How can you tell a Private Equity Executive in the swimming pool?
He is black and blue from patting himself on the back so much.
PAPERS
I Allege that Blackstone is using deceptive sales practices in retail distribution.
The SEC and State Regulators are on it. I feel the public should have the information.
"We have seen a number of proposals, from private equity funds where the returns are really not calculated in a, in a manner that, uh, well, I, they're not calculated in a manner that I would regard as honest"
Warren Buffet 1/8/23.
Warren Buffett: Private Equity Firms Are Typically Very Dishonest - YouTube
(I had it transcribed in the IRR-101 section.)
The SEC states in the federal register that the IRR which results from the subscription line is artificially high. Here is how it works.
If a PE firm buys a lemonade stand on 1/1/23 for $100 and sells it on 12/31/23 for $110, the IRR is 10. If you make $10 over 365 days, you get a 10 IRR. To get cute, the PE firm borrows money from a bank on 1/1/23 and buys a lemonade stand for $100 and sells it on 12/31/23 for $110. However, the PE firm only asks the investor to send in money on 12/30/23. The investor sends in $100 on 12/30/23 and gets back $110 on 12/31/23. Since he "made" $10 in one day, his IRR is now 100. That 100 IRR is what is on the pitchbooks- it looks like performance but it is illusory (Howard Marks term). As the investor pays back the bank - the 100 IRR turns into a 10 IRR. "Early IRR" is high and fake, "late IRR" is low and real.
The SEC has fined various PE managers for undisclosed fees. Will the focus of future enforcement actions be something far more serious.....fake performance? Castle Hall Diligence: 7/12/18
"Private Equity Funds don't beat the S&P"- Private Equity specialist at a top 5 wealth manager. (1/21)
In a July 2017 article, the Financial Times wrote about "Private Equity's Dirty Secret" - the subscription credit line. Per the article: This little-discussed technique, known as subscription-line financing, helps private equity managers earn performance fees because one of their funds’ key assessment metrics, the internal rate of return, is based on the date an investor’s cash is put to work. “This sleight of hand artificially raises the fund’s apparent performance but it does nothing to increase the actual returns earned by investors,” says Jennifer Choi, managing director of industry affairs at ILPA.
FINRA 2210 (d) requires PE firms to clearly explain what the performance numbers on the pitchbooks mean. They are prohibited from using footnotes. PE firms pretend on the pitchbooks that IRR is performance. Because of the FINRA 2210 violation and the Reg BI violations (above) , I believe that the investors in these funds don't have to fund capital calls. Ask for the real performance numbers before you invest.
Hey, Kurt ...... IRR doesn't mean (Expletive)...I mean it really doesn't mean anything....not until at least 10
years of a funds life (and depending on the fund), it can be meaningless until the end (of the 12+ years)
life of the fund......- I don't want the clients to hear this. recorded conversation (05/21) with
an experienced Blackstone salesperson. He is selling every day to "sophisticated" QP's.
IRR is tricky. Blackstone states that they have made 15% in PE since 1987. What does that mean? There are 35 years at 15% or 525% growth.
A. Does that mean that an investor who put in $1,000,000 in 1987 and re-invested his profits has
$133,175,523.42 in 2022? He compounded his money at 15% for 35 years. I think a reasonable
investor thinks this is what Blackstone's means.
B. Does it mean that when Blackstone started in 1987 and an investor put in
$1,000,000- there was no competition so the investor made a 400% IRR in 1987. In 1988,
he had $5,000,000. The competition starts. For for next 34 years, that $5,000,00 makes 3.67%
(125%/34) annually. In 2022, that investor has $17,028,459.26.
C. Does that mean that Blackstone has no idea what the dollar value today would be because
there are so many variables in IRR that it is meaningless to quote it over a 35 year time period.
To repeat myself, according to FINRA 2210(d), they have to explain what they mean so their investors
understand it and they can't use footnotes.
I challenge Blackstone to a long bet. I bet the actual performance of the Blackstone funds will be well below the 15% (or other target) that Blackstone claims. I believe most PE funds won't beat the S&P. I believe what I am telling is the truth. I have no ill-will towards Blackstone. I would be thrilled to meet anyone from Blackstone and discuss my allegations.
I challenge Blackstone to publish their returns- month by month over a 12+ year "high school" to "4th year pro" chart like I have above.
- Kurt Stein
201-822-9658 (office)
917-533-6912 (cell)
steinkurt@gmail.com
I was a source for /mentioned in the following articles.
https://www.nytimes.com/2021/12/04/business/is-private-equity-overrated.html
Everything on this website are allegations.