The Next Big Short? Private Equity, 401(k)s & the Warning Signs Ahead

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The next big short. If you haven’t seen the movie, The Big Short, Mike, it’s based on Michael Lewis’ book about the financial crisis and the few out there that made a fortune off of trading the absolute calamity that it was. People that have been listening to us and following what we do know that we called it too. We warned everybody here on the program something wicked this way comes.

Did we trade it? Did I short it? Did I go down to Goldman Sachs and have them create securities? No, that’s not what I do for a living. It’s not. It’s okay. It’s okay. Again, I don’t want to live quite frankly in that world. And we can even go back, know, prior to me even having the show, go back to the 1990s, we called Enron, we called the .com collapse, all the columns that I wrote about that. And even when I was right,

when it came to Enron, I was wrong. I called the demise of Enron and it took a year. Stock continued to go up after I said something’s wrong here, something to miss here, and man, did I get called out on that until I was right a year later. And that’s the reality of shorting things and being in this world where companies can’t extend and pretend and push things back and not deal with

the reality of the day. And that’s what we’re dealing with right now when it comes to much of private credit and also private equity. I’ve been talking about this for some time. I’ve been warning people about this for some time. Earlier on this year, I was none too happy. None too happy when the Trump administration basically signed off on allowing private equity, private credit assets to go into 401k plans.

No bueno, no bueno. And I told you exactly what that was. That was again, an effort to get the insiders, the big wigs liquid. That’s all. Finding a sucker to overpay for assets and make the general public think that they’re cool and they’re hanging out with the big money, the sophisticated investors out there when, like every other time, the sophisticated investors are there to

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drink your milkshake for lack of a better phrase. Jamie Dimon actually asked about what’s going on with deterioration in credit quality and he sees parallels to pre-crisis era stuff saying people do dumb things. Dumb for who? I would say Jamie.

And we’ll get into that a little bit. It’s not dumb if your modus operandi is just to get deals done. Dumb in the sense that we allow these things to happen, take place. Dumb in the sense that people buy into these things. Absolutely. Yesterday, this is from personal experience and I’ve talked about this here on the show. I had five offers.

Five offers, five different groups wanting to buy Markowski investments and what we do and what we have built for a valuation that quite frankly is patently absurd. Some of these offers, again, they had offered before. They’re actually coming back and even offering more money at absolutely ridiculous multiples. Now, if I

My brothers and I, we had that ethical bypass at birth, we could do the Steve Miller brand, take the money and run and be set for generations. That’s how ridiculous the multiples are. But again, I know what they’re up to and we’re not gonna do that. Now again, I’ve already warned people that many other advisory firms are.

doing just that. And if you’re not careful, you’re going to be on the, let’s put it a short end of the stick on that one. Let’s just leave it at that. Private equity when it first came out made sense. Made sense. And again, they’re not all bad. They’re not all bad. The overwhelming majority, quite frankly, are. That’s just the reality. I will stereotype the industry right now because it’s that bad.

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When they first came out, they would buy for a decent value. They would buy for a decent value. They oftentimes they would create greater value and it became more and more popular, became one of the cool things to do. You know, I started hearing this with, you know, kids that I used to coach.

in lacrosse and they’re in college and I really want to get involved in private equity. And I’m like, hmm, you know, basically, you know, kind of going on a different track. And then, you know, being in contact and dealing with some of these private equity companies, because again, you know, over the years, trying to buy us get contact with us. And I mentioned this before.

They the people running these things I the best way I can explain it to them is they remind me again of Kendall Roy from the television show succession. Right exactly who these people are. Yes, they went to fancy pants schools. Yes, their families are very, very wealthy more often than not. And yes, they’ve never worked a real job in their entire life. I don’t care about their

their MBA or anything like that that they have. They’ve never worked a real job in their entire life and have a clue. They’ve got their models.

They’ve got their models and that’s what they do right now.

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P firm sitting on 32,000 average holding period right now for the companies that they take over seven years.

Seven years now again, I want I made this clear before I’ll make it clear again. They price these companies that are on their books. Okay. And again, they’re charging a management fee to the people that buy into the PE funds. And they’re also taking a 20 % chunk of any gains, gains and I use air quotes there because they’re the ones that are determining the gains. Which is nuts. If you ask me.

One story after another, I continue to look at. You’ve got these PE houses unable to list or sell. Their Chinese portfolio for the past two years got $1.5 trillion in Chinese assets. This was accumulated over the past two decades and they can’t sell it.

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They can’t get liquid. They can’t find a buyer for this stuff. They’re going to continue to charge people because they’re holding on to it. What does that mean? There’s a great column about this. It’s actually written by Nick Nemeth. These people are not investors was the name of the column. Got my attention because

much younger than I am, but he gets it. He figured out what the game is and how Wall Street actually works right now. I’ve mentioned before here, and I don’t like the phrase financial planner. I don’t like it. I like financial preparation. That’s what I help my clients do. I help them prepare.

Investment banking, when one thinks of investment banking, one thinks of, okay, banking, that’s your investing assets looking to grow them. PE and investment banking on Wall Street, it’s not about investment. It has nothing to do with that. It’s about deals. That’s it. They’re getting paid based upon deals.

It’s important to understand, I talked about this here on the program. I’ve talked about skin in the game. I’ve talked about incentives, a great book on skin in the game written by Nasim Nicholas Taleb.

These people get paid when they close deals. Investment, what turns out down the road, that’s not their concern. And he equates this, and as Colin talks about, you the financial crisis, and he said he was a kid at the time. And this is one of the things I liked about the movie, Big Short, is they had these,

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interesting ways of explaining these various different investment instruments derivatives there. They used Margot Robbie, they used Anthony Bourdain, you know, a couple others to try to explain just how ridiculous these things are. And quite frankly, most people didn’t understand them, but it didn’t matter.

It didn’t matter. It just mattered that money was moving, deals were being done. That’s how people got paid. Not to be right. Had nothing to do. Had nothing to do about what would be being right. You know, these guys that work in investment banking, private equity, all these places, they don’t see clients. They don’t see losses. They don’t see any of that stuff. They’re just about getting the deal done. That’s all.

That’s who they are. Global private credit market hit 3.5 trillion assets at end of 2024. That was up 17 % year over year. Morgan Stanley says it could be 5 trillion by 2029. And the numbers, they continue to go up.

The numbers continue to go up. And again, I see more and more stories about.

You know, PE not not being able to get liquid yet. They want to throw in money at me. And other companies out there. Private equity in university, we got eight to nine trillion in global assets under management across all strategies. Now, again, that’s that’s a nice payday. I tell you, you get the deal done, but then it’s also two percent.

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He’s got a 2 % on 9 trillion. That’s not chump change. And again, 20 % of any of the increased valuation, which again, they’re putting out that valuation.

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Again, this is not about getting a good return. It’s not about preservation of capital. That’s not how they get paid. Yeah, sure. You get management fees on committed capital, but it’s origination fees too. Transaction fees.

Nick puts it in this column, says, the money is made in the doing, not in the being right. Again, are these investors or are they just deal makers? There’s a significant difference, and it’s what I’ve been warning people about. And again, he gets into depth, the many of the things I’ve talked about here and some of the weaknesses that you’re seeing, the cracks.

in all of this. And what could happen next? What could happen next? Well, first and foremost, what PE firms are still doing now is they’re still looking at fragmented industries, veterinary clinics, dermatology practices, car washes, HVAC companies, advisory firms like my own family offices.

Anything that has small operators, they go out, this is what I get to. They buy a platform, a bigger one, and they want to roll it underneath that platform. This is kind of the pitch that I get. you can, you know, we could just want to take a, well, we don’t want to take your whole firm. want to take a minority stake and Markowski Investments, and then you’re going to get equity in this bigger thing. And I’m like,

No, but look at the numbers, but it’s how they’re structuring these things. the platform company, they’ll buy at one valuation. The smaller companies that they roll in will be a little bit lower valuation. Then they turn around and they raise the valuation on that and say, look at all the money that we’re making. Sure, sure, they’ll hire the McKinsey folks to come in and, I wish we could streamline this, do this, do that.

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Fire all the smaller clients, in the case of a business like ours, and move on. And I’ll get into McKinsey another day. And the goal is to find another greater fool, a sucker, to pay a higher price for this. And they do sometimes. Sometimes they sell them to other private equity companies that have cash. Why? Well, we got a deal done. We got a deal done, and we paid X amount of dollars

for this company, meaning now we can start charging. We get the transaction fee. We also can start charging our investors, management fee based upon what’s going on. More money. Chik-ching, chik-ching. Again, these are not investors. They are deal makers. And quite frankly, they’re dangerous. They’re dangerous. There’s really not much difference what’s taking place today.

In comparison to what took place with the funky mortgages and mortgage-backed securities and all the things that took place. There really isn’t. Again, it’s different as far as its overall effect on the broader economy with when the proverbial poop hits the fan. But it’s the same type of thing. All of this stuff is again in a shady area. There’s not a lot of oversight.

When things go to hell, probably, and I’ve said this before, you’re gonna start hearing about we couldn’t see it, you’re gonna start hearing about black swans, it’s out of nowhere, nobody knew, how could anybody know this, all this stuff. We knew, we knew last time, we know this time. You know, it’s interesting is that.

remember Alan Greenspan never forget this Alan Greenspan was being testifying in front of Congress in regards to the financial crisis. I mean, I Congress is bringing everybody up. How could this happen? And while this coming Alan Greenspan as well, I didn’t understand, you know, how why they would, you know, Wall Street would put these things together, and it wouldn’t be in their their best interest. And I’m scratching my head. I said, it’s the same thing now, brother. Okay.

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You eggheads still haven’t figured out how Wall Street actually operates. My warning to everybody right now, quite simply, is that if in your 401k, your retirement plan out there, you start getting, oh, look, we got these new offerings and you can invest in private equity or private credit, all these things in your 401k, giving away one.

wonderful opportunity to get in and invest like the big boys invest.

Run. Now better off.

Better off. I tell you what you do. You call us I’ll call up the human resource department at the company you work for and tire them a new one I’ll ream them for you. And guess what? You can be on the call while I do it

Because they’re coming after you. In order for them to keep this very lucrative game going, they have to find more suckers, like any other Ponzi scheme. They have to find more suckers. And they’re looking at this point in time. Your approach by your advisor in regards to private credit, private equity, strongly suggest, strongly suggest getting yourself

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a second opinion. The ones that are run properly are few and far between. Again, the big short number two. yeah, I wouldn’t. I’m not gonna start shorting blue. I don’t do that. Okay, I don’t because again, you have to first and foremost, know, that’s

not a hedge fund. That’s not my game. I don’t take undue risk. Never going to let risk lead to run in the reality is like I said, they can they could pretend for much, much longer than most people can say. And again, it’s out there. Math matters. Math is power. And math eventually is going to win out on this. And yes, it would be a big short in that point in time.

Be very, very careful with this stuff. And again, I’m gonna reiterate, if you have any questions at all, get in contact with us. Watchdog on wallstreet.com.