Private Equity Dry Powder May Not Deserve Lighting

In the private equity world, just as is the case in the public equity markets, the time to buy is when others are fearful. That’s an old investment adage, and one that seems to be at least partly driving the recent actions of PE giant Blackstone Group LLC.

In a report Friday, The Wall Street Journal said that the firm has been busy as of late making investments and going where others fear to tread in falling markers (both public and private) with a record $32 billion invested in all of 2015, which was up 21 percent from 2014’s levels. A “large portion” of investing activity came through in the fourth quarter of the year, which indicates at least some contrarian mindset as markets got slammed, which in turn had doubtless led to Blackstone’s perception that bargains were in the offing and now it has about $80 billion it can allocate headed into this newly dawned year.

And, as The Journal noted, the move is in contrast to other firms, as they have been busy with jettisoning their own positions, raising cash, and finding the sidelines a safe place to be. If there is a “sustained” decline in markets, said The WSJ, then look for PE firms to put that dry powder to work. The key areas where Blackstone put its own investments include real estate, and not energy, where there have been relatively untouched amounts to about $8 billion in the coffers. As had been reported, Blackstone had entered into a pact late last year to take a 17 percent stake in NCR Corp., which makes ATMs and other payments hardware and has been branching into software. The company’s shares at that point were down from 2013 peaks by more than 30 percent.

It’s not just the heavy hitters that have kindling at the ready, awaiting a match. The industry itself has $1.3 trillion to spend across a plethora of asset classes, said The Journal, citing data firm Preqin. And it might take much to start a landslide of investment.

However, climbing the wall of worry might be a sucker’s bet. The process works, at least for a bit, when stocks, or bonds, or any assets keep rising even in the face of negative news. The rise seems unstoppable, until it stops. In the case of private equity, the jump may come through the next few months as the PE players, big and small, eye one another and invest in lockstep, fearful that they may be left out in the cold, lagging others’ performance records. That would lead to money pouring from investors to these hot hands, at the expense of other funds.

But what happens when the music stops? What happens when some sort of macro data does indeed rock things downward so that the “bottom picking” that investors hoped would show as prescience proves to be … premature? As of this writing, stocks are swinging upward on negative interest rates engineered by the Bank of Japan. That speaks, yet again, to stimulus propping up markets, not fundamentals, and that should be a flashing caution sign to investors everywhere, no matter the markets in which they play.