At a private equity conference recently, I was struck by the effort taken to paint a balanced picture of the investing environment. Given their success over many market cycles, but in niche industries, it was perfectly appropriate to discuss the balanced and strategic approach to the unchartered waters of the pending dislocations in the financial markets. They remain confident they have the tools and intellectual capacity to navigate the pending rapids that will capsize many. They have their best river captains in long standing employees and portfolio partners.
What struck me was collective sigh of relief on faces that “things are good, not great, but good.” But when they return to their investors and various committees, their positive affirmations will essentially highlight the structural integrity deterioration in assets managed by most others in the room who will effectively be wondering whether their specialized and unique professional skill set will support education payments and mortgages.
Here is my question: If the commercial real estate market experiences even 50% of the impairment feared who will really be hurt? If the wash, rinse, reinvest formula of private equity and real estate investing slows distributions, values are marked down by amounts not seen prior, and full monetization’s are extended by years, who will bear the pain? Clearly banks will consolidate and after the wheat is separated from the chaff, bankers will put another monogramed tote bag in the closet for their grandchildren to throw out later. Spoiler alert, Drexel swag is worthless along with Bear Stearns and Lehman.
The obvious loser is the massive pension plans and sovereign wealth funds. But what scares me is the amount of potential selling of liquid assets like stocks and government debt that may need to be sold to put plans back into the indiscriminate and fabricated iron clad asset allocations. What does the value of the massive number of vacant buildings in NYC have to do with consumer staples? Is asset allocation now the driver of relative analysis or even intrinsic value? The economy and financial markets are forever glued, but the structural integrity of the adhesive seems to be giving way.