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Warren Buffett condemns PE industry over reporting practices

The billionaire investor criticized the booming sector during his latest Berkshire Hathaway shareholders meeting, saying he wouldn’t get excited about alternative investments.

Warren Buffett and the private equity industry just don’t seem to mix.

The billionaire investor and CEO of Berkshire Hathaway criticized the booming sector during the latest shareholders meeting over the weekend, saying he “would not get excited about so-called alternative investments.” Among the reasons: PE investors, in his view, have been juicing return metrics by not immediately calling committed capital.

“We have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest,” Buffett said Saturday, per video footage of the meeting. “If I were running a pension fund, I would be very careful about what was being offered to me.”

Specifically, Buffett and Berkshire Hathaway vice chair Charlie Munger took particular issue with PE firms that charge management fees on capital in the form of Treasury bills while not factoring the uncalled money into the firm’s IRR metrics.

“It makes their return look better if you sit there for a long time in Treasury bills,” Buffett said. “It’s not as good as it looks.”

“All they’re doing is lying a little bit to make the money come in,” Munger added.

Berkshire Hathaway has been forced to compete with private equity firms that have received record amounts of capital in recent years, which has in turn driven up the prices for possible acquisitions. In his annual letter to shareholders in February, Buffett said he was looking for an “elephant-sized” purchase, but noted the prices of targets were too high.

Though Buffett has reportedly contended that he would never run Berkshire like a private equity fund that uses large amounts of debt, that hasn’t kept him from doing business with the sector. But his recent history with the asset class isn’t stellar. In 4Q, Berkshire reported a share loss of more than $15,000 in its Class A stock and wrote down more than $3 billion of its investment in struggling packaged-food conglomerate Kraft Heinz, per CNBC. In 2013, Berkshire Hathaway partnered with Brazilian private equity firm 3G Capital to purchase Heinz in a deal that valued the company at approximately $28 billion, including debt, then merged the business with Kraft two years later.

The partnership has not gone well. In addition to flat-lining sales, Kraft Heinz was recently charged $25 million by the Securities and Exchange Commission for unethical accounting practices, per The Wall Street Journal. On Monday, the business reportedly announced that its financial reporting from 2016, 2017 and the first three quarters of 2018 were unreliable, and it will have to restate earnings. Berkshire is currently the largest shareholder in Kraft Heinz, with more than 325 million shares valuing its stake at some $14 billion. The company’s stock has dropped roughly 25% since the beginning of the year.

Featured image via Worawee Meepian/iStock/Getty Images Plus

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    Written by Adam Lewis
    Adam Lewis was a financial writer covering private equity for PitchBook. He covered dealmaking, company and investor news for the PitchBook newsletter and blogs about the intersection of private equity and politics. A graduate of the WSU’s Edward R. Murrow College of Communication, Adam was previously a sportswriter covering the Mariners and Seahawks.
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