One of my favorite things to read each quarter is the earnings call transcripts from the leading private equity and investment management firms. Hearing what these smart and patient investors are thinking and doing in the current environment is a huge help in framing my own view of the world. I have stolen many ideas from the private equity and distressed folks over the years -- and far more have worked out in my favor than not.
This weekend I sat down with the transcripts from several of these firms and dug through them while watching a little college football and the World Series.
Apollo Global Management's (APO) call is one I look forward to each quarter. Josh Harris and Leon Black are very smart, very successful investors and I usually come away with at least one potentially big profit idea.
On the call Harris discussed the volatility we saw in the markets last quarter, especially in the energy sector. He said, "During these times, you should expect our contrarian style of investing to drive us to lean into situations from which others may shy away. In certain cases where market values are falling, but our conviction remains, our funds are buying more."
He addressed energy specifically saying, "During this period of dislocation, where pricing of the underlying commodity has declined significantly but industry participants haven't yet fully absorbed the impact, we are tactically picking our spots and working to identify buying opportunities. We continue to believe this is a very attractive area to be raising and investing capital, and our expectation is that the opportunity set for deployment will expand over the next 6 to 18 months."
Focus on that last sentence very carefully. The only way for the opportunity set for capital deployment to improve is for oil prices to stay low and possibly fall further over that timeframe. After digesting this, I found it interesting when I read yesterday that Hans Jakob Hegge, CFO of Norwegian energy company Statoil (STO), said he now thinks that it may be 2018 before we see oil prices improve. Those approaching oil and oil stocks need to have a very strong stomach and a very long timeframe in order to earn the outsized profits I believe will eventually be achieved.
Apollo's Harris also addressed the real estate markets. He said, "I would say in the U.S., there's selective, opportunistic real estate opportunities. Some of the core markets are getting at this point in the cycle, as you might expect, relatively fully valued, so we're playing, in some cases, we think the arbitrage between some of the core markets and some of the secondary markets is interesting. And we're looking in some of those secondary markets. "
That has been my strategy of late with real estate securities as well. The larger REITs are getting fairly pricey and I have considered them overvalued for more than a year now. I prefer to focus on REITs such as Ashford Hospitality Trust (AHT), BRT Realty (BRT) and the single-family home REITs like American Homes 4 Rent (AHM) and Silver Bay Realty (SBY). Wall Street could care less about these firms and the valuations are still attractive.
Apollo also thinks that rising rates or even the perception of rising rates would help create opportunities for patient investors. Harris replied to a question about rising rates saying, "I think a lot of what's driving what is an overvalued environment, as at least I believe and have said many times, is the excess liquidity in the market, starting with the quantitative easing that's going on. And so even the perception that rates are going to go up creates volatility and pullback in the credit markets, which ultimately helps across credit immediately because we buy stocks at higher returns and private equity over time because prices come down."
I hope he is right as we continue to sit on a ton of cash and would love to get it invested in a bunch of safe and cheap opportunities.
Like us Apollo is awash in cash. It currently has $30 billion of uncalled capital to eventually put to work. As Harris put it on the call, "Clearly we have been betting that there will be more volatility and lower values over time. And clearly, lower for longer is not good. We're a value investor. Lower for longer is not a good environment for a value investor, period, full stop." That is an issue with which I am all too familiar of late.
Reading the reports of leading private equity firms can help clarify our thinking and uncover new long-term opportunities for profits.