Hands-on Value Creation

Blackstone is a principal beneficiary of the consolidation of alternatives / private markets. It stewards $649 billion in assets under management.
 
According to its 10-Q, Blackstone collected $1.18 billion in management and advisory fees (net of fee reductions and offsets) in the first quarter of 2021, with the Private Equity segment accounting for 35% of the total ($406M).
 
The firm generated $36 million in incentive fees in Q1.
 
Institutional investors (and their consultants) often say that they allocate to managers based on their prior performance and ability to drive operational value add.
 
When it comes to performance, some of Blackstone’s funds are publicly available on the CalPERS website:

You could also scroll through Washington SIB’s portfolio overviewor CalSTRS’ to see whether and how the performance figures differ.

It’s hard (for me) to square the fees paid with the performance delivered … but I also don’t have the problem of finding a place to invest $500M.

(Though Portico happily accepts donations if you’d like to give us $500M to play with … you can check back in 10 years and see how we did).

Alternatively, maybe Blackstone employs its value-creation capabilities to build strong, sustainable businesses, thereby effectively de-risking each investment.

(The firm seems to be so great at this that it has confidence buying the same portfolio companies multiple times … sometimes after a bankruptcy, e.g., Extended Stay America).

This is how Blackstone markets itself:

Great leadership teams are critical for success. Blackstone’s operating partners and network of operating executives work directly with CEOs and their senior teams to improve operating performance, strategy and governance.

And:

Environmental, Social and Governance principles have been integral to Blackstone’s corporate strategy since our founding. We are committed to responsible investing practices and incorporate them into everything we do.

Comforting language befitting a “safe pair of hands.”

Which is why the F-1 prospectus of Oatly — a Swedish oat milk company that received a $200M investment from Blackstone, Oprah, et al — made me laugh out loud:

What a joke.

— Mike


Greg Bowes on The State of EM Private Markets

In the latest episode of the Portico Podcast, I speak with Greg Bowes, Co-Founder and Managing Principal of Albright Capital — a global investment firm with expertise in special situations, infrastructure, infrastructure services, and real assets — about the state of EM private markets.
 
The label ‘variant perception’ gets bandied about quite a lot, mostly as nonsense. But Greg has a different view on EM private markets than most of the managers I’ve met, and I thought he’d be a great guide to walk through where the industry is in the summer of 2021.
 
Check it out on Apple Podcasts | Google Podcasts | Spotify


Grab Bag

  • Fred Wilson on the globalization of venture capital investing (avc)
  • $900 billion in Chinese government guidance funds (FT)
  • Ludovic Phalippou interviews Simon Clark about The Key Man (link)
  • Golden Gate Ventures and INSEAD report on Southeast Asia exits (link)
  • Benedict Evans on e-commerce as logistics (link)
  • B3 (🇧🇷) tests crypto platform for startup funding (link)

From the Bookshelf

Has the world become so topsy-turvy that a living creature, whom the gift of reason makes divine, believes that his glory lies solely in possession of lifeless goods? Other creatures are content with what they have; but you, who are godlike with your gift of mind, seek to embellish your surpassing nature with the grubbiest of things, and in so doing you fail to appreciate what an insult you inflict on your Creator. He sought to make the race of men superior to all earthly things, but you have subordinated your dignity to the lowliest objects. For if every good belonging to an individual is truly more valuable than the person to whom it belongs, then on your own reckoning you men rank yourselves below the tawdriest things, when you pronounce them to be your goods. Such an outcome is fully deserved, for the status of man’s nature is this: it excels all other things only when aware of itself, but if it ceases to know itself, it falls below the level of the beasts. This is because lack of self-knowledge is natural in other living creatures, but in humans is a moral blemish.

 — Boethius, The Consolation of Philosophy (Oxford World’s Classics: 2008)

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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2021, all rights reserved.

The Winner-Take-Most World

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).

* * *

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

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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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2021, all rights reserved.