The smart money is selling; the dumb money is buying. Who to follow? Choose wisely, grasshopper (from the 1970s TV series Kung Fu, for SLL’s younger readers). From Wolf Richter at wolfstreet.com:
Private Equity is a big force in the investment scene. There are nearly 4,000 of these firms in the US, and they’ve invested in about 13,000 companies. They’re considered the “smart money” because of their acumen, insider knowledge, and ability to time the markets, which they have to in order to profitably exit their their long-term illiquid investments.
OK, even the smartest among them got caught with their pants down last year when the oil price crashed. And those that invested in natural gas drillers have been regretting this move for years, after the natural gas price crashed in 2009 without ever really recovering since. Fracking, which boomed thanks to a near endless flood of money from Wall Street, including PE firms, has dished out costly lessons in return.
So, even the ultimate “smart money” can get carried away by its own hype. But recently, they’ve been doing something else: they’ve been dumping existing investments at record pace.
In the second quarter this year, exit volume by US-based PE firms “exploded” to $125 billion, according to a report by the Private Equity Growth Capital Council. This includes sales to the public via IPOs and to “strategic and financial investors,” such as corporations.
It brought the first-half exit volume to $195 billion, up 46% from the same period in 2014 and up a stunning 275% from the same period in 2013. Something is going on, and they want out.
And they’re not going to slow down anytime soon, “as corporate acquirers clamor for deals,” according to The Wall Street Journal:
On Monday, McGraw Hill Financial agreed to buy SNL Financial LC, the data provider backed by New Mountain Capital LLC, for $2.2 billion. That came on the heels of a $2.35 billion deal launched by WPX Energy Inc. for First Reserve-backed RKI Exploration & Production LLC.
They figured out, in an environment where nearly all assets are overpriced, it’s a great time to sell.
They already waited too long exiting their oil-and-gas investments, which now have started to collapse under the weight of debt and negative cash flows. Instead of struggling to salvage parts of their portfolio companies during restructuring or bankruptcy proceedings, they should have exited in 2013 and early 2014, when exuberance about oil covered up even the depression among natural gas drillers.
But elsewhere, things are still hopping. And it’s high time to get out before the energy debacle and the turmoil at the riskiest end of junk bonds spread more deeply into the PE firms’ portfolios.
And there have been eager buyers: the unsuspecting public via funds that invest in IPOs; and corporations that are buying everything in sight.
To continue reading: Smart Money Dumps Assets at Record Pace
