Buffett model wins the day
Credit-market gridlock has trapped Stephen Schwarzman, who relies on lenders to fund acquisitions, while leaving Warren Buffett free to pursue the debt-free deals that have helped make him the world's richest person.
By Bloomberg |
NEW YORK: Credit-market gridlock has trapped Stephen Schwarzman, who relies on lenders to fund acquisitions, while leaving Warren Buffett free to pursue the debt-free deals that have helped make him the world's richest person. Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway, has $59 billion in cost-free money from insurance premiums to invest. Schwarzman's New York-based Blackstone Group, manager of the biggest private-equity fund, is being forced to bypass Wall Street banks after they stopped financing most leveraged buyouts.
Buffett and Schwarzman each takes a different approach to the same goal: finding companies they consider undervalued. Investors are betting that Buffett's model will prevail, at least for now. Berkshire climbed 5.4% since the subprime-lending crisis sent the Standard & Poor���s 500 Index tumbling as much as 19.7% from its October 9 peak. Blackstone dropped 43% in the same period.
���There's a massive, massive advantage for Buffett in this kind of market,��� said Guy Spier, chief investment officer of New York-based hedge fund Aquamarine Capital Management. ���All the leveraged finance has dried up, so he's going to have a much better time finding things to buy.���
Blackstone's vulnerability was underscored on March 10, when the company said fourth-quarter profit plummeted 89% amid what Schwarzman called a ���severe financial crisis���. Banks started pulling back from most LBO lending last June after as much as $400 billion in debt sat unsold on their books and losses from the subprime-mortgage market increased.
Without new loans, LBO firms struggled to complete deals, while declining bond prices forced Blackstone to write down the value of some of its holdings. The company is now contacting hedge funds and mutual funds in search of new financing, which usually accounts for as much as two-thirds of the price of an LBO.
Buyout firms such as Blackstone and New York-based Kohlberg Kravis Roberts relied on free-flowing debt to announce a record $745 billion of transactions last year, according to data compiled by Bloomberg. The pace has stalled in 2008, with $56 billion of announced deals through Tuesday, a 71% drop from a year earlier.
Buffett and Schwarzman each takes a different approach to the same goal: finding companies they consider undervalued. Investors are betting that Buffett's model will prevail, at least for now. Berkshire climbed 5.4% since the subprime-lending crisis sent the Standard & Poor���s 500 Index tumbling as much as 19.7% from its October 9 peak. Blackstone dropped 43% in the same period.
���There's a massive, massive advantage for Buffett in this kind of market,��� said Guy Spier, chief investment officer of New York-based hedge fund Aquamarine Capital Management. ���All the leveraged finance has dried up, so he's going to have a much better time finding things to buy.���
Blackstone's vulnerability was underscored on March 10, when the company said fourth-quarter profit plummeted 89% amid what Schwarzman called a ���severe financial crisis���. Banks started pulling back from most LBO lending last June after as much as $400 billion in debt sat unsold on their books and losses from the subprime-mortgage market increased.
Without new loans, LBO firms struggled to complete deals, while declining bond prices forced Blackstone to write down the value of some of its holdings. The company is now contacting hedge funds and mutual funds in search of new financing, which usually accounts for as much as two-thirds of the price of an LBO.
Buyout firms such as Blackstone and New York-based Kohlberg Kravis Roberts relied on free-flowing debt to announce a record $745 billion of transactions last year, according to data compiled by Bloomberg. The pace has stalled in 2008, with $56 billion of announced deals through Tuesday, a 71% drop from a year earlier.
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