Permanent capital: Perpetual cash machines
In 2009, Bill Ackman surveyed the wreckage of the US property market and spotted a golden opportunity. General Growth Properties, owner of shopping malls in 40 American states, was teetering on the verge of bankruptcy — and Mr Ackman, founder of the Pershing Square hedge fund, sensed it was time to buy.
There was just one problem: his own investors. Spooked by the financial and economic crisis spreading around them, many Pershing clients were asking for their money back. To cope with the flood of redemption requests, Mr Ackman had to keep almost half his fund in cash — money that he wanted to put to work in companies like General Growth.
Today, General Growth is worth 140 times its value in 2009. Pershing Square is thought to have made about $3.5bn from its investment in General Growth, but Mr Ackman still rues not being able to invest more in the company.
“I had one hand tied behind my back,” Mr Ackman recalls. “In 2009, we wanted to go on the offensive. But even though we were up a lot that year I still felt like we missed out. Because of the possibility of massive redemptions we had to hold too much cash.”
Hedge fund and private equity managers have always been subject to the whims of their investors or the rules of their funds. After all, the money belongs to their clients. But, for the managers, few things are more galling than having to pass on a “sure thing” because they have to give the money back, as Mr Ackman was forced to do.
Now many of the world’s savviest hedge fund and private equity managers think they have found a way round the problem. Instead of traditional funds that allow investors regular opportunities to redeem their money, or buyout funds that wind up after 10 years, they are looking to raise money for vehicles that bring cash in that can be invested in perpetuity. In the industry parlance, this is known as “permanent capital” and is seen as a new holy grail.
Whether these are stock market listed funds or acquisition vehicles that raise money in public share offerings, or reinsurance companies that bring in premiums to invest, they have a few things in common: fat fees and an end to the need to plead with potential investors to write cheques every few years.
Private equity bosses, complaining about a shortage of cheap companies to buy, are staring at years of lower returns. And with hedge funds having had their fourth consecutive year of sub-10 per cent growth, pension funds such as Calpers are reconsidering their investments. Pressure on fees is intensifying and permanent capital raised now could lock in arrangements that may in the future look quite generous.While it is too early to say how many of these vehicles will justify the fees they pay to their managers, the quest for permanent capital is already changing the alternative investment management industry. Hedge fund managers and private equity firms are getting larger, more diverse and more institutional, becoming more like traditional fund management groups where gathering assets may be prized ahead of generating stellar returns.
The inspiration for many alternative managers is Berkshire Hathaway, the listed investment vehicle of Warren Buffett, who for 50 years has been able to invest the profits from his businesses and the premiums from his insurance operations without investors pressuring him to return cash to them. The result is that Berkshire is the fourth largest company on the US stock market.“Everyone is suffering from Warren Buffett envy,” says the head of a private equity firm in New York. Berkshire had the money for rescue loans to Goldman Sachs in 2008 and Bank of America in 2011, moments of great fear in the markets when everyone except the US government seemed to be fleeing. Berkshire has made profits of more than $12bn to date on those deals....MORE
