The private equity business is simple: using large amounts of debt, buy a company at a low multiple of cash flow, increase the cash flow and then exit at a substantially higher multiple. The combination of cash flow and multiple expansion, juiced by leverage, has produced spectacular returns, leading investors to pour more and more money into the sector, fuelling the record- breaking level of activity. As Warren Buffett pointed out at the recent Berkshire Hathaway annual meeting: “If you have a $20bn fund and get a 2 per cent fee, you’re getting $400m a year. But you can’t raise another fund with a straight face until you’ve invested it, so there’s a great compulsion to invest it quickly so you can raise another fund and get more fees.”
Knowledge grows through sharing! To be the best, learn from the best! May all your dreams come true! Collections of Value Investing articles, interviews and videos, especially on Warren Buffett and Charlie Munger and articles from various disciplines to build "Latticework of Mental Models"
Wednesday, June 27, 2007
Whitney Tilson: Buyout Binge Is Sign of Good Health
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