Buyout Prices Moving Up
Buyout Prices Moving Up
Cheap debt and an army of private equity funds with dry powder have pushed acquisition multiples to an all-time high, according to this article from S&P Global. With an estimated $881 billion of cash waiting to be invested at private equity funds, acquisition prices are likely to remain elevated. Given the outperformance of buyout funds versus public market benchmarks over the last 10 years, more institutions will likely continue to shift their resources to these private equity vehicles. The Law of Diminishing Returns dictates that as a strategy or asset class gains popularity, it becomes harder to generate favorable returns. In our view, increased capital chasing deals and paying significantly higher prices sows the seeds for future underperformance. At First Fiduciary, we try to “zig” while other investors “zag.” We look for high-quality companies that are temporarily out of favor. Unpopular companies tend to trade at low multiples. Paying low prices typically helps limit our potential downside. First Fiduciary’s longer-term investment horizon enables us to wait for a company’s fortunes to shift and, importantly, for the stock market to realize it. This combination of valuation discipline and a long investment horizon allows us to protect and grow clients’ capital over many years.
Noteworthy Articles We’ve Read:
Farmers Fable
Exponential growth = good. Exponential growth combined with sharing = great. Really interesting description of an economic framework that was quite common hundreds of years ago but has since fallen out of favor.
Impressive lift boat
The massive size and strength required by a lift boat to raise a cruise ship out of the water for maintenance is almost unbelievable.
Artificial intelligence in investing
Have computers changed investing forever? The author of this article thinks so.
Quantum computing on the way?
Back in June, we linked to an article on quantum computing. Here’s another article on the subject, which is a technology of high interest to us. It could fundamentally change the way a number of industries operate.
Bitcoin, 11 years in
Interesting post from an economist who describes bitcoin as similar to an old-fashioned chain letter.
Epidemic of "fake" earnings
A respected investor warns of an epidemic of “fake” earnings that will expose companies in the next downturn. From the article: “Too many companies are addicted to making creative accounting adjustments that bump up operating profits known as EBITDA -- and investors are turning a blind eye.”
The deep sea
Fun infographic about the deep sea. Keep scrolling.
Books We’ve Read:
Cable Cowboy: John Malone and the Rise of Modern Cable Business
by Mark Robichaux
An in-depth look at how John Malone used creative financing and a lot of debt to create a cable TV powerhouse (and make himself a billionaire). By keeping operating costs low (and customer service poor), his company had the ready access to capital needed to buy distressed cable companies on attractive terms. Malone was clearly ahead of his time as a capital allocator, and investors have since tried applying his style to other industries with much less success. In the last few years, there has even been evidence of his influence on recent land grab Silicon Valley start-ups like Uber and WeWork where the mantra seems to be “lowest cost of capital wins.” – AG
The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution
by Gregory Zuckerman
Jim Simons, a world-renowned mathematician, believed he could use his math skills to beat public markets. He was right. Starting with commodities, currencies, and bonds, and eventually moving into equities, Simons and his team of math, physics, and computer science PhDs generated better returns than anyone over the past 30 years. The book was very engaging but relied mostly on the second- and third-hand accounts of ex-employees to describe Simons and his process. The author managed to do a good job of describing what Renaissance Technology (the name of Simons’ firm) accomplished, but not how. – AG
Out & About
Fort Lauderdale, FL
Ft. Lauderdale’s dining scene is filled with trendy restaurants featuring Mexican fare. One stands out for its great beachfront location and its superb cuisine. Lona, 321 N. Ft. Lauderdale Beach Blvd. (www.lonarestaurant.com), is located in the Westin Hotel and is the creation of Chef Pablo Salas. Salas’ restaurant, Amaranta, in Toluca in the State of Mexico, is consistently ranked as one of the top restaurants in Mexico. Friendly, attentive service compliments Salas’ delicious, creative offerings featuring his native cuisine. Favorites include drunken grouper, pan seared with a Mexican beer glaze, braised beef cheek served with a sauce made from puréed pumpkin seeds and grilled vegetables and amazing tacos (fish, chicken, pork, steak or vegetable). The Mexican ribs appetizer was a hit as was the tuna tostada. Lona takes its cocktails seriously, offering an interesting mix of creative drinks made with fresh ingredients. For tequila connoisseurs, the selection is extensive (over 150 to choose from plus over 30 varieties of mescal). – MA & BH
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