U.S. stocks are higher in early afternoon trading on Friday, with the S&P 500 (^GSPC 2.47%) and the Dow Jones Industrial Average (^DJI 1.76%) (DJINDICES: $INDU) up 0.32% and 0.27%, respectively, at 1:30 p.m. ET. From the widely followed indices to the opaque financing vehicles of New York high finance, today's column contains a useful lesson for all investors.
Last week, this column warned about the danger in allowing oneself to be impressed by people or companies that boast an association with prestigious "brand name" institutions to the point where it impairs one's ability to assess an investment opportunity on its merits. In the column, I cited the examples of healthcare companies Valeant Pharmaceuticals International and Theranos
A recent story from the opaque world of New York private equity provides another example of this type of risk. On March 26, federal agents arrested Andrew Caspersen, 39, the scion of a wealthy family of financiers, at LaGuardia airport in the presence of his wife and two young children.
Caspersen is charged with soliciting $95 million in investment assets in a fraud that included a failed $17 million bullish options gamble on the S&P 500 placed from a personal brokerage account.
For a financier, Caspersen had impeccable educational and family credentials: He was graduated from the Groton School, an elite Massachusetts prep school, Princeton University, and Harvard Law School. His father, Finn M.W. Caspersen (now deceased) and all three of his brothers also attended Harvard Law School. (Full disclosure: One of Caspersen's brothers was a member of my college class at Princeton.)
In 2003, Harvard Law School launched its largest ever fund drive, led by Finn Caspersen, which ultimately raised $476 million. The Caspersen family made the largest gift in the history of the school, designated for the Caspersen Student Center.
Although he has been fired since his arrest, his LinkedIn profile continues to list him as a partner at the Park Hill Group, part of PJT Partners, which was spun out of the world's largest private equity firm, the Blackstone Group LP in Sept. 2015.
Caspersen could certainly tick all the boxes when it came to his background, but what of the investment opportunity he was purporting to offer potential investors (including, reportedly, his mother and at least two of his brothers!)? That's where things get more vague.
In an excellent in-depth article (sign-up may be required), this is how The Wall Street Journal described his pitch to a Southwestern investor: "Invest a few million dollars alongside sophisticated institutions -- as well as Caspersen's friends and family -- and earn a 15% annual return with minimal risks."
A 15% annual return with minimal risks in an environment in which the 10-year Treasury is yielding less than 1.8%? Folks, if you believe that one, I can introduce you to the scion of an African dictator who needs help with a cross-border wire transfer.
All joking aside, I'd want to know a lot more about these "minimal risks" before I would even consider an investment like that, because, on the face of it, it sounds too good to be true.
The Journal explains that Caspersen said "the money was going to finance a $50 million credit line, secured by Irving Place's assets, and that their investments would churn out a 15% annual interest rate." A 15% annual interest rate on a credit line? With minimal risks? One needs only to consider the interest rates currently being charged in consumer finance or on junk bonds to realize that something is probably off.
Keep in mind that an annualized return of 15% is on the other order of five to six annual percentage points higher than the long-term return on the U.S. stock market. If you expect to earn that sort of premium, you should ask yourself how you have been chosen as a recipient of such munificence.
That holds for esoteric private equity investments as well as investing in well-known, publicly traded companies. Investments with those risk-return characteristics exist, but they are exceedingly rare.