by Louis Basenese, Small Cap and Special Situations Expert
Friday, November 27, 2009: Issue #1146
If there’s one investment approach that always yields the headiest profits, it’s when you go against the crowd – and are proved right.
Take oil, for example. Two summers ago, as oil prices were zooming higher, renowned oilman, T. Boone Pickens, predicted that the price – then at $140 a barrel – would hit $200 by the end of the year. Not to be outdone, Gazprom’s chief warned that oil was headed to $250 “in the foreseeable future.” Nearly every pundit on Earth put forth a similar view.
But I wasn’t buying the hype.
Rather, on June 17, 2007, I wrote this to my Contrarian Strategist subscribers: “I’m convinced [oil] demand will certainly fall if prices remain at current levels much longer. More so than strong growth in emerging markets can make up for… A pullback is overdue.”
Sure enough, prices promptly nosedived. For the record, I didn’t expect such a sharp decline (oil prices fell over 70% from their highs), but folks who acted on my advice pocketed a hefty profit.
Sadly though, few investors have the nerve to be true contrarians and consistently go against the crowd. I intend to change that, though. So grab a bottle of Maalox because I’m giving everyone who chickened out on oil a chance to make amends with a private equity investment.
But take note: This article likely represents your “last call” to ante up before everyone else catches on…
An M&A Rebound is Brewing… Minus One Major Player
When Warren Buffett recently gobbled up the remaining stake in Burlington Northern that he didn’t already own, the move officially put everyone on notice: Mergers and acquisitions (M&A) are back in a big way.
But truth be told, an M&A rebound has been brewing ever since July, with deal volume steadily increasing, particularly in the technology sector. Yet one type of buyer has been conspicuously absent: private equity funds.
This is important because these private pools of money fueled the last M&A booms in 2006 and 2007, accounting for almost 20% of global deal value. Yet this year, less than $20 billion in private equity deals have been announced. That’s a far cry from the over $250 billion worth of deals completed by this time in 2007.
As a result, most investors have written off the high-flying, high-profile dealmakers. But that’s a big mistake.
Why Private Equity Needs to Get Back in the M&A Game
Private equity funds play a vital role in our financial system. They provide a lifeline for troubled companies and help those firms struggling to maximize shareholder value to get some relief from Wall Street’s relentless quarter-to-quarter scrutiny by supplying cash for operations.
What’s more, private equity funds are not in as dire straits as many believe. On the contrary, in fact. Collectively, they’re currently sitting on over $1 trillion in cash to fund deals, according to London research house, Preqin. And as the economy improves, financing is becoming available again. This means they can leverage that $1 trillion to buy much, much more.
Most importantly, there’s an urgent reason private equity funds need to get back into the mix. They don’t get paid to sit on cash. They get paid to put it to work. And the market’s current bargains won’t last indefinitely.
Add it all up and although it’s contrarian, I’m convinced that private equity will return to the M&A scene with vengeance. It could actually be the biggest surprise of 2010 – and naturally, I’ve found a way for us to capitalize on it…
Jump Aboard the Private Equity Train With The Blackstone Group
I recommend you take a close look at The Blackstone Group (NYSE: BX). It’s the premier private equity firm in the world, with the talent and track record to back it up. As such, it’s privy to the choicest deals out there.
What’s more, it’s sitting on a cash horde of $27 billion – more than enough to service the small debt balance and fund new deals.
Management is preparing to exit prior investments, including Merlin Entertainments and Graham Packaging, freeing up precious time and resources to pursue and capitalize on new opportunities.
Blackstone’s fundamentals are improving, too.
- During the most recent quarter, the company beat expectations, posting a narrower third-quarter loss, as CEO Stephen A. Schwarzman indicated that the worst of the downturn has passed.
- Moreover, it reported a 50% increase in segment revenue, as management and performance fees checked-in at a much higher rate.
- Most important of all, Blackstone is going back on the offensive. In recent weeks, it purchased two mall properties from Glimcher Realty Trust, as well as bid on a stake in China’s fourth-largest life insurer, Taikang.
In the weeks and months ahead, I expect much more activity. But to be clear, owning Blackstone doesn’t mean we get a cut of the profits from every private equity deal. It only entitles us to the management fees generated as a result. But as the number of deals picks up, these fees should increase significantly, too… and bring share prices along for the ride.
The fact that shares trade well below the June 2007 IPO price of $31, and sport a dividend yield of 8%, only makes the opportunity more compelling.