While regular people stumble around brainwashed with the “you can't time markets” mantra, many private equity managers capitalized famously in the late bull market ending 2007–by timing their own exits perfectly.
This morning's Wall Street Journal points out the painful truth for unsuspecting and now decimated investors. See Private Equity's Ultimate Buyout:
“Two years ago the founders of Blackstone, Fortress Investment Group and Apollo Management were the toast of Wall Street. Now investors who bought into their vision know what getting toasted really means: Their shareholdings in the listed vehicles are down between 85% and 95%.
But not everyone is in the dumps. In 2007, the firms' key principals — comprising just 11 men — took $6 billion in cash off the table. The combined market value of those three firms today? Roughly $6 billion.
Take Fortress. It came out of nowhere in February 2007 as the first U.S. listing of a private-equity and hedge-fund firm. The firm's five principals — led by founder Wesley Edens — cashed out just prior to the IPO, selling 15% of the company to Nomura Securities for $888 million. On top of the Nomura proceeds, the principals received an additional $409.2 million in distributions from the company just before listing.
That roughly $1.3 billion dwarfs Fortress's $620 million stock-market valuation — with the stock down 95% since the IPO.
Blackstone's June 2007 initial public offering, meanwhile, yielded $2.6 billion in cash proceeds for three individuals. Co-founders Pete Peterson and Stephen Schwarzman banked $1.8 billion and $684 million, respectively, while President Hamilton James received $191 million. The firm's market value stands at about $4.5 billion, down 85% since the IPO.”… there is more if you care to read the whole list of examples.
Lest US stars get in our eyes. Canada also had some bull market heroes who sold their companies at peak cycle to hoards of greedy buyers. The Sprott Inc. IPO in May of 2008 was an incredible feat of timing for its founding principals. See Does Sportt's IPO signal end of rally? We now know the answer to this article's rhetorical question was a resounding “YES”:
“Sprott Asset Management Inc.'s initial public offering this week will make a billionaire of the hedge fund company's founder, spurring speculation Canada's decade-old commodities boom is ending, investors say.”
Having founded Sprott Asset Management in 2000, right at the start of the credit driven boom in commodities, and selling the company public almost exactly at the peak of the cycle in May 2008, Mr. Sprott made himself a billionaire. Very impressive timing indeed. Unfortunately for those that blindly bought the IPO, their timing has been a horror show.
From the issue price of $10 in May 2008, Sprott Inc. shares traded down 75% to $2.50 by November 2008. And the flagship Sprott Canadian Equity Fund lost 43.7% in 2008 alone. The Canadian Equity Fund losses in 2008 evaporated all of the previously impressive gains of the prior three years, making compound returns -3.66% a year for 3 years ended Dec 31, 2008; -13.05% a year for the Sprott precious metals fund, and -23.70% a year for the Sprott Energy Fund. See Sprott’s web site for performance numbers.
None of this was illegal. The principals simply used their expertise and knowledge of cycles to cash out at the top. They were smart to do so. Those that bought were the fools.
These transactions were not unique. They come from a long-tested formula on how to become super-rich in business. Invest at the start of a cycle and sell out anywhere near the top.
My only quibble is with the hapless slaughter of innocents in the process. I cannot count how often I meet people who start off their conversation with “I know you can’t time markets but…” This is when I know we will have to spend considerable time deprogramming their brainwashing before we can proceed. The public has been brainwashed by the buy and hold propaganda of the financial industry. They have spent billions “teaching” us all the falsehoods that we “know.”
To move forward, we must step into the detox chamber and start from scratch. Lay back…relax…breathe…and say after me… yes, we can time markets, yes we can. We do, because we must, otherwise we will be the ones left without a chair when all the music stops.
Cory’s Chart Corner
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