The Ledger
Every statement that passed quotation and attribution checks. Mix any filter with any other: certainty 1/5, debate potential 5/5, or both at once.
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Bridgewater is an elite academic department run by a cult leader
“Bridgewater is like, take MIT and Harvard's economics department and Stanford and Caltech's comp sci department and have them run by a cult leader and shift that all together, and you've got Bridgewater.”
Private credit funds offer 8x leverage covenant-lite loans to hide defaults
“And they basically start buying market share by offering the riskiest loans. So they're offering unit tranche, eight times debt to EBITDA loans with no covenants, and basically because they don't want to show their LPs that any of their loans have defaulted, T…”
25% to 30% of LBOs would go bankrupt in a normal recession
“And so much of private equity today of LBOs is single B or triple C type quality, that I would say 25 to 30% of LBOs would go bankrupt in a normal business cycle, normal recession with normal levels of delinquency.”
Private equity will likely enter an extend-and-pretend zombie state
“There's this extend and pretend zombie type behavior where the money that you put into private equity never blows up, but you never get it back, you know. And I think that's probably the most likely scenario”
US private equity multiples are distorted and significantly overpriced
“Now I think private markets are much more expensive than public markets, and you can see this with the venture-backed stuff like WeWork. Private markets say it's worth seventy-five billion. Public markets say it's worthless. You can see it in the deal multiple…”
CEO pedigree and elite education do not predict stock returns
“Turns out that going to business school empirically does not mean that your stock price does better. Turns out working at an investment bank or top tier consulting firm has no impact on the stock price of the company that you run. Turns out that your track rec…”
Distressed debt returns during crises have historically been disappointing
“Distressed debt doesn't do all that well. Everybody says, oh, the thing I want to do in the next crisis is buy a lot of distressed debt. Well, we have a simple rule at Verdad on both the equity side and the credit side, which don't buy things that go bankrupt.…”
Private equity historically made most of its profits below 7x EBITDA
“First, it said that private equity had made the majority of its money in deals done at less than seven times EBITDA.”
Heavy LBO debt prevents compounding businesses from reinvesting for growth
“Because a firm that has eight X debt to EBITDA, that is taking out all of its excess free cash flow to pay interest, can't reinvest for growth. So why buy a compounder and lever it up? In theory, you should have much higher return opportunities other than payi…”
A growing share of PE LBOs cannot cover interest from cash flow
“From people I've talked to in the industry, and this is purely anecdotal, I don't have data to support this, but an increasingly large percentage of private equity LBOs are facing what they would call, quote unquote, liquidity problems. What is a liquidity pro…”
Energy PE funds avoided marking down 2013-2015 vintages despite sector collapse
“Energy private equity is fascinating, because 2013, 14, and 15 vintages of energy private equity funds, when oil prices drop 70%, they've started to rebound a little bit, a huge drop in oil prices, S&P small cap energy down 70 or 80%, peak to trough, 90 plus p…”
Japanese corporate bankruptcy is effectively eliminated by government policy
“And the reason you don't need anything fancy in Japan is that nothing goes bankrupt. So the Japanese government basically has eliminated bankruptcy for corporations, so you don't need any risk controls.”
Executive compensation should not be tied to share price
“And this is more of a political point, but I don't think that executive compensation should be tied to share price. Because the share price is so volatile, and so wild, and it doesn't look like from this data that who the CEO is, is having much of an impact on…”
Middle-tier high-yield bonds deliver the highest expected credit returns
“And the long-term empirical research actually finds that that stuff, the sort of Goldilocks of the bond market, does better. That it actually has the highest expected returns.”
When a stock rallies but bonds fall, the bond market is right
“Let's look at trailing price momentum for the bonds and the stocks, and let's look at things where the stock went way up and the bonds went down. Who's right? Turns out, in those cases, that the bond market's right. The stock should come down.”
The best time to buy small-cap value is after worst trailing returns
“The best time to buy small value is when it's had the worst trailing returns.”
Simple quantitative models have 8x the statistical power during recessions
“Simple quantitative models tend to have about eight times the level of statistical power during recessions than during times of economic growth.”
High-yield spreads blowing past 600 bps marks a prime equity entry
“When high-yield spreads blow out past six, that's as good a time of any to start dumping money into equities.”
Most investors are story-driven rather than rule-testing
“And I find that that's actually relatively rare in investing. I think a lot of people are very story driven, and they're very idiosyncratic driven, so they're bottoms up, quote unquote. And they don't say, well, I'm gonna do X, but would X if it were applied a…”
Nobody can accurately forecast corporate earnings despite widespread industry efforts
“Kahneman directly talks, for example, about earnings forecasts. He says, look, there's a huge amount of work done in earnings forecasts. Nobody can forecast earnings. People keep trying.”
Predicting corporate growth over one to five years is nearly impossible
“Not only is it impossible to predict, it's just wildly volatile. You can have a company you thought was gonna grow 15% that declines, and that's very common. Doesn't matter if you're forecasting one year away, three years away, or five years away, it's all rea…”
Engineering and predicting top-line revenue growth is impossible for PE
“You can't predict revenue growth, and it's really hard to control it. Wish we could, and if it were possible, there'd be a class at Harvard Business School, how to drive revenue growth, okay? It's just impossible and unpredictable, and maybe you get things rig…”
Cheap LBO opportunities exist in Europe and Asia, but not the US
“Now, I think in Europe or in Asia, I think there are still cheap LBO opportunities, right? So a firm like Bain or Blackstone, they're still seeing opportunities to do really attractive buyouts ex-U.S. But within the U.S., you can't.”
Credit rating agencies effectively forecast corporate bankruptcies
“The credit ratings agencies do a darn good job at forecasting which companies are likely to go bankrupt.”
Machine learning models finding non-regression factors are likely flawed
“So if your machine learning is finding something that standard regression models didn't find, it's probably not a good model.”
Value investing advocates have been wrong for nine years in the US
“And all of these quantitatively educated CFA people that know the names Fama in French are saying, no, no, growth doesn't work by value. And you know what? They've been wrong now for nine years in the United States.”
Data shows private equity firms are highly effective at operational cost-cutting
“I think the empirical evidence would show that private equity firms are good at cost cutting. They are good at cutting the fat. They are good at streamlining operations, and we saw that a lot in the data.”
The majority of private equity acquisitions are sponsor-to-sponsor deals
“These days, if you're buying a company, the majority of private equity acquisitions are from other private equity firms.”
Leveraged equities with multiple expansion deliver outsized returns
“We're going to focus on the ones that are levered because when they get multiple expansion and they're levered, that's where you really make a ton of money.”
Quantitative stock ranking models disproportionately favor illiquid micro-caps
“Within the best ranked things, and this is true for most quantitative strategies, a disproportionate share of the most attractive things to virtually any quantitative ranking model are micro cap or small cap. And they're illiquid. So they're trading a few 100,…”
Alpha comes from tedious trading that larger funds cannot execute
“Our logic, again, is that if we are doing things that other people are unwilling to do or unable to do, unwilling because it's tedious and boring, unable because of capacity issues, and we can do that, that should be where alpha is. I mean, that should be what…”
Small-cap value underperforms or drops in 50% of years
“If you add up the years when the market is down, and then the years that small value underperforms the rest of the market, that's 50% of years.”
Quantitative investors leverage Twitter for superior peer feedback
“I think this is why so many quantitative investors use social media and Twitter especially, is Because the feedback on your ideas is so good, and the knowledge sharing is so good. And so I think that it's like going to the best section of business school.”