BlackRock (NYSE:BLK) is reportedly in the market to raise a $10 billion private equity fund, pitching it with marketing materials that compare the strategy to Berkshire Hathaway's (NYSE:BRK.A)(NYSE:BRK.B) long-term, buy-and-hold investment philosophy, according to the Wall Street Journal. It's quite the comparison for a fund that hasn't even collected checks from investors, but people are actually running with it!
Bloomberg reported on the story by writing that "similar to the approach of Berkshire Hathaway Inc., BlackRock would look to hold on to its stakes for a long time." Money really can't buy that kind of positive press.
Of course, BlackRock's fund isn't Berkshire, really. It's just duplicating a piece of the Berkshire puzzle by taking a long-term approach in which it will buy stakes in private companies with the aim of holding them for 10 years, perhaps longer. That's kind of like Berkshire, but it copies what's arguably the least important piece of the Berkshire Hathaway story.
What made Berkshire
At the risk of stating the obvious, buying businesses in whole or in part, and holding onto those stakes for a long time doesn't guarantee that you'll outperform. The buy-and-hold part is just what Berkshire is known for, not what makes it great.
Berkshire, as we know it today, is the result of three things that are almost impossible for any one company to do:
- Embracing a long-term, buy-and-hold philosophy.
- Owning growing insurance companies that reliably generate underwriting profits.
- Hiring a world-class portfolio manager who'll work for $100,000 per year.
You need all three of these things together to create another Berkshire. It's not sufficient to have just two out of three. It's all or nothing, as we've seen time and time again through a long list of Berkshire copycats that have copied everything but its performance.
Creating the next Berkshire
Taking the long view is the easiest way to replicate part of Berkshire's model. Buying stakes in private businesses and holding them for a long time is relatively trivial -- anyone can do it, but not everyone can do it well. Unlike stocks, private companies are actually pretty hard to sell. You may find that you hold for the long term because you simply couldn't sell even if you wanted to.
But some have also tried, and largely failed, to duplicate Berkshire's insurance component. Look to Greenlight Capital Re as a pertinent example. It's basically a David Einhorn-managed hedge fund that also deals in reinsurance on the side. Greenlight Re shares have basically gone nowhere in the last 10 years, thanks to a combination of less-than-stellar underwriting and the poor investment performance of Einhorn's long-short strategies in recent years.
Daniel Loeb's Third Point Reinsurance hasn't done any better. Since 2013, it has also gone up and down, but over the full length of time, shareholders have earned basically no real return on their investment. Investing in bank CDs would have been the better, and much safer, wager.
This isn't to pick on either Third Point or Greenlight, really. It's just illustrative of how hard it is to make money in insurance and simultaneously run a great investing operation, after expenses. To be entirely fair, Berkshire is a long-only investor, whereas these hedge fund reinsurance companies buy and short stocks. It's worth revisiting in the next bear market, though Berkshire Hathaway has quite the lead.
Who wants to be underpaid?
Buffett is an interesting case study because he's both the greatest investor of all time and the most underpaid. He collects all of $100,000 in salary from Berkshire each year, an amount less than what most firms would pay a new analyst right out of an MBA program, despite more than a half-century of almost uninterrupted investing success.
Compensation alone may be one of the most important elements of Berkshire's success, but for obvious reasons, not many of the best-known investors want to distract themselves with managing other people's money to make a mere $100,000 per year doing it.
Of course, BlackRock plans to stop short of running an insurance operation, or working for virtually nothing. The Wall Street Journal reported that it would charge a "management fee that covers its expenses and a certain profit margin and a performance fee." Said another way, BlackRock will likely stand to make a healthy amount of money from this fund, regardless of how well it does.
Neither BlackRock nor its fund are the next Berkshire, but I think we probably all knew that.