BREAKINGVIEWS-Buyout barons struggle to heed Buffett doctrine

By Jonathan Guilford

NEW YORK, May 8 (Reuters Breakingviews) - As Warren Buffett steps back, some of the world’s biggest money managers will try to keep building on his legacy. They already ape the outgoing Berkshire Hathaway BRKa.N CEO’s best idea, tapping insurance funds to invest. The harder part now will be to equal his extraordinary patience.

Buffett lieutenant Ajit Jain has ceded to private equity firms embracing the idea of using gigantic pools of customer premiums paid to cover anything from death or retirement costs to auto policies as a source of capital. He says Berkshire is “no longer competitive in this space” because so-called alternative asset managers borrow more and have higher tolerances for risk.

Apollo Global Management APO.N and KKR KKR.N, like Berkshire, own insurers; Blackstone BX.N and Carlyle CG.O sit between underwriters and the returns they desire. Berkshire famously uses its hefty balance sheet to buy stocks, like Apple AAPL.O, and companies such as railroad operator Burlington Northern Santa Fe outright. The buyout foursome is seeding big lending businesses, ferreting out assets like once-esoteric securities.

Steve Schwarzman’s Blackstone alone oversees some $240 billion of insurance funds and another $270 billion from individual investors. If it’s not put to work soon, it will drag down returns and make it harder to raise more money later. Buffett typically hangs onto his portfolio of companies, such as Benjamin Moore paints and See’s candies, but buyout shops are eager to sell theirs and have struggled to do so because of wild market swings and the gaps in valuation assessments they create.

Buffett’s arduous task has been hunting elephants, as he calls the gargantuan acquisitions required to influence his $1 trillion conglomerate. Carlyle and its peers have instead built huge pipes through which deals must constantly flow. Apollo’s Athene business is the country’s largest annuity issuer. Boss Marc Rowan said it once consumed “everything we produced and more,” but insists it is more conservative when needed, evidenced partly by Athene’s slightly shrunken first-quarter profit as it built up cash and investment income lagged rising costs.

Size can be a strength, as Buffett has proved, especially when times are tougher. The bewildering array of strategies enlisted by private equity’s big four should be in a similar position. Carlyle’s AlpInvest dabbles in secondhand buyout-fund stakes, which are now flowing into the market. Its quarterly earnings more than doubled from a year earlier, making more available to distribute to shareholders than Wall Street was expecting, per Visible Alpha data.

This diversity helps them copy the Oracle of Omaha in other ways, too. Blackstone, for example, unveiled a $5 billion deal last month to help struggling Canadian wireless carrier Rogers Communications, evoking in some ways Berkshire’s $5 billion purchase of preferred stock in Goldman Sachs as the financial crisis took hold. Apollo’s Hybrid Value business, which by blending debt and equity financing is a good fit for these kinds of deals, returned 19% over the past year.

KKR follows Buffett most directly, even declaring that it is building a “mini Berkshire” by holding companies on its balance sheet to generate steady dividends. Such payouts increased 52% from the first three months of 2024. Even so, investing wisely, especially nowadays, requires restraint, which Buffett put to good use for 60 years. Buyout firms are unable to play as long a waiting game.

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CONTEXT NEWS

Private equity firm Carlyle said on May 8 that it generated $413 million in after-tax earnings available to be distributed to shareholders in the first quarter, 13% more than a year earlier.

Rival investment shop Apollo Global Management said on May 2 that its equivalent metric, adjusted net income, grew 5% year-over-year, to $1.1 billion. Earnings from its insurance unit, Athene, fell roughly 2% to $804 million as funding and interest costs outpaced rising investment income.

KKR said on May 1 that its adjusted net income increased 20%, to more than $1 billion, from the same three-month stretch in 2024. The asset manager’s Strategic Holdings business, which comprises stakes in portfolio companies it plans to keep on its balance sheet long-term, grew earnings 52%, to $31 million.

Blackstone on April 17 reported that its distributable earnings rose 11% from a year earlier to $1.4 billion. Capital inflows of roughly $62 billion jumped 81%, leaving the firm with $177 billion.