If you spend enough time on Wall Street, you learn that there are two types of investors. Smart money, and dumb money. The smart money is always ringing the cash register and pocketing millions of dollars. The dumb money... well... they're not.
There's a little known third group of investors who don't fit in either category.
They're not dumb, but they realize they're not smart either. (Who said self awareness wasn't good?) So, they do the next most logical thing... they follow the smart money. They invest only where the smart money invests.
The hardest part about that strategy is figuring out where the smart money is investing.
Every so often we get a glimpse. Today, we got such a glimpse at what some of the smartest on Wall Street are thinking. Think of it... being able to invest alongside some of the smartest investors in the world.
Goldman Sachs (GS) announced they'd raised $5.5 billion for a new investment fund. The fund is called GS Vintage Fund V. It's a dedicated private equity secondaries fund.
Ok, two questions... Why follow Goldman? And what's a secondaries fund?
First, Goldman. The name should send shivers up your spine. When I was in banking, we used to joke that their business cards landed with a thud... while ours just floated. They carried more weight in the banking world than any other firm out there.
The entire firm is filled with the best and brightest and they all know how to make money.
Think about recent history... Goldman was smart enough to get into mortgage backed securities, sub-prime loans, and CDOs as the industry was getting hot (they made lots of money). Then they were smart enough to see the bubble and get out. They even shorted parts of the industry before it peaked (which made them even more money). I don't know about you, but that's a pretty smart move in my book.
Think of all the money you could have made by following their moves.
So, what's this secondaries fund they just established?
A secondaries fund is a pool of money set up to buy out other investments in private equity funds. I know it sounds complicated... but think of it this way.
If you're a giant pension fund, insurance company, or college endowment, you need to invest your assets. One big way to invest is through private equity. Think of big investment funds like KKR, Blackrock, and The Carlyle Group.
Here's the catch... when you hand these private equity managers your money, they require you to leave it there for 7 to 10 years or more! These investments aren't like stocks. You can't trade in and out of them every day. If you need to sell your investment for some reason, you need to find someone to buy it.
Normally, when a long term investor needs to exit a private equity investment there's a reason... like they need cash. Because of that the buyer gets to dictate the terms of the deal and write his own check! Nice work if you can get it.
It's a lot like the real estate market today. If you have a big wad of cash and want to buy a bank owned house, you can name your price. Same thing for Goldman with the secondaries fund... If somebody needs to sell, Goldman will be happy to buy... at forty, fifty, or sixty cents on the dollar. (I told you these Goldman guys were smart.)
Plus, they only buy when the underlying investments look good.
Remember, private equity takes investment dollars and buys companies... they often make them more efficient and then look to resell them for big profits. So before Goldman will buy, they'll look at the underlying investment... if they like what they see, it's a chance for them to make even more money.
So how can we make money off this?
Unless you happen to have a few hundred million in cash lying around, buying secondaries directly is going to be a bit difficult. Ok... impossible.
But Goldman is shining a light on one part of the market that deserves a second look.
The asset managers.
Think about it. The investments many of these private equity funds have made are in solid companies. That means when prices return to normal, buyers will see these investments pop in value. But let's peel back the onion one layer more.
The asset managers also benefit when the underlying investment does well. So the big score for guys like KKR and Blackstone comes when they make big money for their investors. Right now, these funds are being shoved into the wood chipper with the rest of the market. Just look at the charts on The Blackstone Group (BX), and Och-Ziff Capital Management Group (OZM).
As the market rebounds, so will their investments... and that means big returns for the money managers. And don't forget Goldman in all of this. If they're right, they stand to profit handsomely. Take a look at these asset managers... especially Blackstone. I can see them driving big gains in the next few months and years as the market recovers.