Bloomberg Businessweek - USA (2020-06-29)

(Antfer) #1
◼ FINANCE Bloomberg Businessweek June 29, 2020

24


● A decisionbytheU.S.DepartmentofLaborcould
opena newmarketforbuyoutartists:You

PrivateEquityMaySlide


IntoYour401(k)


operations, which eventually closed, and added
companies such as insurers, which generated pre-
miums he could use to make other investments.
This is essentially a cheap way to borrow money,
and was an important part of the Buffett recipe.
In 2000 hesnappedupMidAmericanEnergy,the
keybuildingblockinhisnowsprawlingenergy
operation.Headdedtherailroad BNSF in 2010 in
a famous crisis-era deal. With the additional pur-
chase of Precision Castparts in a deal valued at
$37.2 billion more than four years ago, Berkshire
became a company with a  huge concentra-
tion of its operations in industrial sectors.
“Berkshire is obviously much larger, therefore
it will grow more slowly, but it is also much more
defensive than it used to be, and that has value to
many investors,” Armstrong says. “I can’t think of
a better-positioned company to own if you believe
that bear markets and recessions have not been
permanently eliminated by some magic force.”
They certainly haven’t been. But the latest epi-
sode of market volatility was curiously unfriendly
to Buffett’s opportunistic style. In the 2008 finan-
cial crisis, companies such as Goldman Sachs
turned to Berkshire because of its huge amount of
capital and Buffett’s reputation as a white knight
investor. This time, the window for him to swoop in
and do deals on the cheap slammed shut almost as
soon as it opened, thanks to strong intervention by
the Federal Reserve to keep interest rates low and
ensure that companies could continue to borrow.
“There was a period right before the Fed
acted, we were starting to get calls,” Buffett said
at Berkshire’s meeting in May. “The companies we
were getting calls from, after the Fed acted, a num-
ber of them were able to get money in the public
market frankly at terms we wouldn’t have given.”
Berkshire still has advantages few other compa-
nies or investment portfolios can replicate. It can
take the cash generated by any business it controls
and redeploy it to other operations. Take See’s
Candies, a confectionery maker that Buffett bought
in 1972 for $25 million. Since the purchase, the com-
pany had earned $1.9 billion pretax and required
just $40 million in additional investments, Buffett
outlined in his annual letter released in 2015.
Berkshire ended up putting that leftover money to
use by buying other businesses. “Envision rabbits
breeding,” Buffett said in the letter.
Berkshire also has unique risks, such as the ques-
tion of who will eventually succeed the 89-year-old
Buffett. Given that, skeptics such as Rolfe argue that
investors who want exposure to some of the busi-
nesses that make up Berkshire, like Geico or BNSF,
can invest in their publicly traded competitors.

THE BOTTOM LINE Berkshire Hathaway isn’t growing as fast or
finding as many monster deals as it used to. It’s not that Buffett has
lost his touch but that the business has changed.

The Trump administration has cracked open the
door for private equity funds to get into 401(k) work-
place retirement plans. There’s roughly $5.6 trillion
in such accounts, and the prospect of capturing even
a sliver of it has the industry abuzz. A more com-
plicated question is whether ordinary investors will
really want their money going into buyout funds.
Private equity is a different beast from the mutual
funds retirement savers are familiar with. PE manag-
ers often buy companies whole, financing the pur-
chase with debt that ends up on the books of the
companies themselves. That adds to potential prof-
its but also to risk and complexity. Funds tend to
have long lockup periods, during which investors
can’t get their money out, and charge high manage-
ment fees as well as take a share of profits off the top.
The U.S. Department of Labor, which oversees
retirement plan rules, on June 3 issued guidance
that’s been taken as a green light to include PE funds
in some plans. It doesn’t say that workers should
suddenly get an option to pick one by themselves.
Rather a PE fund might be included as part of the
portfolio of another diversified fund.
“This really sets the stage,” says Jonathan Epstein,
founder of the Defined Contribution Alternatives
Association, a trade group that’s pushed for allow-
ing more kinds of investments, including PE, in
401(k) plans. One possibility is making PE part of a
target-date fund, a popular option that mixes invest-
ments in stocks and bonds and gradually reduces

Buffett’s many remaining fans still see an
opportunity to own, in one stock, a collection of
businesses that’s hard to match. “They are in com-
pletely different industries, they are affected by
different forces to a large extent,” Armstrong says.
Along with that comes “a group of stocks, plus a big
amount of cash, and that cash is allocated by peo-
ple who have a demonstrated track record in doing
it well.” �Katherine Chiglinsky

“The problem
is these
numbers are
not what you
think they are”
Free download pdf