Last month we looked at what the big Private Equity funds are doing with their capital.
To recap, the big three were making bets on the reopening of the economy, real estate, India, casinos, and the digital economy.
You can read those updates (Part I: here), (Part II: here), and (Part III: here).
Today though, I want to discuss what I found by looking at all three firms’ latest 13F filings.
What most people don’t realize is that many Private Equity firms also have large portfolios of public equities. This can be due to a lot of reasons, such as companies they invested in privately going public, Pre-IPO investing, or special situations.
Furthermore, the track record of these public assets held in these Private Equity funds often rivals their own performance in private companies. In other words, historically speaking, their returns on publicly traded stocks are pretty darn good.
Let’s dive in…
The Investment Every Fund is Making
This quarter, one theme dominated what these Private Equity funds were investing in…
In fact, this theme dominated most of the Private Equity “smart money” including Seth Klarman at Baupost, Boaz Weinstein at Saba Capital, Jeffrey Smith at Starboard, and Phillip Goldstein at Bulldog. EJF Capital and the brilliant folks at RiverNorth were also going into this trade in a big way.
Even Michael Price, the old school activist value investor, was involved in this trade.
They all are buying SPACs in a big way.
I’ve described the best way to invest in SPACs around a dozen times here on this site and, once again, it’s clear the top traders are following the exact same method.
They are either buying into the IPO or at a discount in the aftermarket.
If the price goes up when a deal is announced, they ring the bell and make a profit. If it doesn’t, they redeem the shares and get their money back.
Many of the funds sell their warrants, so the proceeds represent a small profit even on the worst deals.
Done correctly, this strategy produces market-beating returns that consistently outperform other arbitrage strategies.
Because of the redemption feature that gives investors back their money if they don’t like the deal, the risk profile is somewhere in the neighborhood of a high-quality bond.
Huge Bets on Inflation
All three PE funds also invested in companies and financial instruments that will benefit if we see inflation rear its ugly head anytime soon.
KKR is betting the most on inflation by loading up on floating rate Closed-End Funds (CEFs). Floating rate loans adjust higher based on interest rates. If rates go up, so do the payments the borrowers have to make on the loans. This offers some measure of protection against higher inflation and higher interest rates.
KKR is buying these CEFs at a discount to Net Asset Value (NAV), so both the closing of the discount and the stream of cash from the loans in the fund give them two sources of return.
Suppose for a second that we do get a decent level of inflation. In that case, many of these funds will flip from a NAV discount to a premium, giving shareholders a shot at a double-digit return from a fixed income investment when most income funds are losing money due to rising rates.
The CEFs KKR bought include Voya Prime Rate Trust (PPR), Nuveen Floating Rate Income Opportunity Fund (JRO), and Nuveen Credit Strategies Income Fund (JQC).
They also made a large investment in the Invesco Senior Loan ETF (BKLN) to gain additional exposure to floating-rate loans.
In addition, KKR made an add-on purchase in FSK KKR Capital (FSK), a BDC with 80% of its loans structured as variable rates. I have covered this fund in-depth here.
Bets on Energy and Real Estate
All three funds this quarter made huge bets slanted towards energy and real estate.
For example, Apollo bought VICI Properties (VICI) and EPR Properties (EPR)… Blackstone bought Vine Energy (VEI) and First Industrial Realty Trust (FR)… and KKR bought Kilroy Realty (KRC).
These are investments that would benefit enormously if we see strong economic growth leading to inflationary pressures.
We Stand on the Shoulders of Giants
I’ve said it before, but I’ll say it again…
These Private Equity giants invest ahead of the crowd and have historically found great success at doing just that.
Following the footsteps of the “smart money” and actually understanding their investment themes is a sheer way to make easy money in any market.
Since November of 2020, I’ve been compiling a list of value-oriented stocks that have Private Equity interest, similar to the assets we just discussed. If you want access to the portfolio, look no further.
Best,
Tim