Lindsay Capital Partners

According to Morningstar, the Federal Chairman Jerome Powell kept the federal-funds rate target range unchanged at 5.25%-5.50% at its July meeting. Fed’s latest commentary signaled that it’s likely to cut rates in September.

What do you think, should the federal chairman have cut rates in its July meeting or do you agree with the pause until September?

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🏢 Lindsay Capital Partners: Private Equity Investment Firm

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According to research by Viswanathan Parameswar at Schroders, “small and mid-sized private equity funds have outperformed large funds” throughout different economic cycles.

The chart above shows returns by fund size during the Great Financial Crisis (2007-2009) and Dotcom bubble (2001) recessions. The Schroders team found “that small and mid funds delivered higher returns than large funds in terms of both Total value to paid-in (TVPI) and net internal rate of return (IRR)”.

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🏢 Lindsay Capital Partners: Private Equity Investment Firm

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This week I listened to Invest Like the Best Podcast by Patrick O’Shaughnessy, in which he interviews billionaire investor Robert F. Smith.

Robert is the Founder and CEO of Vista Equity Partners, which is a private equity firm that is the most successful software-focused investment firms. Robert discusses how he was able to take advantage of the opportunity in the enterprise software space and how he was able to scale his investment firm.

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🏢 Lindsay Capital Partners : Private Equity Investment Firm

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Non-Political Post: According to CoStar the Biden administration is proposing a 5% rent cap for properties receiving federal tax breaks.

According to the National Multifamily Housing Council (NMHC) Biden administration proposal will not improve housing affordability and will impact the local communities for the following reasons:

-Rent controls typically adversely impact non-corporate landlords such as “mom & pops” landlords

-Rent regulations typically limit new Multifamily Construction in the market

-Rent regulations significantly reduce property values, thus reducing tax revenue for local communities

-Rent regulations overtime reduce the supply of affordable housing

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🏢 Lindsay Capital Partners: Private Equity Investment Firm

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Why do private equity firms have a strategic advantage over publicly traded companies (that are held in your index funds)?

According to an article by Felix Barber and Michael Goold of the Harvard Business Review, outside of financial engineering, the main reason private equity firms outperform publicly traded companies is their strategy of “buying to sell”.

Private equity firms typically purchase undervalued businesses that are poorly managed. Immediately after purchase, the private equity firm will replace the under performing management team and make other operational changes that increase the business’ value. After the value has been maximized, the private equity firm will be able to realize the gain for their investor base by selling the business. This is in contrast to publicly traded companies that have a “buy and hold” strategy, where they often hold on to the business long past the time the value of the purchased business has been recognized.

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🏢 Lindsay Capital Partners: Private Equity Investment Firm

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How have private equity firms been able to produce strong returns in the current high interest rate market?

According to Justin Park and Alisa Wood at KKR, compared to the last 50 years, interest rates are below the historical average. “The average effective fed funds rate between 1976 and 2023 was 4.66% compared to 3.35% over the past two years”.

Secondly, compared to prior years private equity firms have reduced their reliance on leverage (debt). “In 2013, debt as a percentage of total capital structures reached about 60%. Today, by comparison, that percentage is closer to 35%”.

As shown in the chart, economic shocks such as long periods of elevated interest rates, has resulted in lower multiples and asset price discounts. Such economic shocks has historically resulted in private equity firms outperforming public equities (US Stock market) due to an increase in bargain opportunities.

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🏢 Lindsay Capital Partners : Private Equity Investment Firm

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During my vacation I listened to the Invest Like the Best Podcast by Patrick O’Shaughnessy, in which he interviews billionaire investor Justin Ishbia.

Justin is the Founding Partner of Shore Capital. Shore is a private equity firm that invests in microcap businesses within industry niches. Justin discusses how he was able to scale his firm to $7 Billion by completing over 600 acquisitions in the past three years.

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🏢 Lindsay Capital Partners: Private Equity Investment Firm

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Bain & Company released their 2024 Global Outlook for Private Equity. Below are the main takeaways for private equity:

-The rapid rise in interest rates led to a precipitous decline in capital raising, 66% decline in deal exits, and 60% decline in deal value.

-The 66% decline in private equity exits has led to the pull back in LPs, as LPs have put new allocations on hold from all but the largest funds.

-The long-term outlook for private equity remains strong, however private equity firms must continue to innovate to create value and rethink liquidity solutions

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🏢 Lindsay Capital Partners: Private Equity Investment Firm

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Jayson Tatum recently signed the richest NBA contract in history, in which he will earn $65 million dollars per year. However what is not being widely discussed is home much money he will actually take home.

According to sports writers Geisha Pulimoottil Don and Andrew Petcash of Profluence Cap, Jayson Tatum’s income will breakdown as follows: “$23.2 million goes straight to Federal tax, $4.7 million as the jock tax, then comes $8.1 million in Escrow and agent commission, and finally $1.4 million in FICA/Medicare”. Leaving Jayson Tatum with a take home pay of $25.2 million.

What is the potential benefit for Jayson Tatum and other high-income earners considering investing in multifamily assets?

The IRS permits the owners of income-producing properties to deduct the property’s purchase price and the value of its improvements from taxable income over the course of the property’s useful life. This effectively assigns a monetary value to that wear, tear, and obsolescence, allowing property owners to categorize it as a business expense and thereby reducing taxable income.

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🏢 Lindsay Capital Partners: Private Equity Investment Firm

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The Urban Institute highlighted the Bay Area, Seattle, Phoenix, Atlanta, and Denver as the five cities that could benefit the most from converting vacant office space into multifamily housing.

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🏢 Lindsay Capital Partners: Private Equity Investment Firm

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Colliers Capital Markets - 2024 Multifamily Outlook:

-Cities are increasingly looking to promote the conversion of vacant office space to multifamily. These incentives have come in the form of tax benefits and capital contributions for the project.

-Rents have continued to revert to the mean, as markets that lagged previously, have now become the leaders in rent growth.

-Multifamily has $1 trillion in loan maturities through the end of 2028

-Rental demand will remain strong, as homeownership remains unobtainable for the average buyer

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🏢 Lindsay Capital Partners: Private Equity Investment Firm

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According to Leslie Shaver at Multifamily Dive:

-“Despite posting the highest volume of any commercial real estate sector, apartment sales fell 44% year over year to $6.7 billion in May”

-“Mid- and high-rise apartment transactions fell 60% to $2.5 billion, while sales of garden properties declined 26% to $4.3 billion”.

The decrease in the number of buyers is a signal to us that the current market conditions may present unique buying opportunities, as competition continues to wane in the Multifamily space.

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🏢 Lindsay Capital Partners: Private Equity Firm

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Vanity Fair and BusinessWeek highlighted the biography of the famed billionaire investor Edward Lampert. Over a sixteen year period Lampert’s hedge fund ESL Investments averaged returns in excess of 29%. During his run at the helm of ESL Investments Lampert managed funds for billionaires David Geffen, Michael Dell, Richard Rainwater, Thomas Tisch, and the Ziff family.

In 2002, Lampert was thrown into the spotlight when he acquired a majority stake in Kmart for less than $1 billion, upon its emergence from bankruptcy. Lampert later merged Kmart with Sears. At the time proponents of the merger dubbed Lampert “The Next Warren Buffett” due to his extensive investment track record of turning around companies.

Lessons learned from Edward Lampert (per BusinessWeek)

-“Look for companies with long-term value that the markets are missing”

-“Invest at a low enough price to protect their downside”

-“Buy a few companies they know intimately”

-“Seek out mature and easily understandable companies that throw off lots of cash; avoid tech”

-“Act like businessmen who team up with CEOs and influence the way companies are run”

-“Focus intensely on how their companies allocate capital to maximize returns”

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🏢 Lindsay Capital Partners: Private Equity Firm

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According to Globest.com, Yardi Matrix expects the below multifamily segments will continue to experience distress over the next 2 years:

-Value-add deals that were previously financed with short-term debt between the years 2020–2022

-Value-add deals owned by syndicators that lack the financial ability to pay down existing loan balances or pay for an extension

-Construction loans in high-growth Sun Belt markets that are taking longer to lease up as a result of a oversupply of units in the markets

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🏢 Lindsay Capital Partners: Private Equity Firm

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According to an AP report “Inflation in the United States eased in May for a second straight month….The trend, if it holds, could move the Federal Reserve closer to cutting its benchmark interest rate from its 23-year peak”.

“Measured from a year earlier, core prices climbed 3.4%, below last month’s 3.6% rise, and the mildest such increase in three years”.

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🏢 Lindsay Capital Partners: Private Equity Firm

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