generic Warren Buffett: Private equity is 'not as good as it looks'
Warren Buffett isn’t a fan of private equity and the way leverage has been increasingly used over the years while investor protections have lessened.
Private equity is "not as good as it looks,” the Berkshire Hathaway (BRK-A, BRK-B) CEO said at the 2019 Berkshire Hathaway Shareholders Meeting on Saturday. “If I were running a pension fund, I'd be very careful about what is being offered to me,” said Buffett.
"I would not get excited about so-called alternative investments,” he said, explaining that the supply and demand factors using leverage to purchase businesses have changed dramatically over the last 10 or 20 years. Specifically, he notes that covenants to protect debt holders have deteriorated over the years.
Pension funds commonly invest in private equity (PE) funds because of the nominally high returns they offer due to the leverage they employ. However, Buffett reminds investors that PE funds require money to be reserved, or “on call,” in the form of Treasury Bills, which is often not included in performance statistics.
‘All they’re doing is lying a little bit’
"It's not a fair fight when a bunch of public officials are listening to people who are paid for raising money," said Buffett.
Berkshire Hathaway Vice Chair Charlie Munger chimed in, saying, "All they're doing is lying a little bit to make the money come in.”
Buffett doesn’t have any plans to run Berkshire like a PE fund. "We're not going to leverage up Berkshire ... Had we [done so], we would have made more money over the years.”
Buffett explained why this is not his preferred strategy. “We've seen a lot of high-IQ people ruined,” specifically referring to Long Term Capital Management — a hedge fund that required a Federal Reserve-orchestrated bailout in 1998.
Regarding the fund’s demise, Buffett said, “It all turned to pumpkins and mice."
—
Jared Blikre is a senior producer and global markets reporter at Yahoo Finance. Follow him on Twitter: @SPYJared
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.
