<p>Xiggi, Can you define and elaborate on “to separate the essential and productive research from the whimsical and arcane (most charitable terms I can use here,) and make sure that the two are correctly ascertained on their potential economic return.” </p>
<p>One would argue that the drive toward “essential” and “productive research” degenerates invariably to a lot of pedestrian and “me-too” research.</p>
<p>Potential economic return ( not to mention saving many 1000’s of lives) on basic research is nearly impossible to estimate. Here’s a couple stories to illustrate that.</p>
<p>[The</a> story of the discovery of heparin and warfarin - Wardrop - 2008 - British Journal of Haematology - Wiley Online Library](<a href=“http://onlinelibrary.wiley.com/doi/10.1111/j.1365-2141.2008.07119.x/pdf]The”>http://onlinelibrary.wiley.com/doi/10.1111/j.1365-2141.2008.07119.x/pdf)</p>
<p>[Private-equity</a> firms: Between a clock and a hard place | The Economist](<a href=“Between a clock and a hard place”>Between a clock and a hard place)</p>
<p>When endowments report in about a month they are going to make pretty sunny statements about their returns, but like that duck on the lake next door beneath the surface things are not good at all with their PE investments-where most of their money is stuck.</p>
<p>Sm74, this could really stink.</p>
<p>“The tougher conditions may force a restructuring of the industry. In the near-term more private-equity firms will take minority stakes in each other’s companies, says Michael Magliana of Moelis & Company, an investment bank. For example, in June 2010 Blackstone sold a 28% stake in Merlin, a theme-park operator it owns, to CVC, another private-equity firm. This kind of transaction lets firms retain a piece of their investment until markets swing back. Already, secondary transactions, in which private-equity firms sell whole investments to each other, make up a quarter of deals by value, according to Preqin, a data provider.”</p>
<p>So, what is the story? I sell a piece my investment at an overinflated price, and you sell a piece of yours at an overinflated price…and so we are out nothing. But, now we can report a valuation based on this overinflated price.</p>
<p>I’m getting really cynical. :)</p>
<p>[The</a> Biggest Private Equity Buyouts in History](<a href=“http://www.businessinsider.com/the-biggest-private-equity-deals-in-history-2011-4]The”>The Biggest Private Equity Buyouts in History)</p>
<p>The major endowments have gotten themselves in the position where their future is very much dependent on what is going on in the non-transparent world of Private Equity. To understand Private Equity you have to drill down into the investments that have been made. And that’s not that hard to do because a huge portion of the money went into these mega deals in 2006 and 2007. Before then PE firms were doing pretty small deals and doing pretty well with them but that all changed in 2006. The major PE firms took in huge amounts of investor money. For example at KKR they went from a 2002 fund-raising of $6B to $17.6B in 2006. TPG went from $5B in 2003 to $15B in 2006 and then another $19.8B in 2008 before the crash. Endowments rolled over their winnings from the earlier funds to these mega funds.</p>
<p>If you look at the top 14 investments and take out RJR which is the only one before 2005, and Alltell which was immediately sold and take a hard look at the remaining companies it is a very sad story:</p>
<ul>
<li><p>Only 3 of the companies have gone public. Kinder-Morgan and HCA between cash drawn out and public market value have given their owners small profits. The other-Freescale-had an initial equity investment of $7B and has a current market value to the investors of a little more than $2B for a big loss.</p></li>
<li><p>If you google the remaining 9 companies its real hard to see that there is much equity value there. Harrahs tried for an IPO but failed. Many of the companies including Hilton and TXU(energy Futures now) have had to pour more equity in to re-negotiaite loans. about the only company worth buying is Boots and that was a European deal.</p></li>
<li><p>By my calculation these deals represent $75-$80B in equity from limited partners(endowments/pension funds) and from the 3 that have gone public there is a public value of around $20B. How these remaining companies do is going to have a huge impact on the major endowments.</p></li>
<li><p>In addition to being 50-60B short on their investments ofcourse investors have also been paying 2% management fee on that $80B for another $8B transfer from investors to the PE firms over the past 5 years.( Hence the lavish birthday parties).</p></li>
</ul>
<p>The reason endowments are screaming for their money is because they are tied up in these investments and honestly its hard to see how they are going to get cash from them anytime soon. The 3 ipo’s that have taken place this year have all gone down in value by over 20%, the cost of high yield financing has gone up dramatically, investors are avoiding risk and who wants to buy a no growth company with a huge amount of debt. Not alot of takers out there at the moment.</p>
<p>Stark-what aggravates me is that I am cynical as well but I very rarely hear a discouraging word about PE from the NYTimes, WSJ, or CNBC. They seem more intent on being their buddy. The best place to get much real journalism usually is in Britain.</p>
<p>“Stark-what aggravates me is that I am cynical as well but I very rarely hear a discouraging word about PE from the NYTimes, WSJ, or CNBC. They seem more intent on being their buddy.”</p>
<p>I agree…</p>
<p>It is very hard to watch CNBC.</p>
<p>Nice post #305.</p>
<p>
</p>
<p>Its quite likely that that is precisely the story. And its an old one. And a regrettable one. </p>
<p>I had not been following this very closely until I read the Princeton report. Its quite dismal. These endowments are now worth a great deal less than anyone realizes, and there is no hope to liquify them anytime soon. What no one remembers in history is that from about 1972 through 1982, there were very,very few IPOs. We could enter a similar era.</p>
<p>You’re not going to hear many discouraging words about any of this because it is equivalent to yelling fire in a crowded theatre. Some people understand this, but if you point it out you may be disciplined or fired by your employer. This would include journalists.</p>
<p>“You’re not going to hear many discouraging words about any of this because it is equivalent to yelling fire in a crowded theatre. Some people understand this, but if you point it out you may be disciplined or fired by your employer. This would include journalists.”</p>
<p>This makes sense. I do think there is a little too much hero worship, though.</p>
<p>[Private</a> equity: Get a grip | The Economist](<a href=“Get a grip”>Get a grip)</p>
<p>Example of the brutal truth telling you get from the British that you don’t get over here.</p>
<p>Great article. Thanks for the link.</p>
<p>At the end of the article the author says"In the end pressure for consistent and conservative valuations must come from the clients". That’s the BIG problem. What incentive does the guy running X endowment have to get a conservative valuation—the incentive is exactly the opposite. He wants to report that he has done better than every other endowment manager-he maximizes his bonus and is a hero. It’s everybody’s incentive from the PE Fund, to the endowment manager, to the school President, to the Board of the School that is made up of PE managers to put as rosy a picture on their investments as they can.</p>
<p>[Cerberus's</a> NewPage Files for Bankruptcy - NYTimes.com](<a href=“http://dealbook.nytimes.com/2011/09/07/cerberuss-newpage-files-for-bankruptcy/]Cerberus’s”>Papermaker Owned by Cerberus Files for Bankruptcy - The New York Times)</p>
<p>Another multi-billion dollar PE bankruptcy. Pretty common little talked about fact of PE is not only do they do the equity on these leveraged deals many of them, as in this case, own the debt as well.</p>
<p>Company like Cerberus has had many painful bankruptcies and is known to strip assets from companies they acquire. Sad fact is that the emplyees of these companies pay a huge price but nowhere do you hear campus groups questioning why their endowments are supporting this kind of behavior. I’m all for free enterprise but what some of these PE companies do gives capitalism a pretty bad name.</p>
<p>Thanks for the link.</p>
<p>I smiled when I read the sentence about too muvh debt.</p>
<p>I thought these PE guys were geniuses and knew better. :)</p>
<p>I wonder if any endowments are eventually going to take a hit because of this…</p>
<p>Stark-they are pretty smart atleast in getting endowments and pension funds billions of dollars to invest–most of these guys are billionaires and will remain billionaires regardless of what happens to the companies they bought.</p>
<p>Brandeis’ endowment appears to have recovered and is on track to grow.</p>
<p>FYI: [University</a> raises $62 million during fiscal year 2011 - News - The Justice](<a href=“http://www.thejustice.org/news/university-raises-62-million-during-fiscal-year-2011-1.2575401]University”>http://www.thejustice.org/news/university-raises-62-million-during-fiscal-year-2011-1.2575401)</p>
<p>That’s good for Brandeis.</p>
<p>[KKR</a>, Blackstone Deal-Rigging Lawsuit Over LBOs Expanded by Federal Judge - Bloomberg](<a href=“Bloomberg - Are you a robot?”>Bloomberg - Are you a robot?)</p>
<p>“‘Bidding Clubs’
The firms allegedly formed “bidding clubs,” referred to in the private-equity industry as “consortia” or “teams” to rig the bidding, according to a redacted fourth amended complaint made public yesterday. Use of the clubs limited the number of bidders, depressing prices at target companies, the plaintiffs said.
“We’re not going to have any comment on that,” Owen Blicksilver, a spokesman for Fort Worth, Texas-based TPG, said in a phone interview today.
Kristi Huller, a spokeswoman for New York-based KKR, said the company “doesn’t comment on pending litigation.” New York- based Blackstone’s spokeswoman Christine Anderson and Elizabeth Gill of Washington-based Carlyle Group also declined to comment.
‘Sham Bids’
The conspiracy began in at least 2003, plaintiffs said in court papers. The so-called bidding clubs would orchestrate competing bids and knowingly submit “inferior sham bids,” according to the complaint. The average premiums paid to shareholders in bids involving club deals were significantly less than those paid in either sole-sponsor LBOs or acquisitions by strategic bidders, the plaintiffs said.
The defendant firms were enriched through the conspiracy as debt financing shields the income they pull out of target companies from taxes. The annualized net returns to the firms are 20 percent to 30 percent, according to the complaint.”</p>
<p>[Insider</a> Trading Investigation Yields Another Guilty Verdict - NYTimes.com](<a href=“http://dealbook.nytimes.com/2011/09/20/insider-trading-investigation-yields-another-guilty-verdict/]Insider”>Guilty Verdict Reached in Another Insider Trading Case - The New York Times)</p>
<p>54 guilty verdicts and counting. Maybe endowments should think about the ethical implications of investing so heavily in this alternative investment.</p>
<p>I am shocked, shocked that there is crooked dealing on Wall Street. Better question is how much actual fair dealing goes on?</p>
<p>Insider trading is stupid. The chances of being caught are very high. People are not aware that the NYSE and Nasdaq have staffs of people watching big market moves in stocks. When a major announcements moves the stock, they go back to the days and weeks prior to the event and review the trading pattern. They look into the origins of the trades, and if they look suspicious, they investigate further. </p>
<p>That’s how Dennis Levine and Ivan Boesky got caught back in the 80s. Also Marty Siegel. Levine had an offshore account that he used to trade on inside info he got in his M&A job at Smith Barney. After a couple of successful trades, his offshore banker decided to “mirror” the trades for his own (the banker’s) account at Merrill Lynch in Caracas. After a couple of those, the Merrill Lynch broker clued his officemates in on the fact that he had a rather prescient client, and the whole office began to mirror the trades when they were made.</p>
<p>The SEC picked up the Merrill trades pretty quickly, and they worked their way back to Levine, although to get him they had to follow him home from LaGuardia to figure out who he was. </p>
<p>Apparently there is thinking that Madoff was able to get away with his scheme because his investor thought he might possibly be a cheat of some sort. If so they were right, but not in the way that they thought. :)</p>
<p>I think there is quite a bit of insider trading going on…not as much as the old days though.</p>
<p>I am including front running orders. </p>
<p>There is an investigation going on right now to see if the US debt downgrade news was leaked.</p>
<p>I can’t remember the regulation that stopped companies from giving analysts and brokerage firms non public information. That did have a large affect on reducing insider trading.</p>
<p>There was an article in Rolling Stone magazine recently that dealt with the issue of the SEC destroying documents that were gathered in investigations. Matt Tiabbi was the writer.</p>