In the coming need to do homework, it is often good to read books about finance because they offer a summary and a perspective that you will not likely receive by reading the newspapers and blog posts. Recently picked up a book called King of Capital by David Carey and John Morris published by Crown Business, NY, 2012.
The book is about private equity and Blackstone run by Steve Schwarzman. On Wall Street there are multiple private equity firms including KKR and a host of other firms managing billions of dollars. They are what is known as alternative investments, when a private equity firm buys a company, attempts to make it profitable and hopefully in a few years issue an IPO which allows the private equity firm to sell its holdings over the next couple of years. The advantage is making 3 or 4 or more times the amount of money that was spent to buy the company. This happens because there are cycles in the economy and there are ideas for expansion and growth that were not being used before the buyout. When KKK did the first couple of deals they made a lot of money, and in Wall Street if someone makes a lot of money with seemingly little risk, there will be a multiple of players who wish to do the same thing. The difference is some will be able to raise funds. The first years it was hard to raise funds because only a few players were active in the alternative investment area, however once wonderful returns are made, more holders of large funds made the transition to own alternative investments. In the world of capital the new players were the pension funds and the wonderful thing about pension funds is they always have new money to invest, while at the same time worried about their pension obligations.
In the book, the authors discuss various deals that Blackstone has made over the years, and while some were wonderfully profitable for the firm, there were others that failed and over the years Blackstone had to change how they make their decision to invest. One method they adopted the pitch has to be done to a wide variety of people and someone has to play devil’s advocate to ensure the one in the hundred possibilities that could happen is given consideration in the decision. It does not mean all decisions will be profitable, many will not and that is the important take away. Even with the brightest minds in the room, for a company to turnaround and make consistent profits it is not a sure thing. Many times the firm loses money because the economy is not static, it is dynamic and what works in one area of the economy does not work in another.
Linking to dividend paying stocks, when you buy these companies you are buying them because of their abilities to generate profits over the years. Sometimes they could generate more than normal, but they have consistently generated profits and can pay dividends. There is something wonderful about that and it is not as easy as it might seem to be. The company’s history is filled with failures, but there are successes and they produce consistent profits.
There are more questions than answers, till the next time – to raising questions.