The Winner-Take-Most World | Portico Advisers

Did you know that KKR said it collected $1.4 billion in management fees last year?

And that its annual income from management fees has grown by $710m since 2015?

It blows my mind.

Hats off to the team for executing a bold growth strategy.

But … it just seems like a waste of money, doesn’t it?

The firm collected $6.2B in management fees between 2015-20.

The bulk of that likely flowed to individuals with a low marginal propensity to consume.

(Comp and benefits accounted for ~70% of expenses between 2018-20, according to the latest 10-K).

And it also flowed to a firm with a low marginal propensity to invest.

(Based on the historical financials accessed via Koyfin, the firm’s MPI [= ΔI / ΔY] was actually negative comparing 2015 to 2020; it averages out to 0.11 between 2016-20).

What boggles the mind is there are allocators at large institutions who have no compunctions about handing a growing amount of pensioners’ savings over to mega-cap firms, largely to pay the latter’s employees to show up to work.

It’s not as if this is hidden knowledge. It’s laid out in public filings. For instance, here’s KKR’s segmented revenues for 2020:

What an amazing business.

(Note that the management fees in the chart are provided on a GAAP basis, and the $1.4B figure cited at the top is based on a KKR presentation featuring recast, non-GAAP financials).

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When I see KKR’s $710m increase in annual management fees, I can’t help but think about several clients that are raising funds and could invest that money in wealth- and health-creating companies.

Alas, these firms aren’t on many LPs’ radar screens because their fund sizes are “sub-scale.” Or they require too much legwork. Or they’re so “risky” that it makes more sense to pay a toll to KKR (and / or Apollo / Blackstone / Carlyle, etc.) than to use it as callable capital.

Look. This isn’t just about KKR. They’re a premium brand for a reason.

But the specific case is useful for what it tells us about private markets and the world more broadly.

And that is that we’re in a winner-take-most economy.

The inequalities across multiple vectors have been getting worse for a long time.

Just look at this chart from Morgan Stanley global strategist Ruchir Sharma (source):

I believe the consolidation of capital in fewer, large-scale managers is leading to less innovation and more sclerosis. And I think the incentive structures at large LPs and GPs are broken, contributing to poisonous outcomes.

It’s all a bit evocative of Matthew Klein and Michael Pettis’s Trade Wars Are Class Wars, which argues that international trade conflicts are a direct result of domestic inequality. Namely, “a conflict between bankers and owners of financial assets on one side and ordinary households on the other.”

It’s unsustainable.

— Mike

The Caesars Palace Coup

Speaking of mega-cap buyouts, I have a summer book recommendation: The Caesars Palace Coup by Max Frumes and Sujeet Indap.

It’s a riveting telling of the rapacious actions of Apollo and TPG, and the combative restructuring of Caesars Entertainment.

A taste:

Too many people — and often twenty- and thirty-something-year-old men trying too hard to prove themselves as tough guys — private equity and hedge fund alike, were fighting merely out of vanity. Most of these funds took money from identical pensions — Texas Teachers, CalPERS, CalSTRS. These fights to the death just moved money from different pockets of the same investors.

Mobile Money Metrics

GSMA has released its Mobile Money Metrics portal.

Given the vital and growing role that mobile financial services play globally, this is a terrific resource not only to glean insights on the scale of mobile money accounts, agents, and transactions by geography, but also the names of services in each country.

It’s awesome. Check it out.

The Abraaj Fiasco

I wanted to experiment with a different format with the Portico Podcast, and decided to revisit my writings on the Abraaj fraud scandal as they were happening in real time a few years ago.

It’s hard to overstate the impact Abraaj’s governance failures had — and continue to have — on EM private markets. Give it a listen and let me know what you think.

Persistence in PE / VC Performance

A fresh look at the persistence of PE & VC funds using Burgiss data.

From the Bookshelf

For decades, the U.S. Treasury’s approach to international finance was driven largely by what made sense for major American commercial and investment banks and the owners of financial capital. The interests of everyone else in the economy were largely ignored, if not outright opposed by counterproductive commitments to maintain a strong dollar. This was always justified on the grounds that deregulating capital and increasing its mobility would lead to the best possible outcomes.

The resulting increases in wealth, they explained, would inevitably trickle down to all Americans — never mind that international capital flows are far more likely to be driven by speculation, investment fads, capital flight, and reserve accumulation (often for mercantilist purposes) than by sober investment decisions about the best long-term uses of capital …

The world’s rich were able to benefit at the expense of the world’s workers and retirees because the interests of American financiers were complementary to the interests of Chinese and German industrialists. Both complemented the interests of the wealthiest throughout the world, even from the poorest countries. The modern surplus countries do not need colonies to absorb their excess production because they can work with bankers, their willing collaborators in the deficit countries.

The perverse result is that deepening globalization and rising inequality have reinforced each other.

— Matthew C. Klein and Michael Pettis, Trade Wars Are Class Wars (Yale University Press: 2020)

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