The $3 Trillion Private Equity Bubble is Finally Bursting
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- Опубліковано 6 жов 2024
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There has been a lot of talk about how the US real estate market is in a bubble. But people are getting it wrong. The real bubble is in a little corner of the finance industry that is unknown to the average person. This industry has trillions of dollars in assets, and the companies it owns employ roughly 12 million Americans. The industry that I’m talking about is Private Equity. In this video we are going to cover how this bubble in private equity formed, when it could burst, and most importantly what this means for the economy.
Private equity has long been considered the gilded class of high finance. Its big bets and ginormous pay days are the envy of Wall street. Private equity firms such as Blackstone, KKR, and Carlyle are considered some of the most prestigious companies in the entire world. Even relatively junior employees at these funds can see their pay approach half a million dollars annually with senior investors regularly taking home 7 figure paydays.
Yet for all their savvy dealmaking, even the titans of private equity are getting caught off guard by the swift rise in interest rates. Higher interest rates are costing companies owned by private equity billions of dollars in higher interest payments and threaten to push many of the portfolio companies into bankruptcy. The consequences of which would be devastating to investors, the economy, and the millions of people employed by these companies.
*Disclaimer: Neither this video, not any content produced on this channel should ever be considered investing advice or official financial advice. All content is made for entertainment and educational purposes.
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You look for companies that have value, and leverage all the equity in that company.
In fact, you loan them more than they're even worth... what could go wrong?
I love you experts... what sort of bailout you have in mind this time? Going with the great reset everyone is talking about?
Hindsight says you're using same ploy as a century ago, swallowing up banks for pennies per share (First Republic was $140 stock, Chase got for 25 cents each)
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Another "unintended consequence" of ultra low interest rate policy and excess leverage.
In the example FIRM A borrows 800 K per house but never pays any interest on that debt. That’s unrealistic. At current rates they would pay at least 8%. That’s 64 K on top of the 800 K. 64K x 5 = 320K. So instead of One Million profit they received 680 K profit. Big difference
Just a simple example to show the power of leverage.
@8:00 "The Interest rates were low and the Private equity people thought this would be a permanent fixture of the market" ??!!?? OMG - - Get the heads of these firms into a financial history class .... Are they that unaware of what the FED Reserve does??? Do they not know how rates have fluctuated over the years and how under Carter they were as high as 10%12%????
Very fair point. To play devils advocate, many people were saying 0% interest rates were the new normal
@@InvestorCenter I do appreciate your information and am thankful that you are giving insight as to how various firms are operating.
But Please Please ... do not listen to those people who think there will never movement in the market ... Financial markets are as changeable as the weather ... Yes you know that winter is cold and summer is hot in the long term, but that thunderstorm, hurricane, flood can show up next day ... talk to the tulip people of the Netherlands in 1637 or the investors in 1928 and what they thought was the "New Normal" ... Just be careful and know that reversals do happen ...
Agree. The only constant in the economy and investing is change. When the first Covid “stimulus” payments were made, I started screaming about inflation and the impact on interest rates. Not rocket science to see that coming.
Would these firms not take fixed interest rates to lock in low rates?
Informative Video... Thumbs Up....Thanks.
Thanks for watching :)
I work at one of the MFPEs out there. We are getting burnt really badly given the floating rates. Super accurate, although the 90% LTV is likely impossible. We see 4-6x ebitda or 60% LTV in most cases
Very interesting perspective! What is your role at the firm? Also, the 90% LTV was an exaggeration to demonstrate the point
@@InvestorCenter hey there didn't expect to get a reply. I'm an investment professional, aka excel and memo monkey. Great video keep it up. Imo the PE industry cannot rely on debt going into the future given debt levels and the intense competition, ie there are far too much dry powder chasing good deals. There are only so many stable businesses with moats that generate recurring cash flows to service their debts.
@@kemingyu4266 that’s a great role. I work at a long only hedge fund
@@InvestorCenter Ah the be all end all (supposedly). IB>PE>MBA>Tiger Cub>LO PM. Not that I agree though.
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I just thought the same.
That is why the oldest and most prestigeous PE firm Thomas H. Lee Partners, LLC. FOUNDR commited suicide, few months ago.
Seems like private equity has a lot of debt that has to be re set in the next couple of years. At these rates debt coverage ratios are just not there. This kind of debt could defiantly pop the bubble!
Ain't the PE firms with the debt, it's the companies.
good educational video - would be nice to have more of these even if covers the basics. Thank you.
Love the content! So much good info, but why the creepy background noice? Feels like a horror movie vibe
Trying to make the video more engaging from an audio/visual standpoint. Thanks for the feedback!
WRONG. They have unlimited money it can't burst. Every economist has been saying this for years while PE owns literally every market.
It’ll burst if the wrong president is in charge because they didn’t fund their campaign
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Excellent video! Thanks so much for your insight and wisdom!
This is interesting. Please more!
Glad you enjoyed it!!!
Not that it matters but wouldn‘t it be more accurate to call Profit from selling Equity because the pure Profit in both examples is 200k (1.2 - 1) whether it‘s 5 or 10 houses?
You’re 100% correct. That was an error that slipped by myself and the editor
Great presentation.
Thank You
Welcome!
thanks for all this information.
“Alternative” is scary enough for an investment. Heck, Carlyle used to be the gold standard, but when it went public that should have been a warning.
Seems like we always try to pay later, ine day it won't be anymore room to do that.
Some clever ones have sold their duds further into other companies saving not only their asses, but some of those who invested in them, there are lot out there who did that last 10 years or so.
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Hi I like the video, but why did you not show a cost for the mortgage to buy the properties?
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I have a question. Is the definition of private equity used throughout the video consistent? For example, I own a significant interest in two businesses that are privately held. Hence, private equity. We have no Wall Street money, just 8 and 4 people at risk. But we would fit the layman’s definition of private equity. Do you know what definition your sources used?
Private equity means the asset is structured as a securities.
It ain't that at all. Look it up.
What are stocks or ETFs to monitor that ate tied to that $3 trillion private equity funds?
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So will these lead to massive sell offs of homes?
If I'm a millionaire, I'm just dumping my money into the S&P 500. Why would I do business with these scam artists for a lower ROI?
Great vid
Too Much people . I mean, avoiding single action.
Using an lbo don’t mean it a PE
I've seen that the level of dry powder in the industry is all time high. I know dry powder is used to do opportunistic purchases but in case of a default a fund could used such reserves to pay down their debt?
I don't believe you can rob paul to pay peter, but what do I know
Does Black Rock buy Bitcoin?
Do I miss something at 5min and 10 sec: 'Profit from selling' of 400k/house where the true difference between 'Original House Value' and 'New House Value' is only 200k? The downpayment up front of 200k is left out of the calculation? Why?
Thanks for the comment! It was a typo. It should say “cash proceeds from sale”
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The background noise in the video is loud
God I hope so, these ppl are scumbags. Idek know how it’s legal to do these leveraged BOs and not hold any accountability to the debt in the account
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Excessive babbling-rambling talk that's indiscernible with a squeaky voiced irritable speaker
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