May 21, 2007
CHINA DISCOVERS PRIVATE EQUITY
Minds will differ on the implications, but the fact that the Chinese government has jumped on the private equity/alternative assets bandwagon is a sign of the times.
It remains to be seen if China's $3 billion investment in the Blackstone Group signals a top, or the next bull phase in liquidity's big adventure. While the world ponders the issue, we can at least state the obvious: the global economy has more cash than it knows what to do with. Beijing in particular is swimming in it, so why not put a bit into private equity?
"With all the money that has flowed to China and the cash they've built up, they're looking for ways to put it to work,'' Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College, told Bloomberg News.
Strategic-minded investors can only sit back and wonder what the effect of all the liquidity will be down the road. Perhaps there really is a pot of gold at the end of this rainbow. For the time being, notions of anything less are out of favor.
One can certainly make the case that it's all perfectly reasonable. China already holds $1 trillion-plus in dollar reserves, and let's face it: how many more Treasuries can a retooled communist state buy? The fact that the American dollar suffers bearish expectations for the long run certainly won't inspire going off the deep end to buy something approaching pure greenback exposure.
Diversifying one's portfolio is, of course, reasonable and essential. For those of us who assume the future's full of surprises, multi-asset class investing is the only way to fly, an idea that's now grabbed the thinking of those who run the world's fastest-growing big economy. But the question of what to buy, when to buy, and how much of the portfolio to commit are questions that are perennially topical and forever unclear. So it goes with managing risk.
Still, one has to be cognizant of history, even if it dispenses an imperfect guide to the future. That said, the past suggests that as money chases performance within a given asset class, opportunity recedes in proportion. The search for improved risk-adjusted returns is necessary and natural, but today's expectations for progress may become tomorrow's disappointment if the world rushes into greener pastures.
Returns are only unlimited if performance is defined broadly as a dispersion around a mean. Informed investors recognize as much, and it's that worry that's fueling the appetite for something new, something different, something uncorrelated with the usual suspects. The threat motivates investors to look further afield, which threatens to reduce risk premiums, which then spurs looking further afield. Round and round we go.
A vicious cycle, and one that's been going on for decades in its present form. In the 1950s, investment-grade bonds were equated with enlightened money management. In the 1960s, equities began attracting a wider following as an asset class worthy of more than rank speculation. In the late-1980s, David Swensen began pushing the boundaries further by redeploying the Yale University endowment portfolio into areas that were truly alternative at the time. Twenty years later, private equity, venture capital, real estate and hedge funds are virtually mainstream ideas.
The appetite for risk, in short, has been in a constant bull market for 50-plus years. Investors have kept the game going by continually adding inherently riskier asset classes to the mix. One question that comes to mind in surveying the trend: is there an unlimited supply of new risks? Financial engineers say there is.
Such treats may not be available in pure form to the man on the street, at least not yet. But tapping asset classes beyond domestic stocks and bonds is getting easier, thanks to innovations in ETFs, mutual funds and other securities such as exchange traded notes and structured products. What was available only to institutional investors in years past becomes available to the masses. And if the strategy or asset class isn't currently offered in a packaged product, be patient: it's probably coming soon.
The logic driving the trend of diversifying into a wider spectrum of assets is compelling, but the end result may disappoint relative to what we can see in the rear-view mirror. Nonetheless, the triumphs of the David Swensens keeps investors looking, and the financial industry is only too happy to assist by rolling out more product--or shares.
Indeed, Blackstone's IPO plans for going public next month originally anticipated minting new shares worth $4 billion. But now that China wants a piece of the action, Blackstone has raised its IPO deal to $7 billion, according to The Wall Street Journal.
Supply invariably expands to meet demand in a bull market. Alas, the game has shown an annoying tendency to work in reverse during the alternative market condition that also starts with a "b".
Posted by jp at May 21, 2007 9:29 AM
Just remember that you cannot buy house insurance when your house is ON fire. Note that the folks who "invested" during the tech boom of the nineties are still working (ie. they didn't retire on their supposed gains) and i expect the same from those investing in all the non-vanilla stuff now on offer. So your downside in avoiding the flavour-of-the-day is not that great, to my mind. Investing is not about excitement, it's about buying cheap and selling dear, and if the latter opportunity is not evident, then stay in cash. Carry on,
Posted by: franko at May 23, 2007 9:21 AM