to flock to equities, real estate & private equity.  At 7% on mortgage paper, they can just lend.  

b) A lot lower returns, and hence lower management and incentive fees.

When you buy assets putting 20-50% down and using 50-80% debt financing at 3-4%, you make a lot of money.  When you have to put 50% down and use 5-9% debt financing, returns on levered equity are much lower, so you have to charge less.

c) Recent controversy (unjustified) in my opinion over gating at BREIT is not helping.  

 

[no_free_lunch]

I am starting to look at real estate, probably an apartment style condo to keep it simple.  Rents are up 15% or so and prices are down ~10%.  It is suddenly appealing from an investment perspective.  

Edited December 30, 2022 by no_free_lunch

[LearningMachine]

1 hour ago, RedLion said:

 

I'll keep it short, there's a lot more analysis on this and similar companies in the Brookfield thread and there's also a Blackstone thread lurking out there somewhere. Obviously this is all my point of view and maybe I'm totally wrong, wouldn't be the first time, that's why I set 5% position sizes. 

 

BX is the leading alternative asset manager. It was founded in 1985 with $800,000 according to Schwarzman's autobiography and has been one of the great success stories of the last 40 years. The business model is that Blackstone is the general partner to myriad limited partnerships. The GP typically gets paid management fees and carried interest on the different funds. The management fees are incredibly sticky, predictably, and as long as BX continues to start new strategies and grow its existing strategies, the management fees will continue to grow at a healthy pace even if there's a downturn in the markets. 

 

BX is well diversified, so it's not just PE, it also has the biggest real estate business in the world which is mostly focused on industrial and multifamily. It also has huge credit and infrastructure businesses. BX has just under $1 trillion in fee paying AUM which is about 2X the size of its biggest competitor. 

 

Will 5 or 6% interest rates be a drag on BX compared to ZIRP? Sure, I admit that. Will 5 or 6% interest rates kill fundraising in its tracks? I think not. BX is adding new strategies, and has had enormous success with fundraising in real estate from retail investors. This fundraising (BREIT-retail) has slowed, but only after an amazing run. This same strategy can be rolled out with other products. 

 

BX is asset lite and earns an insane ROE, doesn't need its own capital to grow. It has a net cash balance sheet. BX pays out 85% of its Distributable Earnings as a variable dividend. DE = FRE + carried interest + disposition gains. Carried interest and disposition gains will likely be down for the short-intermediate term while rates rise, but as long as BX continues to raise AUM, it has more and more carry eligible capital which is setting us up for record carried interest on the other side of this cycle. More importantly, BX can be purchased today for less than the value of its FRE, and you get carry and disposition gains for free. 

 

BX did $4.29 per share of FRE in the last twelve months and is trading around $75. So this means BX trades at 17.5X its Fee Related Earnings. FRE will almost certainly continue to grow at high single digits or faster with an 85% payout ratio. Then you get the carried interest and disposition gains which will likely be substantial on the other side of this business cycle. 

 

 https://www.blackstone.com/wp-content/uploads/sites/2/2022/10/Blackstone3Q22EarningsPressRelease.pdf

 

 

What's the risk of lawsuits against GP by LPs who got sucked into buying assets where GP chose to take on short-term loans/mortgages at lower interest rate to show positive cashflow/income to LPs, and now can't refinance at higher rates, leading to loss of capital for LPs?

 

I'd say non-zero.  Any chance the first few public lawsuits can trigger a wave of lawsuits?

Edited December 30, 2022 by LearningMachine

[Gregmal]

6 minutes ago, LearningMachine said:

 

 

What's the risk of lawsuits against GP by LPs who got sucked into buying assets where GP chose to take on short-term loans/mortgages at lower interest rate to show positive cashflow/income to LPs, and now can't refinance at higher rates, leading to loss of capital for LPs?

 

I'd say non-zero.  Any chance the first few public lawsuits can trigger a wave of lawsuits?

I take it you’ve never done a private securities deal before? You’re probably better off bc of it, but regardless, the paperwork alone is reason to run. And that’s at boutique firms. At the powerhouse firms? Odds of 0% chance are greater than the odds being a 1% chance.
 

LPs get sucked into stuff all the time. Largely because they’re suckers. Which is why they sign all those docs almost regardless of term.

Edited December 30, 2022 by Gregmal

[Red Lion]

Agreed with Gregmal. Also, these GPs have been through many cycles with good and bad investments along the way, and there hasn't been any crippling litigation or anything. 

 

I'm actually in the business of suing large corporate defendants for my day job and belong to organizations of trial attorneys that do the same, and I am pretty sure the GP's are not on anyone's radar in terms of big pending litigation. 

 

There's always a non-zero chance of litigation, but the GP/LP structure has a LOT of jurisprudence behind it, and I think it's probably going to take a case of outright fraud to make a good case. There's always the breach of fiduciary duty type causes of action, but like Gregmal says they've usually setup pretty ironclad contracts governed in pretty ironclad jurisdictions. 

 

Some of the biggest exposure to litigation is with the biggest and most blue chip of all like JNJ, MMM, PG, etc. But even if one of BX's LP's subsidiaries manufactured forever chemicals and faces huge liability, BX is likely legally insulated. So I would argue that in some ways BX has a more resilient business model less prone to serious litigation than a lot of multinational corporations. 

[Gregmal]

Adds to Nintendo, Disney, GS, GOOG to close out the year.

[Xerxes]

Things are never bad as they look in the worse of times (interest rate headwind) and never as good as they look in the best of times (interest rate tailwind). 
 

On BX, at some point in IDK late 2023, the DE will/hope (?) bottom out, and so will the share price. While “harvest” and realizing gains is on pause, seeds are to be planted by BX counter cyclically.
 

Until then the collapse in the multiple is warranted, until they can demonstrate to the market that the asset-light business is an “all weather” business. Given that there is no post-BX-IPO historical data on this business as light asset business operating in normalized rate environment. 

 

Lastly while the business certainly had a tailwind in a zero rate world, as institutional capital flowed in, and while the IPO was in 2009. it does not mean that John Grey and Steve Schawrzman were born yesterday (I.e the day before zero rate kicked in 08-09).
 

They know a thing or two.  

 

 

[Viking]

Over the past week: SU, GOOG, AMZN, META, QCOM, DIS

 

I also rebuilt my dividend portfolio (mostly Canadian stuff): TRP, ENB, T, BCE, VZ, BNS, CM, CWB, WFC, C, SLF, GWO, DXT

Edited December 30, 2022 by Viking

[Dinar]

Bought Clipper (CLPR) today

 

[n.r98]

Thanks for the informative responses - wish everyone a great (maybe debaucherous?) New Year in advance. Let's get em benjamins for 2023!

[Luke]

Yesterday I added to Micron, Meta, TSMC, Amazon, opened a small position on Kering, sold some Berkshire to buy more Alphabet

[Red Lion]

20 hours ago, Xerxes said:

 

Until then the collapse in the multiple is warranted, until they can demonstrate to the market that the asset-light business is an “all weather” business. Given that there is no post-BX-IPO historical data on this business as light asset business operating in normalized rate environment. 

 

Lastly while the business certainly had a tailwind in a zero rate world, as institutional capital flowed in, and while the IPO was in 2009. it does not mean that John Grey and Steve Schawrzman were born yesterday (I.e the day before zero rate kicked in 08-09).
 

They know a thing or two.  

 

 

 

To be fair, the IPO was in mid 2007 right before the collapse. The market was quite excited to see BX IPO (when the fed funds rate was north of 5%) and then the stock just got completely gutted over the next couple years. BX went on to gain it all back and then become ~7 bagger from IPO price to the peak, plus payout more than the IPO price in dividends. 

 

BX literally IPO'd with great hype based on the historical figures of 5%+ on the federal funds rate. 

 

Also, BX is far more diversified and earns a very healthy percentage of its income from FRE. 

 

I think it's fair to see BX trade at a lower multiple of Distributable Earnings, but at the bare minimum the business should be worth 20X FRE with the carry for free. This would put it at $86 based on trailing FRE. I believe this is a very conservative valuation, but that's around when I started backing up the truck, because I don't like paying for carried interest. 

[Luke]

Added to FFH, Meta,Alphabet

[competitive-advantage]

Bought Apple. I made the order in the weekend and did not expect Apple to go down so quickly to $125.45. I feel good about this investment after reading the annual reports of Apple, Samsung, Mediatek, Xiaomi, Vivo and Alphabet.

[Dinar]

CNQ - Canadian Natural Resources

[dipod]

CNQ, SU, JOE, AMZN

[Luke]

2 hours ago, competitive-advantage said:

Bought Apple. I made the order in the weekend and did not expect Apple to go down so quickly to $125.45. I feel good about this investment after reading the annual reports of Apple, Samsung, Mediatek, Xiaomi, Vivo and Alphabet.

Buffett liked it even a bit higher. My concern is how much innovation they can pull off to gather more market share but one might not even need that. Just growing in the other markets/emerging markets+buybacks should reward you. Services are also growing. What is your thesis longterm? How do you see apples future?

[Mephistopheles]

AMR, BTU

[cwericb]

Little bit of CKI.T (Clarke Inc)

 

[Luke]

More TSMC and Amazon

[Cod Liver Oil]

Apple Card/Apple Pay is a gorgeous system. Does anyone else use it?