Why Private Equity Firms are Halting Withdrawals
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- เผยแพร่เมื่อ 7 ส.ค. 2024
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0:00 - 1:06 moomoo
1:07 - 3:26 Intro
3:37 - 5:46 Private real estate funds
5:47 - 7:29 Blackstone withdrawal freeze
7:30 - 11:14 Net asset value
11:15 - 13:48 Underperformance of private real estate
13:49 - 14:45 Illusion of smooth returns
14:46 Incompetence of pension funds
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Glad you picked a more trusted advertiser. You certainly got a lot of pushback from masterworks.
I thought the part about how pension funds are run by their beneficiaries was the most interesting part. I live in New Zealand and the Ontario Teachers Fund has been involved in a few high profile busts down here in the past. They ended up buying the phone book business just as internet advertising was becoming dominant and lost billions.
@Wall Street That was a good one. You had me going for a second before I figured out it was a scam bot. Better luck next time.
The Ontario teachers pension fund is generally pretty successful. They own multiple sports teams, huge quantities of commercial and residential real estate all over the world, and huge tracts of American farmland.
Obviously they don’t always pick winners, but they’re pretty notorious in North America. One of the few really successful pension funds.
They also lost 95 millions to FTX.
@@CamF64 Are the sports teams profitable? They're pretty notorious as money pits. Ol' Evergrande poured untold piles of cash into their soccer team before they went bust, Paris FC was busy going bust when the Qataries bailed them out in exchange for the french football associations World Cup vote, and I do not believe any of the English premier league makes much if any profit. Sports teams are usually billionaire ego boosters or political influence vehicles rather than a good investment business.
@@CamF64 Sports teams are notorious for misallocation of wealth. I could think of better investments to choose when spending a billion dollars. The Ontario pension plan got into bitcoin. Enough said.
I worked for JP Morgan for four years and what I learned would shock you. Companies like Black rock are not reporting the losses in those pension plans. Most of the pension plans now are insolvent, and we will see them collapse in the next few years.
There is conflict of interest. As they charge a percentage of assets they manage, they have an incentive to increase the value of their properties.
I might be dumb here, but is that not an allignment of interest?
Nvm i get it, appraisals =/= Real value
@@adamhenriksson6007 not if they are just increasing the value on paper, charging fees based on that higher value, and then eventually have to mark them back down 40%. (Thus taking HUGE fees, while zero returns to investors)
@@iamthere135 Exactly. Scott explained it perfectly.
The management fees are usually charged on commitment amount - i.e. the original amount put in, not the whole AUM.
@@Zeratul306 they also charge performance fee.
And once capital is allocated, managemente fee is over assets, and not commited capital.
Private equity has grown exponentially over the last couple decades, but it has collapsed in the last year with most funds making no new investments. Turns out the returns, risks, and fees were identical to crowdfunding.
Idk if I'd put it quite like that. But generally moreso that private equity has higher risk and return and when low risk has next to no return due to low rates impacting bonds and the like. So if people had a lot of money and wanted any return, they need the riskier private funds to have any return at all.
@@ZeromuS_ side effect of government constantly borrowing to support being the reserve currency.
More of a giant pyramid scheme
@@ZeromuS_ they are being greedy and not offering their clients enough incentive to stay. Clients end up making the same or less if they didn't invest in private equity to begin with.
@ZeromuS_ Dude, both crowd funding and early stage private equity say that one in four firms succeed, that the average firm has 10-20 employees, and that they raise a couple million bucks on average. The difference is crowdfunding favors innovative consumer products and private equity favors innovative business solutions.
A related reason for pension funds to prefer private real estate funds over REITS is that if the value appears to always being going up you avoid showing losses. If the pension fund can hide losses then they avoid admitting theyre under funded which is a common problem
Well he kind of says that at 14:19, but true
Private equity funds are designed to mitigate “bank run” scenarios. Investors can sell their positions in “secondaries market” but they would have to find their own buyer to take on the position on their behalf with whatever premium or discount there may be on the valuation.
"Where are all the clients yatchs?" Awesome book.
Corruption from the inside- fees for all 🤡
It's not corruption if it's legal.
As somebody who services private equity funds, the lack of education around them are astounding. Private equity funds are not something investors arnt meant to hop in and out of. As an LP of the fund, you are committing Capital to the whole investment period of the fund with strict withdrawl penalties (if even allowed at all, which many LPAs don't). This is because they are not run in perpetually and usually have life cycles of 5-10 years. Most invest in extremely illiquid investments, with many not even under consideration to be sold until the end of the investment period to prepare for distributions.
The problem is bad incentives: If you can show the retirees that things are only going up in a smooth way, they're gonna trust you. With the liquidity, you may lose trust, even if it's the same investment.
The thing about that is that, as Michael Burry pointed out, most investors actually don't do any research whatsoever. Retirees aren't usually looking at the data and investing it on a weekly basis based on which stocks they think will do well. Instead, they're saying "Okay, bank, invest this $2000 into whatever stocks you think will do well," and those investors are usually just saying "Okay, let's just put that money into the top stocks on the Fortune 500 list."
The problem is that if Fortune 500 companies, like Tesla and Walmart, don't do well, that means that most of the average citizens have their money invested into a 'failing' company without even knowing it. So, they might one day look at their investments, realise the $2000 they invested in Walmart is now $1500 and panic, then remove their investment which makes the stock fall even more which makes more people panic, starting something similar to a bank run.
Plus, retirees are going to take their money out eventually, it's not staying there forever and it looks like the next generation will have less money to put in investments, as well as the next generation after that.
@@qty1315 These aren't failing companies. On average you're still earning a statistically significant Return, it's Just that Most of These companies decline and fail.
Of course you could construct way better Portfolios, where you'd Focus on the different systematic risk factors, but the S&P500 seems to be the gold Standard for Index investing, though I think that Worldwide Indexes Like the MSCI World will outperform, even If it Takes a few more decades to Reach that Point.
But the Panic selling is totally true. The fear is really irrational, but I feel Like that is one of the inefficencies that active Investors can Take Advantage of.
Always thought it was weird that REITs are just as volatile as stocks.
Because it is a stock. You don’t own real estate. You own stock in a company that owns real estate. Just like the difference in owning Tesla stock and owning a Tesla car.
@@Football__Junkie Yeah that's a good explanation thx!
Don’t cry for the teachers. Cry for the tax payers (you)… these public pension funds will 100% get bailed out. It’s not even a question.
Is it not normal they limit withdraw? real estate is not a liquid asset so they can only sell so fast to pay back the investors?
Put it all in index funds of various sorts. Nobody ever gets rich paying a fund manager (except a fund manager).
I actually owned both Blackrock and Stone, but sold them. Hope was the right move these days.
Dude, most private equity funds have rich chumps as investors. And a bigger issue with pensions is that most of them aren't fully funded.
I think you hit on the real reason. The pensions are chronically underfunded, so in order to make up the shortfall they direct their money to funds that can promise higher rates than the market.
I’m glad mine is
I think pension funds (and a variety of other groups) value the lower volatility. Just look at what happened to UK pensions when government bond interest rates crept a bit higher. Despite the fact that they intended to hold them to maturity and all would have been fine, the mark to market accounting combined with having used them as collateral for some margin borrowing triggered margin calls causing more selling and putting more upward pressure on bond yields/downward pressure on prices. Having some illiquid and low volatility assets mitigates some of that pain.
Definitely not the only thing they should hold, but there's a case for it. Of course you run into a different problem if everybody who buys in plans to cash out under the same circumstances. On some level, you want assets where your need/desire to liquidate is uncorrelated to anybody else's.
You bring up the two biggest private equity firms, but understand there are tens of thousands of these firms.
And most are a house of cards due to their MTM accounting practices and dishonesty.
Down market and heavy leverage, not a good combination. Add to that higher interest rates. I may be poor but I am not leveraged. Paid off home makes one sleep well.
Loving all the high level content lately
Another explanation for the over performance of publicly traded REITs is the volatility premium--investors are being compensated for the volatility exposure vs the lower volatility of private funds. Publicly traded is more prone to speculation and pricing is more dynamic as it can occur in realtime. Private is more like when you own real estate personally, you can say the price doesn't change much in comparison (because your neighbours don't sell often and it's slow to sell actual real estate), but it also doesn't increase in value as much as stocks. The very "illiquidity" you criticize causes the lack of volatility--get it?
Also: BREIT has returned 12.7% annualized in the past 6 years (since inception), so they're actually not underperforming public REITs.
The 12.7% annualized returns over past 6 years is based on NAV estimation, so not directly comparable REITs. It's only comparable once they liquidate their assets and you see what the price really is.
@@wallstreetmillennial Just like holding actual real estate.
Private equity isn't less volatile. The reported volatility is lower yes but the reported volatility is obviously false so it's all a mirage. Investors are paying higher prices to NAV and higer fees to be able to enjoy this benefit and that's probably where the underperformance comes from. The lack of volatility is not only in real estate it's also in other types of private equity. Basically private equity firms refuse to mark down their assets but that doesn't mean that the value doesn't change.
@@Martin-qb2mw Lol you didn't address several points and it goes by property assessments, just like one's own home. It's purely hypothetical to say "oh what if everyone sold at once". The whole point is that you can't do that with real estate, unlike an abstract financial instrument like an ETF. Which is more REAL is totally debatable as a stock is highly speculative. You can change shares in seconds not months like actual real estate.
@@djayjpIf public markets were wildly ineffecient and speculative like you claim they would be easy to beat. But they aren't. You are focused on real estate but real estate is not the point here. Private equity is doing return smoothing with BS marks on all their investments. Stocks and RE alike it doesnt matter. Investors like this effect because it looks good on reports but everyone understands that its nonsense. Except for you of course.
This is why for example, like in Australia, you lessen the risk by the pension companies investing in all of these different types of assets. And often, these pension company funds will directly invest in the infrastructure asset themselves or team up with other pension companies to essentially form a private equity company that invests in infrastructure and real estate of their own. An example is the firm 'IFM Investors', who manage US$129 billion in assets. The solutions already exist but in a lot of countries, pension investment and pension contribution schemes are far behind the times.
Boston Properties Book Value per share increased an astonishing 1.5% per year during the last 10 years while paying out on average, say, 2.5% in dividends. That's an average total return of 4% per year.
I would probably not even pay book value for this stock. BV which by the way is around $40 per share, and it's trading at 70, way more than that.
The idea of allowing my pension money to be invested on my behalf for returns sounds like a terrible idea. The message I’m getting is that I’m letting strangers and society as a whole, gamble with my retirement. This is absurd sounding. Allowing me to determine how money will be invested isn’t a good solution either, since, as pointed out in the video, I know nothing about investing.
It is of little wonder my generation is abstaining from participating in the games of the greater financial industry.
Investing is easy. Just put all your money into ACWI (iShares MSCI All-Countries World Index ETF). They automatically invest in 3,000 companies worldwide, allocating funds based on how big the company is. That's the safest option.
Or, you could put your money in IWQU.L. (iShares MSCI World Quality Factor ETF) They invest in companies which get a good return on the money they put in, have stable earnings, and have low debt. It has historically outperformed compared with the ACWI, but it invests in fewer companies and only invests in developed countries, so it's slightly riskier. But they still invest in over 200 companies, so it's still a very safe investment.
Or, you could put your money into BRK-B (Berkshire Hathaway) and let Warren Buffet manage it for you. He has beaten the market consistently. But he is getting older and he isn't as sharp as he used to be, so he might not make the best decisions in the future. Plus, Berkshire Hathaway has a lot of debt. As a result, it's not as safe as the other investments on my list.
Or, you could invest into Pershing Square Holdings. They have had exceptional returns over the past 5 years, but no-one knows what they're invested in, and they're not covered by American securities exchange laws, so they're riskier than the other options I talked about.
All these private fund managers have done poorly because they have used riskier strategies in an attempt to beat the market and justify their high costs.
Great summary on Private Equity and Alternative Asset managers
Defined-benefit pensions are unsustainable... unless you can be occasionally bailed out by taxpayers. This is why the public sector doesn't switch to 401K and leave all that sweet sweet taxpayer $extortion on the table.
So let me see if I understand this correctly the fee is based off of a subjective number that may never go down in relation to what actual liquidating or selling price of the properties may be - 😂
So the pension fund are run by teachers did exlain a lots of foolish investment by these ention funds. It was always a puzzle for me why such big pension funds do such stupid mistake.
Real estate is always a good sale point to unsophisticated targets because it is easy to explain and is very anecdotally, this is why people think that buying a house is also a good investment
A house is only a good investment if you can make positive cash flow. Otherwise, its lumped into the category of a liability in my opinion. On the other hand, if your rent is the same as a mortgage payment and you have the down payment for a house, it can be a wash. You will always need a place to stay and its better to have the monthly payment goes back into your principle payments than to your landlord's mortgage payment. Again, that is only if you have the down payment to buy the house. Timing is also important. If you bought at the peak of a housing bubble like today's market, there is a good chance you will be under water until the market recovers.
@@ahndeuxOn the other hand, when buying a house, you will have to cover any unexpected expenses, whereas when renting, the landlord will cover those expenses and if he doesn't, you can easily move somewhere else.
Thank you for another great video
Thank you for this video 📹.
Great video as always! I would have to disagree on the point regarding the board making the investment decisions.. this is driven by the investment team (who have appropriate experience). I have to echo a comment I saw below about pension funds wanting to avoid showing paper losses by investing in private real estate funds.
And the salesman said, trust me
It sounds like 2008 all over again. I wonder if there are investors out there holding The Big Short.
at 3:00, its mentioned that 98% of pension funds don't beat passive index's. Thats regular for most investments, the reason being in the standard deviation. More risk is adopted when investing in passive index's, you get all the winners....but also the losers & all the volatility which comes with it. When youre talking about Pensions, the pension managers wouldn't be able to invest in things like index funds to achieve returns because to much risk is associated with it. So they hire professionals, and of course, theres a fee. Pension fee's are some of the lowest in the industry, but of course magnified by massive sums of money it creates wealth & supports companies like Blackrock to hire new talent, create jobs, etc.
All of private equity is a dirty secret.
🔥 great video
Seems criminal to say "I won't give you back your money, because it will impair my returns".
It is not.
You agree to those terms when you sign up.
A good portion of their clients relied on exactly that feature so they can’t make withdrawal in time of crisis. Some are because they want to ensure their company value are higher in time of crisis, some just want it so they can’t make hasty decision in crisis.
Also if they are forced to sell in time of crisis it will lower their sales value rather than waiting for rebound. Many of those companies could last in crisis much longer than other companies because they don’t hold perishable assets and can cut cost faster than say a shipping companies.
I don't see the bad situation doing anything besides changing shape.
Humans have to save and invest just like eating and sleeping, gotta do it no matter what.
Another great video. Thank you.
so it's not good to invest in value? but it's good to just trade?
at 3:50 you say "teachers can retire even if they don't save money" - but this is not accurate as part of their compensation is built into them receiving the benefit.receiving
Basically don’t pay into your pension buy a property yourself
exactly
It might be ok to have some of your retirement money tied with a portfolio manager. I prefer to manage my own portfolios Roth and traditional IRAs, and regular trading accounts. I earn about 12% a year,. It does require me to learn how to trade which is not all that difficult. Most of all I have control, but with it comes with risks.
Recession
Larry Fink's greed and arrogance are also a factor in Blackstone's problems.
He works at BlackRock
Thank you.
if the same psychos who encourage and love bullies are in charge of a huge pension there are bound to be irresponsible and animal-like decisions made
Blackstone and Blackrock are basically divisions of the same company. Same base ownership. Both are ruining the real estate market. They are a PROBLEM.
They're publicly-traded companies with separate stock tickers and separate investors. They used to be connected but they split up a long time ago.
Also, BlackRock doesn't invest in real estate, and Blackstone doesn't invest much in real estate. Blackstone's main investments are Lego and Merlin Entertainment (owners of Alton Towers, Thorpe Park, Chessington: World of Adventures, Heide Park, GardaLand, all the Legoland parks, and probably some others I've forgotten about). Meanwhile, BlackRock is mainly known for their iShares ETFs, which have a much better website than most other ETF providers such as Vanguard but BlackRock has slightly higher fees, which is how they (but still much lower than the fees for actively-managed funds). These ETFs passively invest based on a number of factors. Their main ETFs invest based solely on how big the company is, but some others invest based on how well companies performed in the past, based on their return-on-equity, or based on their price-to-earnings ratio. iShares allows investors to choose how their money is invested without the hassle of buying individual shares.
The main companies which are buying up single-family homes are Invitation Homes (INVH) and American Homes 4 Rent (AMH), both of which own tiny fractions of the total housing supply.
Highly experienced professionals or highly experienced unindicted criminals?
What? Who?
Blacksotone and BlackRock, which is which?
i have no idea where WSM gets its data, but from the real estate PE's i've been involved with, the PE's guideline is 15% ROI annual compounding. if a project does not meet 15% expectation, it will not proceed. and in reality, 15% would be the lowest results i've seen. which isn't surprising, since you can control how much you pay and when you pay. revenue side is more difficult to control. although most of that uncertainty is timing. the revenue target will be met, it sometimes come a bit later.
Is that moo moo thing legit ?
Yes, member FINRA/SIPC
Great video
Can BlackStone be sued for falsely marking their valuation given how unjustified it looks.
One can only hope.
The appraisers are doing their job correctly even if it sounds weird. The public REITs are trading down in ANTICIPATION of prices going down. Prices of the actual buildings are probably not down yet so the downgrade will happen over several years. When properties start trading lower in the actual property market then the appraisers will adjust the value of Blackstones fund but this is a slow process. Smart investors try to sell their private real estate before this as Blackstones fund is obviously overvalued.
@@Martin-qb2mw How can it be correct if BS valuation looks extremely anomalous, especially when all major competitors are down. It’s clear someone is cooking their books. probabilistically it looks really fishy.
@@user-wr4yl7tx3w Yeah, the valuation of BREIT is wrong. It's too expensive. But what I am saying is that there is no good way to get a better valuation. Real Estate prices decay over years and years if there is a problem but the stock market rerates everything in seconds and thats why there is a discrepancy. Appraisers have to check transaction values and those move much slower than the stock market.
@@Martin-qb2mw Actually there is a way. You start with a model developed by experts that has worked reasonably well historically and use that as an additional guide. At least that would be better than relying on stale metrics that only look at the rear view mirror.
Buying a REIT is not investing in real estate. You’re buying stock in a company and relying on their performance just like Fortune 500 companies. Actual real estate investing has benefits such as appreciation, amortization, depreciation, long term financing, etc.
Nope. Not true. You couldn't be more wrong. A REIT provides all those things and more. You actually own a right to the underlying property and benefit from all those items you mentioned.
@@delinquense you’re delusional
Because once you give them your money, it's not yours anymore lmao
Pension funds should go with public funds, liquid, higher returns in most cases. Private equity is the new name for the old LBO(leverage buyout). These LBO's in 1980's raided cheap publicly traded businesses and sold off assets which were worth more than stock. Most Private equity firms are doing the same now. Extract maximum cash flow, then sell business or bankrupt.
When Moomooo will start working in the EU?
First
I don't think the NAV discount explanation when comparing public and private funds, as a general matter.
CoMpaRe tHe PaIr
Anybody know real estate is worse investment you can make!😂
… sort of - to this whole video. If you wanna talk about Blackstone, do that; you go on and on about REITS in general, so this isn’t an accurate comparison given the makeup of different portfolios. Biggest thing you say is the valuations, which are conducted by outside independent firms, which are then audited by Deloitte. Appreciation is only one of many factors that go into valuations. Having been a Big4 auditor, and currently involved with BREIT, I know how these things work.
I know how Big4 auditors are, having dealt with countless of them over many decades, and they are all buffoons. Don't know squat. Too many companies bought clean opinions, only to go belly up the next year.
OK, then explain the discrepancy between private and public REITs in so far as the significant variations in their valuation. The biggest factor is the appreciation without a doubt, which is inextricably linked to the capitlization rate and hence, interest rates. The only factor that could help improve cap rates is the fact that
the rental market remains strong and rents are continuing upward, primarily because of strong labor market but mostly the inflation tailwind.
But even that could never fully offset declining property values. There are many factors at play. Private REITs have much more influence in the determination of the NAV given that they have far less safeguards in place to prevent fraud. In fact, I own millions in private REITs that are still at their peak prices while most of the public REITs are down 20-30%. We are pulling cash out of these private REITs as fast as we can while trying to minimize tax hit.
Ask 100 random people (in the USA) about this subject and see how many can follow this video. I am not critical of WSM. Just try to be realistic. The average Joe is trying to do his/her job. Illiterate with investments.
Seems like public pensions would do better just buying Realty Income and a couple other REITS.
I've been investing in private placements in real estate (workforce housing, mobile home parks, self-storage, senior living, ATMs, etc.) since 2017 and it's made me financially free in my 30s. I legally pay $0 taxes on my passive income. Cumulative IRR over 25%. I'm an above average passive investor through. This is quite different from Blackstone and Blackrock.
REITs are nothing at all like investing in real estate private placements. In the latter you get attractive tax incentives among other things, while REITs are just buying paper.
Liar
Moomoo
Ponzi AF
@3:53
Are you implying that the teachers’ own” money that is TAKEN from their “own” paychecks is somehow not their “OWN” money???
MOASS
It's just another scam haha
except when it goes tits up your property taxes go up and the bad guys still get paid.
not all your viewers are americans, can you please mention next time you advertise something that the bonus isn't for everyone
You changed the title of the video from "Why Private Equity keeps you poor" Just unsubscribe.
Thanks Great video!!
MooMoo is a joke just like Robinhood. Don’t put ur hard earned money in it. My advice is use TDAmerica trade
Are you working on TD? hhah