The Private Equity Mindset, Japan (Again) and Real Estate Rising
Everybody wants to be the steely-eyed trader calmly and coolly making millions in a series of lightning-fast trades flawlessly and ruthlessly executed.
Sadly, the skill set and temperament to achieve that goal is beyond most of us.
That is not a bad thing.
Most of us do not have the skill or mindset to start in center field for the New York Yankees or suit up as the starting quarterback of the San Francisco 49ers either.
We can, however, emulate a class of investors that have consistently delivered high rates of return, making both themselves and their investors rich in the process.
According to CEM Benchmarking, the highest returning asset class has been private equity.
The very best private equity firms deliver returns that are consistently as much as twice the S&P 500 over time.
The formula is very simple and can be executed by everyone willing to adopt a private equity mindset.
The investment approach used by the very best private equity firms is ripped right out of the playbook of Hetty Green and Warren Buffett.
Buy good things when no one else wants them and sell them when everyone is begging to buy them.
That is the core of the returns earned by the very best investors like Buffett and Templeton, and it is also at the heart of the high returns earned by the best private equity managers.
It is not like it is a secret.
Every quarter I listen to the conference calls from the largest publicly traded PE firms, and they tell you how they do it on almost every call.
Last week, Steve Schwarzman of Blackstone said on his call, "Some of the best times to deploy capital are in a risk-off world when sentiment is most negative."
This is perhaps the hardest principle for most investors to follow, but potentially the most rewarding. When headlines are screaming doom and gloom, and your neighbors are selling in panic, that's often precisely when you should be buying quality assets at discounted prices.
Marc Rowan of Apollo pointed out that "Purchase price matters in all markets."
He repeatedly emphasized that entry price is critical in both debt and equity investments.
Rowan also opined that "Hope and prayer we have found to be very poor business strategies."
On KKR's call, CFO Rob Lewin suggested that "KKR is always going to make the decision to side for long-term economics, even at the expense of short-term P&L."
This all sounds a lot more like Ben Graham than Gordon Gekko.
The executives at the three firms also told us exactly where they are investing, and all of their preferred opportunities can easily be replicated by individual investors.
The top areas of focus are:
Digital Infrastructure - The explosive growth in AI and cloud computing continues to drive demand for data centers and related infrastructure.
Energy - Both traditional and renewable energy investments are seeing increased interest from these sophisticated investors.
Japan - After decades of stagnation, corporate governance reforms and economic changes are creating investment opportunities in Japanese companies.
Private Credit - While direct access is limited for most individual investors, there are public vehicles that provide exposure to this growing asset class.
Real Estate - Despite higher interest rates, select areas of commercial real estate are showing signs of recovery, particularly as new construction remains subdued.
I have talked on several occasions about opportunities in Japan, and it is nice to see that the big guns of Private Equity agree with me.
Japan has become a hotbed for dealmaking, with global funds increasingly seeking Japanese investment targets viewed as having poor corporate governance or underutilized assets that could be reformed to increase shareholder value.
The country has seen significant inbound M&A activity, with $81 billion in deals as of October 2024, a 17-fold increase from the same period in the previous year.
A growing number of Japanese firms under pressure from activist investors have recently chosen to go private, creating opportunities for private equity firms like KKR. Japan's corporate governance reforms, rising shareholder activism, and a weak yen have created a favorable environment for dealmaking.
Japan's economy is experiencing what KKR describes as an "economic renaissance," including an exit from deflation. Japanese corporations are increasingly looking to unload non-core assets in a broader bid to improve shareholder returns and profitability, creating opportunities for firms like KKR.
Real Estate is also getting a lot of attention.
Blackstone CEO Steve Schwarzman noted that announced tariffs are likely to drive up construction costs and further reduce new supply, which is actually supportive for real estate values absent recessionary conditions. Construction starts in their two largest sectors in real estate (US Logistics and Apartments) have already fallen to their lowest levels in more than a decade.
All three noted that leaning into periods of market dislocation and volatility should be profitable for investors who focused on valuation and credit and were willing to be patient.
CRO Scott Nuttall at KKR pointed out that "volatility brings opportunity" and that "times like this yield some very attractive investment opportunities." He noted that "we typically look back and wish we had invested more when the world is most uncertain."
Ignore all the headlines about the evils of private equity firms and focus on the fact that they consistently make money.
We can invest with the same mindset without having to pay their fees.
Best of all, every few months the best PE managers will tell us exactly where they see opportunities.
Buy cheap, own businesses (and banks), and focus on financial strength.
It is simple, effective, and wildly profitable.
Next month the 13F filings are due at the SEC, and we can use them to see exactly what companies and assets these ridiculously successful investors are buying and selling to take advantage of what they see happening in the world.