Solar Boom in 2012?

Alex Morales and Jacqueline Simmons of Bloomberg report, Solar CEOs Predict Boom in China Will Ease Glut in 2012:

China may double its installations of solar panels this year, absorbing excess production that depressed prices and margins in 2011, chief executive officers from two of the industry’s top five manufactures said.

Suntech Power Holdings Co. CEO Zhengrong Shi estimated the nation may add 4 gigawatts or more of panels, and Trina Solar Ltd. (TSL) CEO Jifan Gao expects 5 gigawatts. That compares with about 2.2 gigawatts installed in the country in 2011, more than double the capacity of the average nuclear reactor in the U.S.

The cost of solar panels fell 47 percent last year as Chinese manufacturers led by Suntech boosted production, winning market share from Western rivals such as Q-Cells SE and First Solar Inc. With China’s government pushing to consolidate the industry, the remarks from Shi and Gao suggest rising demand may support the biggest panel manufacturers.

“It’s a huge market,” Gao said through an interpreter in an interview at the World Economic Forum’s annual meeting in Davos, Switzerland. “Excellent companies with good technology, balance sheets and also brands will win out. A lot of companies without those advantages will be taken away.”

Those forecasts are more optimistic than the projections of Bloomberg New Energy Finance, which expects Chinese installations of 3 gigawatts this year and world demand from 25.5 gigawatts to 32.8 gigawatts. Trina expects global demand of 30 gigawatts to 35 gigawatts.

Solar Rebound

Solar shares have rebounded in recent weeks, driven in part by politics in Germany, the world’s largest solar market. After adding a record 7.5 gigawatts of panels last year, more than double the government’s target, lawmakers proposed cutting subsidies. A meeting Jan. 25 ended without an agreement and solar stocks climbed.

The Bloomberg Large Solar Energy (BISOLAR) index of 17 companies, which lost more than two-thirds of its value in 2011, gained 1.7 percent yesterday and has increased 20 percent this year. In New York, Suntech rose 2.7 percent and Trina by 5 percent. 30. An index of eight Chineses solar companies rose 5.4 percent, more than five times the pace of the NEX index of clean energy shares.

In Britain, the government estimates that capping subsidies in December would have saved 1.5 billion pounds ($2.4 billion) over 25 years. A court ruled it illegal to end the support then, ahead of schedule, and developers are rushing to complete new solar plants that will earn the old tariff before officials decide when to scale them back.

Chinese Demand

Suntech’s view shows that growing demand in China may also drive a solar recovery this year.

“I’m hearing a lot from on the ground in China about how hopping demand has been,” said Aaron Chew, an analyst with Maxim Group LLC in New York. “China could surpass Germany” as the world’s largest solar market.

Prices of polysilicon, the raw material in most solar panels, rose in four of the past five weeks after falling 65 percent in 2011.

The Chinese government is spurring clean energy to diversify away from coal, which fuels 70 percent of the economy and is blamed for pollution blanketing industrial areas from Hong Kong to Beijing. Renewables currently account for less than 1 percent of supply, which is growing faster in China than anywhere else in the industrial world, according to data from the oil company BP Plc.

Jenny Chase, head of solar analysis at New Energy Finance, said the forecasts assume China will meet and not surpass the government’s target to have 15 gigawatts of solar capacity by 2015. The estimates from Suntech and Trina suggest that China, like Germany, Spain and Italy, may have trouble keeping a lid on installations once developers start understanding how subsidies will apply to their projects.

Supply-Side Push

“Many other governments who have tried to limit their markets have failed,” Chase said in a phone interview from Zurich. “There could be a supply-side push that pushes this equipment out incredibly cheaply without the need for the federal subsidy.”

Solar panel prices have fallen so quickly that the technology is near reaching parity with fossil fuels in terms of the ability to supply power to national electric grids at a competitive price, said Gao of Trina.

‘Grid Parity’

“We have confidence that we will reach grid parity in several years in China -- like in three to four years,” said Gao, adding that Trina had about 10 percent of its sales in China last year. “In places like Australia, this year they will reach grid parity. Next year, it will be Italy and in 2014, regions like California.”

For now, falling prices are hurting companies throughout the industry. Trina cut its forecast for shipments last year along with First Solar, SunPower Corp., Yingli Green Energy Holding Co., Renesola Ltd. and JinkoSolar Holding Co.

Gao also predicted consolidation in the solar industry, and said that while the 10 biggest panel makers now account for just over 55 percent of the market, by 2015, that proportion may reach more than 80 percent.

“Although the industry faced some challenges, if you look at the trend, it’s growing,” Trina’s Gao said. “We expect that by 2015, the new installations that year will be about 50 gigawatts, so it’s constantly growing.”

China, the manufacturing hub for seven of the eight biggest solar panel makers, until 2010 accounted for less than 3 percent of the market for photovoltaics, with 490 megawatts installed. Installations more than quadrupled last year.

Shi of Suntech said China’s market was “exciting” and the market there this year could be “4 gigawatts or more.” Suntech is the biggest supplier of solar photovoltaic panels, and Trina is the fifth largest.

Solar stocks got clobbered in 2011 largely because of euro woes. Germany recently announced it would speed up subsidy cuts and all the solar bears are warning that the solar industry is in trouble.

Rubbish, total rubbish! First, Germany’s solar subsidy program is now the subject of dispute between two ministers in Chancellor Angela Merkel’s Cabinet. But beyond Germany, China is a powerhouse in the solar industry and they are increasing their demand. Moreover, in India, falling costs of solar energy are making it a viable alternative to power generated by fossil fuels.

In fact, Bloomberg reports that India is producing power from solar cells more cheaply than by burning diesel for the first time, spurring billionaire Sunil Mittal and Coca-Cola Co. (KO)’s mango supplier to jettison the fuel in favor of photovoltaic panels.

But solar skeptics abound. Investors prefer listening to bears like Jim Chanos who is shorting China and solars. I prefer looking at what top hedge funds and long-only funds are actually buying. I pay attention to charts, see if the pullbacks are being bought hard and see if fundamentals are gradually improving.

I also love reading articles on the most shorted solar stocks. Why? Just look at Netflix (NFLX), up over 75% this month, and ask those bears on Zero Hedge how their "short Netflix" position is going (LMAO!).

Here is a snapshot of the 10 most shorted solar stocks at the close today (click on image to enlarge):

Bunga Bunga! Keep up shorting those solars, baby, will only make the solar melt-up that much funner for us solar longs! And if the Greek gods are smiling, a debt deal over the weekend will help propel all risk assets, including solar shares, much higher.

Below, Suntech Power Holdings Co. Chief Executive Officer Shi Zhengrong talks about the outlook for solar energy prices. He speaks with Maryam Nemazee and Matt Miller on Bloomberg Television's "Countdown" on the sidelines of the World Economic Forum's annual meeting in Davos, Switzerland.

Hopes Rise For Greek Debt Deal?

Hui Min Neo of AFP reports, Hopes rise for Greek deal as US praises euro salvage bid:

Europe's economic pointman said Friday he expected Greece to agree a deal with private creditors to write down its debt this weekend as the US praised efforts to combat the eurozone crisis.

Speaking at the Davos forum, EU economic affairs commissioner Olli Rehn said the Greek debt agreement may be hammered out before a gathering of European Union leaders Monday, in what would be a major shot in the arm to the summit.

"We're very close," he told the World Economic Forum in Davos. "They're about to close a deal, if not today maybe over the weekend, preferably in January rather than February."

As he spoke in Switzerland, the Greek government in Athens was in talks with private creditors on a voluntary exchange of bonds that would wipe 100 billion euros ($130 billion) off the country's debt of 350 billion euros.

The deal under discussion would see private creditors take a "haircut" of at least 50 percent on 200 billion euros in debt. Previous talks stalled over the amount of interest to be paid on the remaining debt.

Any failure to strike a deal could trigger a messy default, which would be an economic disaster for Greece itself and a threat to banks holding too much sovereign debt while piling pressure on other eurozone states.

Rehn said Greece would remain a special case and that the private lenders would not be required to take losses on any other eurozone country's debt, thanks to plans for a better eurozone financial safety net.

"While I know more or less how the eurozone will look in the next three years, I know that next three days will be very crucial," he said.

"We need a very sustainable solution for Greece, even if Greece is a special case," he told the audience of business leaders and top politicians. "Private sector involvement will not be applied to any other country of the EU."

Speaking at the same debate, German Finance Minister Wolfgang Schaeuble said he expected Greece to avoid a default but he warned its debt level should not exceed 120 percent of GDP.

"We don't expect a default of Greece," he said. "I know that most participants have for a long time, but I don't expect a default from Greece. I'm sure that everybody is ready to deliver what has been agreed."

The head of Germany's top bank, Deutsche Bank, also said he was confident a solution could be found to Greece's woes.

Josef Ackermann said the "haircut", or losses that banks were being asked to take on their holdings of Greek debt, was "almost 70 percent."

"That is a great, great deal. But everyone has to make their contribution and then we will see where we are. We're going to carry on," he told Germany's NTV.

Speaking the day after the Federal Reserve cited the eurozone crisis as a reason for cutting its growth forecast, US Treasury Secretary Timothy Geithner said there were signs a corner was being turned.

"Europe is making some progress," he told delegates. "Over last two months in part they are laying foundations for more credible framework."

"We have three new governments (Italy, Greece, Spain) doing some very tough things, an ECB doing the things you have got to do."

The annual forum has been marked by gloom about the state of the global economy, and in particular about Europe's struggle to cope with yawning public deficits while at the same time seeking growth and jobs.

The euro has been under pressure -- amid fears that Greece or even eventually a giant like Spain or Italy could default on its debts -- and the 17-nation bloc's economy in on the brink of renewed recession.

Davos has reverberated with calls for eurozone nations to act decisively to restore confidence, with Mexican President Felipe Calderon calling on Europe to "bring out the bazooka immediately" to prevent the problem from sinking Italy and Spain.

Geithner said Europe needs a "stronger and more credible firewall" and hinted that the US and emerging economies could supply the International Monetary Fund with more funding to help the eurozone rescue effort.

"If Europe is able to do that, we believe that the IMF can play a substantive role. It can't be a substitute for a European response," he said.

Further fuelling the mood of optimism, Italy successfully passed another market test by selling 11 billion euros ($14.5 billion) in short term bonds at sharply lower rates.

But opposition to a debt deal is mounting. Abigail Moses of Bloomberg reports, Greek Debt Wrangle May Pull Default Trigger:

Opposition to payouts on Greek credit-default swaps from European Union policy makers is softening as disputes over a voluntary debt exchange threaten to push the nation into default.

Any agreement between the Greek government and the Washington-based Institute of International Finance on debt writedowns will only bind 50 percent of investors in the 206 billion euros ($270 billion) of notes being negotiated, Barclays Capital estimates. Hedge funds may resist a deal, seeking to get paid in full or compensated from insurance contracts.

Greece must repay 14.5 billion euros of bonds in March and an agreement that triggers as much as $3.2 billion of default insurance may be necessary unless all bondholders approve, said Marco Buti, head of the European Commission’s economics division. EU Economic and Monetary Affairs Commissioner Olli Rehn said today in Davos that a deal is “very close.”

“Politicians seem less concerned than before about CDS triggers,” said Michael Hampden-Turner, a credit strategist at Citigroup Inc. in London. “Having a payout on Greek CDS is probably better than the alternative: a loss in market faith of the product’s ability to provide a hedge against sovereign risk.”

Worsen Crisis

Officials, including former European Central Bank President Jean-Claude Trichet, have insisted that a swaps trigger was unacceptable because traders would be encouraged to bet against indebted nations and worsen the crisis.

Analysts at New York-based JPMorgan Chase & Co. and Citigroup say a Greek payout may actually bolster confidence in the $232 billion sovereign insurance market and also help boost the government bond market.

Greek Prime Minister Lucas Papademos resumes talks in Athens today with Charles Dallara, the IIF’s managing director, after “some progress” was made at a meeting last night.

Default swaps insuring $10 million of Greek debt for five years cost $6.3 million in advance and $100,000 annually, according to CMA. That implies an 82 percent chance the government will default in that time, assuming investors recover 22 percent of their holdings.

Greek 10-year bonds fell today, pushing the yield on the securities up 16 basis points to 33.64 percent. The price slipped to 21.05 percent of face value. Two-year notes advanced, with the price climbing to 21.33 and the yield dropping 1,814 basis points to 182 percent.

Greece said it may impose losses on investors who fail to support the debt restructuring by adding a so-called collective action clause, or CAC, into its bond documentation. That would force holdouts to accept the same terms as the majority.

Restructuring Event

Use of CACs would trigger a restructuring credit event and a payout of default swaps, according to rules from the International Swaps & Derivatives Association.

Credit events can be caused by a reduction in principal or interest, postponement or deferral of payments, or a change in the ranking or currency of obligations. Any of these must result from a deterioration in creditworthiness, apply to multiple investors and be binding for all holders. ISDA’s determinations committee rules whether swaps can be triggered.

Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

“A CAC is looking increasingly like the best option,” Citigroup’s Hampden-Turner said. “That route seems to tick a lot of boxes: they don’t have a bond default, the official sector gets treated differently than the private sector, and everybody has to participate in the exchange without anybody getting paid in full.”

ECB Opposition

While the ECB oppose any involuntary restructuring of Greek debt, policy makers such as Dutch Finance Minister Jan Kees de Jager say they aren’t against a credit event.

The softer stance signals Greece is unlikely to get sufficient participation in a voluntary bond swap to make its debt burden sustainable. Negotiations have focused on the coupon bondholders will accept on new debt with Europe’s finance ministers pressing investors to accept bigger losses after the IIF made what they described as their “maximum” offer.

“It would be welcome if the ECB is no longer blocking the only sensible route for Greece to resurrect itself,” said Georg Grodzki, the London-based head of credit research at Legal & General Plc, which manages $550 billion of assets.

Hedge funds in New York and London are trying to profit from trading Greek government bonds as banks brace for losses from a debt swap.

Greek Bonds

Saba Capital Management LP, founded by former Deutsche Bank AG credit trader Boaz Weinstein, York Capital Management LP, the $14 billion fund started by Jamie Dinan, and London-based CapeView Capital LLP are among managers that now hold Greek bonds, according to people with knowledge of the transactions.

Officials are now more concerned about preventing a disorderly Greek default that might threaten indebted European nations such as Italy, Portugal and Spain. An orderly credit event would be positive for the market, according to Saul Doctor, a London-based credit strategist at JPMorgan.

“There’s less emphasis on the perils of triggering CDS,” said Barnaby Martin, a European credit strategist at Bank of America Merrill Lynch in London. “It’s now about making sure Greece’s debt is sustainable.”

Portuguese Bonds

Portuguese bond yields widened this month on speculation the indebted nation may follow Greece in seeking losses from private investors. The country’s 10-year bonds yield 14.88 percent. Two-year note yields are higher at 16.54 percent.

The upfront cost of insuring Portugal’s debt jumped 5 percentage points since Jan. 13 to a record 38 percent, according to CMA, meaning it costs $3.8 million euros in advance and $100,000 euros annually to insure $10 million of the country’s debt for five years.

Outstanding contracts on Portugal have tumbled to $5 billion from about $8 billion last year, according to data from Depository Trust & Clearing Corp., covering 2 percent of the nation’s debt.

“Contagion has already happened to a large extent and officials are probably not as scared of triggering CDS as they were six months ago,” said Cagdas Aksu, a European rates strategist at Barclays Capital in London. “If there is any way to avoid the CDS trigger, they will of course prefer it, but the chances of this has become low at this stage.”

Not as scared of triggering CDS? Give me a break! There will be no CDS trigger and no big fat Greek payday for hedgies who bought Greek bonds looking to make a killing.

In his latest comment, Andreas Koutras writes, The Restaurant at the end of the World. Bang or Whimper?:

"Are you going to tell me," said Arthur, "that I shouldn't have green salad?"

"Well," said the animal, "I know many vegetables that are very clear on that point. Which is why it was eventually decided to cut through the whole tangled problem and breed an animal that actually wanted to be eaten and was capable of saying so clearly and distinctly. And here I am." …….

"A very wise choice, sir, if I may say so. Very good," it said, "I'll just nip off and shoot myself."

(D.Adams, The restaurant at the end of the Universe)

Douglas Adams the writer of the Hitchhikers Guide to Galaxy, in his science fiction book the “The Restaurant at the End of the Universe”, has a wonderfully surreal scene. Guests at the restaurant are asked to choose which parts from a live animal they wish to eat, while watching the end of the Universe. The animal voluntarily wants to be eaten.

In a strange sort of way this is what Troika is demanding from Private bondholders. Bondholders are asked to voluntarily kill, or at least half-mutilate themselves while the guests (Troika) are watching the end of Greece. The end however could be either a big crunch (default) or a whimper (no default but just slow death).

This I guess is the 14.4billion euro question (Redeeming on 20^th March 2012). Would the end come with a default or would it be just a big whimper? In other words, a slow drift to a cold death with no bangs and no defaults.

My guess is that it all hinges on what the ECB does with its Greek bond holdings. Answering this would in my mind give you almost certainly the answer to the Crunch/Whimper dilemma. Here is why:

Big Crunch(Default)

ECB owns around 20% of the outstanding Greek debt in Bond form. If it is excluded from the PSI then others would free ride on the back of the ECB driving participation down and making the introduction of CAC (Collective Action Clauses) to force it up almost inevitable. There are many problems with this strategy and we have outlined them in previous posts (CAC Warpath, PSI Enigma, ECB and Europe, ECB Accounting).

With or without the ECB, however, there are very few that would gain from a default. Banks holding bonds outright certainly don’t want this. The ECB does not want this as it would mean losses for her and also supporting the Greek banking system. Germany and the EU would have a much bigger problem to solve in an election year. After all, Germany benefits from the lower value of the Euro caused by the Greek crisis.

It would be optimal to stretch the rope to the breaking point but no further. Only a small fraction perhaps less than 5% would stand to gain. The net CDS volume is around 3billion and is insignificant. So, why is it you may ask that they cannot find an agreement to the PSI? To me all this back and forth is just poker playing trying to secure a better deal. Viewed under this light, many actions make more sense. The only problem is that the rope might break earlier and for unforeseen reasons (Greek political turmoil for example).

Big Whimper (Slow cold death)

If on the other hand Europe finds a way to relieve the ECB of its holding or if the ECB decides to take the hit and participates in the PSI, the hold outs would be reduced to a minimum. Namely, to retail bond holders and possibly owners of Greek bonds under English (non-Greek) law. In this scenario, Greece would not need to cause a credit event or introduce CAC’s to force the participation up. It would also respect market practices and give time for reflection and Election (see France, Germany)!

Conclusion

The end game is very hard to call. Rationality and logic point towards a whimper solution. Human failings and unpredictable events point to a big bang. D.Adams motto in the hitchhiker guide to the galaxy is DO NOT PANIC.

Will it all end in a bang or a whimper? I'm not panicking. My take is that the power elite at Davos have enough of the turmoil in financial markets and they will do whatever it takes to put an end to this Greek debt debacle. Stay long risk assets and keep buying the dips hard.

Below, Nobel Prize-winning economist Joseph Stiglitz, talks about income disparity and employment in the U.S., and the European sovereign-debt crisis. He speaks with Tom Keene on Bloomberg Television's "Surveillance Midday."

And International Monetary Fund Managing Director Christine Lagarde discusses Greece's progress on structural overhauls and the role of the IMF in avoiding a default. She speaks with Maryam Nemazee and John Fraher on Bloomberg Television's "The Pulse" .

Finally, George Soros talks about the European debt crisis, stating that defenses for Greece are too weak. He speaks with Erik Schatzker on Bloomberg Television's "InsideTrack" from the World Economic Forum in Davos, Switzerland. As I stated earlier this week, Soros gets it, and European leaders would be wise to listen to him carefully.

Anxiety Mounts Over Maturing Real Estate Loans?

Julie Satow of the NYT reports, Anxiety Mounts Over Maturing Real Estate Loans:

Borrowers and lenders are starting to grapple with the billions of dollars in commercial real estate loans made during the boom year of 2007 that are coming due this year, in a greatly contracted economy.

Experts have warned of a rash of recapitalizations, refinancings and building sales. In New York City alone, nearly $70 billion worth of commercial mortgages that were bundled together and issued as collateral for bonds are maturing this year. Of those, $26 billion, or 37.4 percent, are five-year loans that were originated during the height of the real estate bubble, when underwriting standards were loosest, according to data from the research firm Trepp LLC.

These include loans on prominent properties, including the Manhattan Mall, with $232 million maturing, and the Jumeirah Essex House, with a $180 million loan, according to Trepp.

“These loans are going to have the hardest time being refinanced since they were underwritten when property values and revenues were far higher,” said Thomas A. Fink, a managing director at Trepp. “We are going to see a wave of loans maturing this year, then again in 2014 and 2017, when the 7- and 10-year deals underwritten during the bubble mature.”

Most large commercial mortgage loans are typically not self-amortizing — that is, they require a balloon payment upon maturity.

While the number of loans maturing is expected to spike this year — $40.7 billion worth of securitized commercial mortgage loans matured last year and $49.5 billion worth is expected to mature in 2013 — the universe of lenders has shrunk. European banks, reeling from the debt crisis, have mostly stopped underwriting loans in the United States, while the market for commercial mortgage-backed securities remains relatively small, at roughly $30 billion in new issuance expected this year. And while insurance companies have increased their appetite for commercial mortgage loans, they are very conservative in their lending standards and selective in their deals.

“This means there may not be enough money available to refinance all of the debt that is coming due,” said Lawrence J. Longua, a clinical associate professor at the Schack Institute of Real Estate at New York University.

In a typical situation, a building that was worth $100 million in 2007 was financed with 80 percent debt, or $80 million. Now the loan — which was interest-only, meaning no principal was paid — is maturing. The borrower owes $80 million, but the value of the property has also dropped, to $80 million. This means that the ratio of the loan to the value of the property is 100 percent. Lenders have little appetite in this market environment for highly leveraged loans, so in one increasingly common outcome, the borrower will recapitalize the property by finding an equity partner to inject new capital into the deal, thereby lowering the overall amount of debt on the property.

Other possible resolutions include the lender extending the maturity date of the loan in the hopes that the property’s value will rise, or pursuing a foreclosure. It is also becoming more common for banks and other lenders to sell their loans to third-party investors who may negotiate with the borrower.

One factor that may drive more deal activity this year is that banks, special servicers and other lenders are eager to find solutions to troubled loans now, rather than postpone a resolution in the hope the market will improve down the road, said Scott Rechler, the chief executive and chairman of RXR Realty, which has recapitalized several properties in the last year, including the recent acquisition of 620 Avenue of the Americas.

“The first half of 2011 was very strong, with a lot of deal-making,” Mr. Rechler said, “but then several incidents, including the European debt crisis and the downgrading of the U.S. debt, made the market seem frothy. This was actually somewhat healthy because it put things back into perspective.”

As a result of these market jitters, he said, “lenders who had been waiting in the hopes that the market would improve, realized that things were still unstable and so they are more ready to resolve their loans now than in the past. Maybe not in the first quarter of this year, but by the second and third quarter I see a lot of things in the pipeline.”

Already, the number of recapitalizations has ballooned. There was $13.3 billion worth of recapitalizations nationwide in 2011, according to the research firm Real Capital Analytics, the most since the firm began tracking the number in 2001.

Another factor driving deal flow is the efforts by European banks to offload some of their American loan portfolios. In December, for example, Blackstone bought a $300 million portfolio of commercial loans backed by American properties from Eurohypo, the troubled real estate arm of Commerzbank in Germany. Other sellers include Allied Irish Banks, Bank of Ireland and Anglo Irish. American banks have also been shedding loans: In September, Bank of America sold nearly $1 billion worth of loans to several investors at a discount.

The sale of these loans can help spur deals because investors who buy these loans at a discount have more room to negotiate a payoff with the borrower, said Andrew A. Lance, a partner at the law firm Gibson, Dunn & Crutcher. A loan that has an outstanding balance of $100 million, for example, may sell to an investor for $80 million, enabling the investor to settle the loan with the borrower for any price between $80 million and $100 million, resulting in a profit for the investor and a discount for the borrower. While under this situation the original lender loses out, in the case of several European banks, regulators are ordering them to increase capital and shrink their balance sheets.

Dune Real Estate Partners participated in such a deal last year when it acquired the loan on the Mark Hotel on East 77th Street from Anglo Irish, recently completing a recapitalization of the property. Dan Neidich, the chief executive of Dune Real Estate Partners, said: “There are so many players now who aren’t the natural owners of real estate — like banks and special services — that never intended to own equity and who want to exit those positions. It opens opportunities for people like ourselves, who are in the business of taking equity risk, and bringing capital into the market to restructure deals.”

But not all borrowers will find themselves in trouble. There are many New York landlords who can simply pay down the loans without much struggle, market experts say. Vornado Realty Trust, for example, refinanced a $430 million loan at 350 Park Avenue in January with $300 million in debt and $132 million in cash. It is currently in the market to refinance the $232 million loan maturing on the Manhattan Mall, at Broadway and 33rd Street.

Still, even those borrowers who can pay down the loans themselves will have to contend with the softened market. “The key issue that cuts across all property types and all kinds of loans,” said Dennis W. Russo, a partner and co-chairman of the real estate practice at the law firm Herrick, Feinstein, “is that property values — the value of the collateral that secures the debt — are down. Combine that with the fact that lenders are conservative right now, and the bottom line is that in many scenarios, borrowers are going to have to find additional capital.”

Despite these jitters, commercial real estate sales rose sharply in 2011. Hui-yong Yu of Bloomberg reports, Commercial Property Sales Rose to More Than $220 Billion in U.S. Last Year:

Commercial property sales rose 57 percent to more than $220 billion U.S. last year, led by retail properties and garden apartments, Real Capital Analytics Inc. said in a report today.

More than 14,700 properties, each worth at least $2.5 million, changed hands in 2011, the New York-based real estate research firm said. Retail-property transactions rose 91 percent from a year earlier to $42.4 billion, and sales of low-rise apartments increased 70 percent to $34.5 billion. Manhattan accounted for 12 percent of total deal volume.

Sales rose as investors sought relatively higher yields from income-producing real estate and debt-laden owners unloaded properties acquired during the bubble years. Deals slowed in the second half of 2011 as turmoil in the market for commercial mortgage-backed securities curbed financing. Office and hotel transactions fell in the three months through December after six quarters of “large” year-over-year gains, Real Capital said.

“Buyers have started to broaden their horizons both geographically and by property type,” the firm said.

The biggest declines in capitalization rates were seen in well-leased, high-quality suburban offices and in shopping centers anchored by grocery stores, Real Capital said. Cap rates are calculated by dividing a property’s net operating income by purchase price, with rates dropping as prices rise.

Banker & Tradesman reports that Boston ranked 18^th on a listing of the top 30 cities worldwide that attracted commercial real estate investment in 2010-2011, and are expected to continue leading the way over the next decade according to a recent report from Jones Land LaSalle (JLL). Even Northern Nevada’s embattled real estate and construction industry has hit bottom and is on the road to recovery (buy casino stocks like Las Vegas Sands).

In Canada, commercial real estate transactions in the Calgary region ballooned in 2011 with both dollar volumes and deal velocity significantly higher than the previous year. But you already know my thoughts on the Canadian housing bubble (commercial is less vulnerable because large public plans own most of the prime properties).

In Europe, Property Wire reports on strong demand for German commercial property:

Transaction volumes for Germany's commercial real estate market will exceed €20 billionin 2012 with continued strong demand from both somestic and foreign investors, it is claimed.

According to research by international real estate advisor Savills real estate worth €22.6 billion changed ownership in Germany in 2011, marking a 20% increase on 2010.

‘The final quarter of 2011 recorded the second best investment volume of the year at approximately €5.8 billion, showing little evidence in the investment market of a deteriorating macro economic environment,’ said Lars-Oliver Breuer, head of investment at Savills Germany.

‘Given a number of uncertainties it is difficult to provide an outlook to 2012 but what will be crucial is whether the situation in the financial markets stabilizes and if the eurozone succeeds in convincing investors of its stability,’ he explained.

‘Financing will be the predominant issue this year but if the continuously strong demand for German real estate can be translated into deals the 20 billion mark is realistic for 2012,’ he added.

Savills research shows that as in previous quarters the retail sector dominated German markets in the last quarter of 2011. Overall retail generated an investment volume of over €11 billion, making up almost half, 49%, of total transactions in 2011 and representing an increase of 60% on 2010.

The office sector, which has historically dominated the German investment market, accounted for just below 35% of all transactions in 2011. Overall offices accounted for €6.58 billion of the investment volume in 2011, up from €4.88 billion in 2010.

According to Matthias Pink, head of research at Savills Germany the reason for the increase in retail investment is partly due to the higher rental stability of retail properties. ‘Investors who continue to focus on secure investments appreciate this characteristic. Another reason is the stable and currently very good consumer sentiment in Germany,’ he said.

Overall almost half of Germany’s 2011 total transaction volume was invested in the leading five markets of Frankfurt, Berlin, Hamburg, Düsseldorf and Munich. Due to several large volume deals Frankfurt led the way generating a single asset transaction volume of over €2.3 billion, making up 14% of the total German transaction volume.

Munich also recorded a strong increase almost doubling its volume invested in single assets in 2011 to €1.6 billion. In Berlin volumes were up 11% and in Hamburg they were up 14%. But in Düsseldorf the transaction volume decreased by approximately 40% compared to 2010.

The share of foreign buyers was approximately one third in 2011 with investors of Anglo Saxon origin accounting for over half of all foreign investment. As in the first half of the year open ended and closed ended funds were among the strongest buyer groups and jointly invested €7.6 billion.

The second half of 2011 saw a notable increase in investment activity from insurance companies and pension funds as well as listed property companies and REITs.

Indeed, pension funds have been busy snapping up real estate in Germany and other European cities like London and Paris (click on image below):

As you can see, institutional investors aren't too anxious about maturing real estate loans. Private equity real estate funds like Blackstone and Lone Star will be scooping up distressed loans for a song and making a killing in the process for themselves and their limited partners.

Below, John Levy and FOX Business hosts Connell McShane and Jenna Lee discuss the current commercial real estate market.

'Major' Changes to Canada's Pension System?

Prime Minister Stephen Harper is in Davos touting 'major' changes to Canada's pension system:

Prime Minister Stephen Harper has signalled his government will bring forward “major transformations” to the country in the coming months — in areas such as the retirement pension system, immigration, science and technology investment and the energy sector.

Of those reforms, Harper said, getting a grip on slowing the rising costs of the country’s pension system is particularly critical.

In the wake of Harper’s speech, it now appears that the Conservative government could be poised to gradually change the Old Age Security system so that the age of eligibility is raised to 67 from 65.

Harper made the revelations in a major keynote speech Thursday at the World Economic Forum, the annual gathering of the world’s political and business elite.

As expected, the prime minister was critical of Europe and the United States for not adequately dealing with the economic problems that have gripped them in recent months and years.

But it was Harper’s assessment of the major changes that lie ahead for Canada that stood out in the speech.

“In the months to come, our government will undertake major transformations to position Canada for growth over the next generation,” said Harper.

The Conservative government will table a budget in the coming weeks that is expected to set the stage for years of deficit-slashing and government reform.

“Under our government, Canada will make the transformations necessary to sustain economic growth, job creation and prosperity now and for the next generation,” said Harper.

He said that means two things: “Making better economic choices now. And preparing ourselves now for the demographic pressures the Canadian economy faces.”

Harper said the country’s aging population has become a backdrop for his concern about how to keep the country strong over the long term.

“If not addressed promptly, this has the capacity to undermine Canada’s economic position and, for that matter, that of all western nations well beyond the current economic crises.”

Indeed, Harper said the country’s demographics — an aging populating and a dwindling workforce — constitute “a threat to the social programs and services that Canadians cherish.”

For that reason, he said his government will “be taking measures in the coming months.”

Harper did not specify what those measures will be, but he said they are necessary — not just to bring the government’s finances back to a balanced budget in the medium term, “but also to ensure the sustainability of our social programs and fiscal position over the next generation.”

“We have already taken steps to limit the growth of our health care spending over that period,” said Harper.

“We must do the same for our retirement income system.”

Harper said the centrepiece of the public pension system — the Canada Pension Plan — is fully funded, actuarially sound and does not need to be changed.

But he added: “For those elements of the system that are not funded, we will make the changes necessary to ensure sustainability for the next generation while not affecting current recipients.”

So far, the government has come forward with a plan to create a private pooled pension system to encourage Canadians to prepare for their retirement.

Still, there are concerns that as baby boomers approach retirement, the cost to government of providing public pensions will skyrocket.

In December, the National Post reported that there was internal debate within the government about increasing the age of eligibility for the other major element of the public pension scheme — Old Age Security — from 65 to 67.

Internal government documents project the cost of the OAS system will climb from $36.5 billion in 2010 to $48 billion in 2015. By 2030 — when the number of seniors is expected to climb to 9.3 million from 4.7 million now — the cost of the program could reach $108 billion.

Among the other priorities where change is coming:

Energy

The Conservative government will make it a “national priority” to ensure the country has the “capacity to export our energy products beyond the United States, and specifically to Asia.”

“In this regard, we will soon take action to ensure that major energy and mining projects are not subject to unnecessary regulatory delays — that is, delay merely for the sake of delay.”

Harper did not explain what he has planned, although he and Natural Resources Minister Joe Oliver have complained that foreign-backed “radical” opponents of the $5.5-billion Northern Gateway project have threatened to slow down hearings by the National Energy Board.

Immigration

The system faces “significant reform,” said Harper.

“We will ensure that, while we respect our humanitarian obligations and family reunification objectives, we make our economic and labour force needs the central goal of our immigration efforts in the future.”

Science

The government will continue to make “key investments in science and technology” that are necessary to sustain a “modern competitive economy.”

“But we believe that Canada’s less-than-optimal results for those investments is a significant problem for our country.”

In future, he said, there will be changes to rectify that problem.

Trade

Harper expects to complete negotiations on a Canada-European Union free-trade agreement this year.

Furthermore, he said, his government is committed to also completing negotiations for a free-trade deal with India by the end of 2013.

And Canada will begin talks to become a member of the Trans-Pacific Partnership while also pursuing opportunities to trade in the emerging market of Asia.

Harper arrived Wednesday at the World Economic Forum determined to tout Canada as a trading nation with a solid economic record and massive oil resources which are ready to be sold and shipped to customers worldwide.

Other members of cabinet who are attending the conference in the exclusive mountainside resort in the Swiss Alps are Finance Minister Jim Flaherty, Foreign Affairs Minister John Baird, International Trade Minister Ed Fast and Bank of Canada governor Mark Carney.

The Canadian delegation used private meetings in the corridors and backrooms at the forum to promote Canada’s hopes for a free-trade deal with Europe, and also break into the emerging marketplace in Asia.

The forum, which dates back to 1971, has drawn 2,600 participants, including 40 political leaders and more than 1,600 senior business leaders.

While the economic uncertainty of Europe gripped the discussions, participants — at the urging of the forum’s founder, Klaus Schwab — also discussed whether capitalism itself needs to be fundamentally reformed to ensure greater social responsibility.

On Thursday morning, British Prime Minister David Cameron told the conference that Europe’s economies had entered a “perilous time” and called for European leaders to avoid “tinkering” with the eurozone debt crisis.

Cameron boasted of his government’s actions to get British debt under control and said the countries in the eurozone (Britain is not a member) must also take “bold and decisive “ action if they want to solve the debt crisis.

Harper issued a scathing criticism of countries in the developed world, which he suggested had forgotten about the importance of creating economic growth.

“Is it the case that, in the developed world, too many of us have in fact become complacent about our prosperity?” Harper asked.

He suggested that developed countries had taken wealth “as a given . . . assuming it is somehow the natural order of things.”

As a result, he said, countries in the western world had become focused primarily “on our services and entitlements.”

As a result, he said, it’s not surprising that, in addition to banks facing debt, countries themselves were also facing sovereign debt crises.

The problem, he suggested, could be “too much general willingness to have standards and benefits beyond our ability, or even willingness, to pay for them.”

Harper warned that the wealth of western economies “is no more inevitable than the poverty of emerging ones.”

He said the problems afflicting Europe and the U.S. threaten to become even more serious in future.

“Each nation has a choice to make. Western nations, in particular, face a choice of whether to create the conditions for growth and prosperity, or to risk long-term economic decline.”

The solution, he said, is for countries to make the sometimes tough, but correct, decisions now.

“Easy choices now mean fewer choices later.”

Easy choices now? Like pandering to banksters and insurance hacks, banking on PRPPs? Thanks but no thanks, that is a recipe for pension poverty, higher debt and less growth down the road.

As a Canadian who blogs on pension issues every single day, I stand against "easy solutions" which will only exacerbate income inequality and reduce retirement security for all Canadians.

If our PM and Finance Minister are serious about solving Canada's pension enigma, they would recognize the need to bolster our public defined-benefit plans, the envy of the world. Some of our smartest pension leaders have made the case for boosting defined-benefit pensions, but they're being completely ignored by our government who panders to banks and insurance companies.

And Canadian banks and insurance companies are being advised by shortsighted fools. If they had any vision and thought about what is best for the country and their long-term profits, they'd be pushing hard to expand CPP and defined-benefit plans for all Canadians. They simply don't get it.

I'm tired of our politicians and corporate leaders telling us that pensions are "too expensive" and that we can't fix pensions and make them better. NDP interim leader Nycole Turmel says MP pension reform should be handled by independent group and that the government should focus on the retirement security of millions of Canadians. Great idea from another MP with her snout in the pensions trough, but who will form this independent group of thinkers?

I know who I would recommend to lead such an independent Royal Commission. Bernard Dussault, the former Chief Actuary of Canada, and John Crocker, the former President and CEO of Healthcare of Ontario Pension Plan (HOOPP), one of the best defined-benefit plans in the world.

Instead our government is going to take the easy route. Canada is facing serious issues, including a major housing bubble about to burst (high end condos are first to go), and all the government can think of is cut everywhere and replace defined-benefit plans by defined-contribution plans.

Don't get me wrong, I'm a fiscal conservative (social liberal) and believe we need serious pension reform, but we are not going about it in an intelligent manner and it's going to end up costing us a lot more in the future.

Every single day I tweet about some company that suffered a pension bomb. Today, it was AT&T who lost a whopping $6.7 billion in the fourth quarter due largely to a change in how it accounts for its employee pension benefits and the breakup fee it was required to pay after scrapping its bid to buy T-Mobile USA.

AT&T is not alone. Many U.S. and Canadian companies are unable to deal with their employee pension benefits. Many have opted out of defined-benefit plan for 'low cost' defined-contribution plans but this is not in the best interest of their employees or in the best interest of their country.

If the leaders at Davos are serious about growth, debt, inequality and other social issues, they have to start thinking hard about retirement security and coming up with a sustainable solution for the long-term.

In a nutshell, here are some of my 'radical' proposals:

• Increase the retirement age to 67 (people are living longer; some economists think we need to raise the retirement age to 70)
• Review cost-of-living adjustments (COLAs) and cut when necessary
  
• Scrap all private companies' defined-benefit plans and consolidate them into a few large public defined-benefit (DB) pension funds. Companies should focus on producing goods and services, not managing pensions.
  
• Consolidate all municipal and city pension plans into large public DB plans
• Consolidate all Crown corporations DB plans into one large DB plan
• Expand CPP to all Canadians and get the funding right
• Cap CPPIB and all large public DB plans at a certain size and create new ones as needs arise
• Make pensions portable so no matter where people work, their pensions are safe, secure, well managed and will follow them
  
• Last but not least, get the governance right and improve it continuously.

I wasn't invited to speak at Davos but that's fine, I'm not into schmoozing with billionaires. But some very powerful people do read my blog and they are there, hobnobbing with the world's power elite. Hopefully they will pass on my message.

Below, World Bank President Robert Zoellick talks with Bloomberg's Erik Schatzker about the economic woes facing Italy. And Kenneth Rogoff, an economist at Harvard University, talks about the European debt crisis and the impact of a Greek default on the region.

The Shrinking Private Equity World?

Maureen Farrell of CNN reports on the shrinking private equity world:

The notoriously private private equity industry can't escape the glare of the spotlight these days, but the more immediate issue facing the industry is a lack of funding.

In 2011, U.S. firms invested just $32.1 billion in private equity, down nearly 79% from the industry's peak year in 2007.

And 2012 is expected to be even worse.

"It's taking a lot longer to raise funds," said Jeffrey Bunder, head of Ernst & Young's global private equity practice. "The process isn't like it used to be. They're having to demonstrate why they deserve the money."

Pensions and endowments, which make up the bulk of private equity investors, have been casting a wary eye on the industry because of the combination of high fees, lackluster returns and generally erratic returns.

Keith Garrison, the director of alternative assets for Texas Christian University's $1.1 billion endowment, said he's been more cautious about investing in buyout funds since the financial crisis.

"The returns have been more drawn out than you would have originally anticipated," said Garrison. "We need to manage liquidity. I'm not the only endowment closely watching its allocation to private equity."

Unlike hedge funds or other assets that offer quarterly returns, private equity funds return cash to investors only when the companies they're invested in are sold, go public or add new debt.

Part of the problem for the industry is that since the financial crisis, private equity firms have had a hard time selling their acquired companies, as mergers and acquisitions and initial public offering activity slowed down.

In fact, current returns are at their worst level since at least 1990, when the California Public Employees' Retirement System first started tracking the data.

Private equity funds raised in 2006 have returned just 4.2% to investors, according to the pension fund's website. Funds raised in prior years generated double digit returns. Similar to hedge funds, managers of private equity firms generally earn 2% fees on all funds they manage and 20% of all profits.

Meanwhile, the same firms are struggling to find companies to take private that could generate returns. The industry is sitting on roughly $400 billion of cash globally. Private equity managers haven't found the right companies to put this so-called dry powder in.

All but the best performing firms are expected to shrink, as investors put a smaller amount of their portfolio into private equity firms.

Firms that have raised between $1 billion and $5 billion with so-so performance will have the most trouble raising new funds.

Most of the largest funds that already have a spot in a public pension such as CALPERs, which manages $219 billion of California employees' retirement funds, will keep some money from these funds. CALPERs and its larger pension peers spend a lot time and a lot of money vetting new investments, so earning that initial spot in a pension portfolio helps keep a private equity firm alive in all but situations of extremely poor performance.

As U.S. investors scale back their private equity investments, the industry is increasingly looking to sovereign wealth funds and wealthy families in Asia and Latin America for new money.

"Funds are spending a lot of time overseas telling their story and thinking there's an appetite there," said Ernst & Young's Bunder. "That money doesn't come in overnight though."

For many private equity funds, that extended fundraising cycle could strike a fatal blow.

So what is going on? Is private equity fundraising really drying up? Not according to Michael Corkery of the WSJ who reports, Public Pensions Increase Private-Equity Investments:

Large public pension plans are pouring more money into private-equity funds, deepening ties between government workers and an industry currently under the harsh glare of U.S. presidential politics.

Big public-employee pensions had about $220 billion invested in private equity in September, or 11% of their assets, according to Wilshire Trust Universe Comparison Service, which tracks the holdings of pensions, foundations and endowments.

That is up about $50 billion from a year earlier, when such investments accounted for 8.6% of large pension funds' assets. A decade ago, pensions with at least $1 billion under management had just 3% of their money with private equity.

Private-equity funds buy companies, restructure them and try to profit by reselling them at a higher price. That approach, particularly with respect to the fate of workers at companies they buy, has become an issue in the Republican campaign because Mitt Romney formerly led private-equity firm Bain Capital.

In Monday's debate in Florida, which holds its primary on Jan. 31, Mr. Romney defended his business track record, which he said involved creating thousands of jobs.

Some of Mr. Romney's critics are labor unions, including those who count public employees as members and have representatives on pension boards that determine how much to invest in private equity. The retirement benefits of thousands of police officers, firefighters and teachers depend in part on the profits of investments in private-equity firms such as Bain.

Earlier this month, the Service Employees International Union, a major public-sector labor group, blasted Bain for what it described as "a long and troubling track record of putting profits above workers." The union said, for example, that Bain had acquired a plant in Indiana where workers were fired and then rehired at a lower wage.

SEIU members have pension money invested in numerous state and county pension plans around the U.S., many of which are invested in private-equity funds. And SEIU members serve on the pension boards that make decisions about where funds are invested.

An SEIU member, for example, serves as a trustee of the Ohio Public Employees Retirement System, which holds billions of dollars in private-equity investments and, in recent years, increased its target private-equity holdings to 7% of assets, from 5%.

Investment officials at the Ohio fund and other public pension plans say their primary duty is to secure the highest returns possible for public workers.

"Our board members are fiduciaries who act in the best interest of the fund, regardless of whatever political leanings they have personally'' or their unions have, said Julie Graham-Price, a spokeswoman for the Ohio pension fund.

An SEIU spokesman declined to comment.

The American Federation of State, County and Municipal Employees, or Afscme, which represents 1.6 million active and retired public employees, is taking a swipe at Mr. Romney for one of Bain's many investments.

"What kind of businessman is Mitt Romney?'' asked a new Afscme-funded television advertisement. The ad said Mr. Romney collected a "fortune" from a company, formerly held by Bain, that was accused of Medicare fraud.

A spokesman for Bain declined to comment.

Afscme's members have billions of dollars of pension money invested in about 150 public pension plans around the nation, many of which are invested in private-equity funds. Afscme's members also serve on pension-fund boards in about a dozen states and cities.

An Afscme member, for example, is one of the trustees overseeing the New York City Employees' Retirement System, which recently increased its targeted allocation for private equity to 7%, from 5%.

The Afscme member on the New York City pension board, Lillian Roberts, said in a statement: "I have a fiduciary duty to protect the investments Afscme members and others have made to the pension fund.''

Ms. Roberts added that she has pushed pension officials to address high fees and other drawbacks of private-equity investments.

A national spokesman for Afscme said it was "ridiculous" to question whether there was a conflict for the union to criticize Mr. Romney's private-equity track record while union members' pensions were invested in private equity generally. "The purpose of the ad was to shine light on Mitt Romney's dubious record in the private sector. …Afscme members have savings in banks that engaged in questionable behavior, too," the spokesman said. "They still know that this kind of behavior needs to be reined in."

Asked about the SEIU and Afscme criticisms, a spokeswoman for the Romney campaign said in a statement: "The last thing President Obama and his cronies want is Mitt Romney as an opponent because they know he is the only candidate that can beat President Obama and put an end to the big labor's power."

Pension-fund officials say they increasingly are turning to private equity in an effort to hit annual return targets of 8%. Over both the past five years and the past 10 years, private-equity returns were more than double those of the S&P 500 stock index and the Dow Jones Industrial Average, according to Cambridge Associates LLC, which tracks over 4,500 private-equity firms.

As of September 2011, median private-equity returns for large public pension funds over the past five years was 6.6%, according to Wilshire Associates. Median stock-market returns for those funds were a negative 0.9% over that same five-year period.

During the private-equity buyout boom of the 1980s, many pension funds steered clear of the sector, fearing the unknown.

Today, pension-fund managers "would say you may be breaching your fiduciary duty if you avoid this asset class," said Bill Kelly, a lawyer at Nixon Peabody who has worked with pensions and private-equity firms for 30 years.

Wilshire said private-equity investments surged last year as a percentage of pension-fund holdings partly because pension funds' existing investments in private equity increased in value while other holdings, such as stocks, were mostly flat.

Pension funds are experimenting with new ways to team up with private-equity firms, such as publishing joint research and investing directly in companies alongside private-equity partners.

In November, the $100 billion Teacher Retirement System of Texas made one of the largest single private-equity investment ever—a $6 billion commitment to new partnerships with Apollo Global Management and KKR & Co. The pension fund and the two New York firms will swap strategies and share resources.

The Texas fund has private-equity portfolio with investments in about 1,500 companies. It doesn't disclose the names of those companies publicly.

"I am confident that our private-equity investments have created more jobs than they have lost,'' said Steve LeBlanc, head of private markets at the Texas fund. "The way you make money is through growth."

Some pension funds enter into side agreements with private-equity firms barring certain investments, such as in tobacco or firearms companies. Since 2004, the largest U.S. public pension plan, California Public Employees Retirement System, or Calpers, restricts private-equity investments in companies that are likely to outsource government jobs to the private sector, such as prison guards and garbage collectors.

In 2010, the Ohio Public Employees Retirement System sent a letter to private equity firm Permira protesting plans by one of its portfolio companies, clothing retailer Hugo Boss, to close a local factory. Permira declined to comment. A spokesman for Hugo Boss said the plan ultimately remained open.

Calpers investment officials had no comment on the criticisms being leveled at private equity in the presidential campaign.

CalPERS' delivered paltry returns in 2011 but their private equity portfolio is up 12% for the first three quarters of 2011.

Increasingly, large public plans are looking to private equity to bolster their returns. Top funds have no problem raising assets. Bloomberg reports that Blackstone secured more than $6 billion of pledged capital for a new real estate fund that will buy mainly distressed-property assets:

The New York-based buyout firm plans to raise at least $10 billion for the fund, known as Blackstone Real Estate Partners VII, said the people, who asked not to be identified because the capital-raising is private. Blackstone expects the vehicle to be fully funded this year, they said.

The company has remained one of the most active investors in commercial real estate at a time when such Wall Street competitors as Goldman Sachs Group Inc. (GS)’s Whitehall funds and Morgan Stanley’s real estate funds retreated after incurring losses in the crash.

“Blackstone is in a bit of a unique position because so many mega-funds have been eliminated or are struggling with ongoing legacy issues,” said James Corl, a managing director at Siguler Guff & Co., a New York-based private-equity firm that raised $630 million for distressed-property investments.

But while the top firms thrive, others lag behind, and private equity is being scrutinized by politicians and investors alike. Some are complaining about private equity's public subsidy while others are calling private equity profits into question:

Private equity has proved better at enriching its own managers than producing investment profits for US pension funds over the past decade, according to a study prepared for the Financial Times by academics at Yale and Maastricht University.

The industry faces mounting political scrutiny as the presidential candidacy of Mitt Romney, a former private equity executive, has drawn attention to its business model and favourable tax treatment. Mr Romney will release his tax returns today after pressure from Republican challengers.

From 2001 to 2010, US pension plans on average made 4.5 per cent a year, after fees, from their investments in private equity. In that period, the pension funds paid an average 4 per cent of invested capital each year in management fees. On top of those, private equity often collects a variety of other fees and a fifth of investment profits.

“Assuming a normal 20 per cent performance fee, this would amount to about 70 per cent of gross investment performance being paid in fees over the past 10 years,” said Professor Martijn Cremers of Yale.

Private equity describes its fees as “two and twenty”, a 2 per cent management fee and 20 per cent share of profits. However, the management fee is usually calculated as a proportion of total capital committed by the investor, which takes time to invest.

So in the early years, the management fee can be a much higher proportion of actual cash invested. For instance, if a $1bn fund invests $100m in its first year, the $20m management fee would be 2 per cent of committed capital, but 20 per cent of invested capital for that year.

From 1991 to 2000, US pension funds paid an average 2 per cent of invested capital each year in management fees, and received 21 per cent returns, after fees, annually from their private equity investments, according to data from the CEM Benchmarking database used for the study. The database covers about a third of US pension fund assets.

The rise in management fees since 2000 may reflect greater fundraising, meaning that more funds are in the early investment phase when fees are high. The increased use of third-party fund of funds to invest in private equity could also have added an extra layer of fees.

The Private Equity Growth Capital Council, a trade body, said that calculating fees on the basis of committed capital was the industry standard, and it was inappropriate to compare fees on the basis of invested capital.

Indeed, Steve Judge, Interim President and Chief Executive, The Private Equity Growth Capital Council, responded to the FT claiming that private equity data isn't rocket science:

Sir, Dan McCrum’s article “Private equity fees called into question” (January 24) describes statistics about private equity performance and fees that we at the Private Equity Growth Capital Council do not recognise. His main finding is that in recent years the pension plans have paid higher fees to private equity funds than in previous decades. In contrast to this assertion, most industry observers believe that management fees have declined in recent years. Preqin, a leading provider of data on alternative assets, finds that management fees for private equity funds are at or below 2 per cent and fees for funds over $1bn in assets have declined to an average of 1.71 per cent.

The reason the nominal amount of fees went up is simple: pension funds and other sophisticated investors have invested substantially more money in private equity over the past 10 years. Since management fees are typically based on the amount of money committed by the investor, it logically follows that the nominal amount of fees to private equity funds will go up as more capital is committed to these funds. This finding is simple mathematics, not news.

Pension plans have found private equity investments to be a superior performing asset class. Just this week Calpers, the pension plan for California’s public employees and the US’s largest public pension, reported that private equity investments returned more than 12.3 per cent during the year while the rest of the portfolio returned only 1.1 per cent.

Mr McCrum’s assertions rely on a study conducted specifically for the Financial Times. Your newspaper should release the study publicly so that the data, methodology and conclusions can be reviewed. Until then, the findings of any unpublished study are inconclusive.

Mr. Judge is talking up his industry. That's his job. The truth is that the bulk of private equity funds are mediocre and if you factor in illiquidity and leverage, they've underperformed the S&P 500 over the last 20 years.

And the fees are high, especially for pensions and endowments investing in private equity funds of funds (totally insane!!!). This is why large Canadian and U.S. public pension funds are increasingly co-investing alongside private equity funds so they can reduce fees.

Of course to do this properly, you need deep pockets and you need to hire talented professionals and pay them properly. For example, Financial News reports that the Ontario Teachers’ Pension Plan has appointed Jo Taylor, a former 3i executive, to be its head of its London office, a new role for the key private equity investor:

The role will involve finding and executing investments, which typically range from between around C$100m (US$98m) and $300m. The London office was set up in 2007 but had until now been run from Toronto by vice-president Andrew Claerhout.

Taylor had spent over 20 years with 3i Group holding a number of senior investment roles before departing in 2008. His last role was as head of venture at 3i, before he then launched an unsuccessful bid to acquire 3i’s venture portfolio in 2009, creating the now-defunct firm Ethean Capital for the bid.

Other large Canadian public pension plans are doing the exact same thing. Will it all pan out? We shall see. None of the Canadian or U.S. funds publish the performance of their direct investments separately from that of their fund investments.

In the end, pensions looking to private equity, real estate and infrastructure to 'save' them might be better off focusing a lot more on public markets. Keep in mind, private equity's landscape is changing and its fortunes are inextricably tied to what's going to happen in public equities.

Below, Jim Bianco thinks the stock market is living on borrowed time. Giving his outlook for the rest of 2012, the president of Bianco research says stocks "might have another 5 to 6% to go and that's on the topside." He has two main reasons for his relative gloom: The end of stimulus and rapidly shrinking earnings.

As much as I respect him, I happen to disagree with Jim. With the Fed committed to keeping rates low until 2014, and other central banks pumping up the jam, I see a massive rally in risks assets once we get over all the Euro gloom and doom. Germany should listen to Soros, he understands what's at risk.

So Much For That Big Fat Greek Payday?

Stefan Kaiser at Spiegel reports, Hedge Funds Bet on Profits from Greek Debt Talks:

The negotiations over the Greek debt haircut are becoming increasingly suspenseful, with euro-zone finance ministers and the IMF pushing investors to accept greater losses. Hedge funds, more than any others, stand to profit, and are betting that the voluntary debt rescheduling will fail.

Who will bleed for Greece? For weeks, private creditors like banks and insurers have been trying to negotiate a debt rescheduling with the country without success. Even when they seem close to agreement, it remains unclear if all creditors are on board. In particular, hedge funds that own Greek bonds could have a significant interest in ignoring the results of the negotiations, instead preferring to focus on an official national default.

Bank representatives assume in the meantime that many hedge funds are not really interested in an agreement. With a controversial investment strategy they have assured themselves of profiting with either a low level of Greek bad debts, or a complete Greek bankruptcy.

At issue are Greek bonds with a total volume of about €200 billion. How many are owned by hedge funds is unclear, but the amount is estimated to be about €70 billion (including other funds).

The bondholders are expected to voluntarily give up 50 percent of their claims. Another 15 percent is to be compensated with either cash or secure bonds of the European rescue fund EFSF. The remaining 35 percent should come in the form of new Greek bonds, that will likely reach maturity in 30 years.

The amount of money the creditors will actually have to give up depends on the interest rates on the new bonds. The Institute of International Finance (IIF), which is leading the negotiations with Greece, is insisting on an average of at least four percent. The euro-zone finance ministers and the International Monetary Fund (IMF) have instead insisted on rates lower than four percent, in order to make the burden on Greece more bearable. The banks calculate that this means they would actually lose closer to between 70 and 80 percent of their claims, and they are balking.

'Not Worried About Their Public Image'

For some hedge funds, the fight over interest rates has given them more incentive to push for a breakdown of the proposed plan. Officially, they are in the same boat as the banks and insurance companies. But in reality their interests are vastly opposed.

"Hedge funds don't need to worry about their public image," one banker says. Their reputation has already been destroyed. Therefore, they can be relatively cavalier in gambling with the possibility of a Greek bankruptcy.

In an internal analysis of the German Savings Banks Association (DSGV), which represents the public banks, the hedge funds come off fairly badly. With the financial investors "only the performance" is most important. There is "hardly a political or economic corrective factor," such as long-term customer or contractual relations, the analysis says. Therefore, "one can conclude that they are not really interested in an actual Greek rescue."

Unlike the creditors who have long held Greek state bonds and definitely stand to lose in the case of a Greek debt haircut, some investors have only jumped in over the past few weeks. They have stocked up not just on Greek bonds, but also on the related Credit Default Swaps (CDS). These Credit Default Swaps guarantee the buyer protection in the event that the underlying bonds default. "This week alone there will be scores of new CDS transactions," one insider says. "And some of them at exorbitant prices."

Those who in the past few days have bought Greek state bonds worth €1 million euros and wanted to protect them against loss with CDS, would have had to pay more than €400,000 or even €500,000. And they fluctuated wildly -- depending on the news, the price of CDS rose and fell sharply. That indicates that the CDS are being used mainly for gambling.

This example shows how the calculations made by short-term investors work:

• One hedge fund stocks up on Greek state bonds. Since the market participants have long expected a haircut of 50 percent, the prices of the bonds are extremely low. They are, for example, at 30 percent of the nominal value at which the bonds were issued. The funds, for example, have bought Greek state loans with a nominal value of €100 million, but paid €30 million for them.
• At the same time, the hedge funds are protecting themselves with so-called Credit Default Swaps (CDS) against a Greek payment default. Such Credit Default Swaps are deals between two market participants. The seller agrees to compensate the buyer for losses, should the underlying obligation default, in this case the Greek state bonds.
• As long as a debt haircut for Greece has not officially been finalized, the CDS secure the full nominal value of the bond, or 100 percent. Therefore they are also very expensive and cost, for example, 30 percent of the nominal value. In addition to the €30 million for the bonds, the funds have also paid €30 million for the CDS, or a total of €60 million euros.

But there are other ways in which the poker game can play itself out, and the funds can make large profits.

• If it comes to a haircut of 50 percent, then two things would happen: The Greek state bonds would gain in value and instead of costing €30 million, run at maybe €45 million. At the same time, the CDS safeguard for the hedge funds would fall significantly in value. Therefore, the funds would only reap a small profit. This variation, therefore, is not attractive for them.
• Things look different for the hedge funds if an agreement breaks down. In this case, the threat of insolvency exists. The chance that the bondholders would get their money back would dramatically decrease. The bonds would have less value than before, and would no longer be worth €30 million, but say just €10 million. And the CDS guarantees would be due. The hedge funds would, depending on the arrangement of the CDS, receive up to 100 percent of the bonds' nominal value, or €100 million. Under this scenario, the hedge fund that invested €60 million would get €110 in return - a profit of almost 100 percent.

If the Institute of International Finance (IIF) and Greece agree on a voluntary haircut, it is attractive for the hedge funds holding the CDS to simply not to take part. In this case, there are three possibilities:

• Too few of the bondholders take part in the haircut. Should more than 20 percent of the bondholders refuse to accept the negotiated conditions, the debt rescheduling could break down, and with it also likely the second rescue package for Greece. The country would be bankrupt, the CDS would be due, and the hedge funds could cash in.
• A lot of bondholders partake. Should, for example, 90 percent of the investors promise to take part, the few holdouts could emerge unscathed, and bet on Greece paying off the bonds as they mature. Hedge funds that hold Greek bonds could in this case become the classic definition of a freeloader.
• The Greek government, though, has threatened not to tolerate such freeloaders. If an agreement is reached with 80 percent of the bond holders, they want to force the remaining 20 percent to take part in the haircut. In that case, the existing bonds would later be so-called "Collective Action Clauses." The hedge funds could still cash in because in this case the debt repayment would not be voluntary, and it would be considered a payment default, making the CDS also come due, and the gamblers would profit.

The strategy does have one snag. The hedge funds assume that in the event of a payment default all CDS providers can pay. That is by no means certain, though. The CDS papers are distributed opaquely throughout the financial system. No one knows for sure who holds them at a given time, and who, in the end, will be responsible for them.

The majority of large banks have both issued and bought CDS. The net risks are therefore officially quite small. But should only one of the larger CDS issuers turn out to have difficulty paying, a chain reaction could be possible with unknown consequences. Under that scenario, it would also likely affect the hedge funds.

Some hedge funds are preparing for a legal battle. Sarah White and Tommy Wilkes of Reuters report, Hedge funds prepare legal battle with Greece:

Hedge funds are combing through the small print of Greece's planned rescue deal with private creditors, readying a wave of potential litigation to squeeze a better payout from the country.

Most bondholders face an uphill battle in wringing a payment from Athens through the courts, but shrewd funds picking up specific bond issues with investor-friendly small print have a much better chance of succeeding.

This is so worrying those negotiating Greece's private sector deal that many are trying to keep the final structure of a rescue package under wraps until it is done to prevent the funds from finding a legal edge, sources close to the talks say.

Challenging countries through the courts is a well-worn hedge fund strategy - some are still battling Argentina for payouts more than 10 years after its record-breaking default.

The closer Greece edges to a disorderly default where it imposes losses, rather than a managed one in which it agrees a deal with a majority of bondholders, the more creditors are likely to go down the legal route.

Athens is racing to cut a deal to slash its debt pile by some 100 billion euros (83.5 billion pounds) through a voluntary bond swap that would see private creditors swallow 50 percent losses.

If a deal is not in place by mid-March, when a 14.5 billion euro bond falls due, Greece may not get the funds it needs from the European Union and other lenders to avoid a managed default.

"If the path followed (in Greece) is a non-voluntary one, there will be excessive litigation," said Rodrigo Olivares-Caminal, a banking and finance law specialist at Queen Mary, University of London, and an expert in sovereign debt.

Madrid-based Vega Asset Management threatened it would take legal action when it quit the committee leading private creditors in talks with Athens last year, unhappy about the size of potential losses, sources said at the time.

One lawyer specialising in debt restructuring said on Tuesday he had been contacted by funds looking at legal options relating to Greece, while several funds also told Reuters they were weighing up strategies if they are forced to take losses.

BLOCKING TACTICS

Funds forced into losses as part of the bond swap or default have several avenues to bring a case, including the European Court of Human Rights or the International Centre for Settlement of Investment Disputes, Olivares-Caminal said.

Hedge fund tactics range widely. Many will be keen for a deal to get done and will not sue, especially if they can profit from the difference between the level of losses imposed and the price they paid for the debt in the secondary market.

Others hope to be paid out in full if enough other private creditors -- primarily banks and insurers -- sign up to the bond swap.

If Greece can get the go-ahead from about two-thirds of private creditors, it plans to pass laws to coerce reticent bondholders, like the hedge funds, into taking losses, sources have told Reuters.

To counter this, some hedge funds are going for defensive strategies and buying up some of the 18.3 billion euros of Greek bonds that were drawn up under English or foreign law, industry and legal sources said. These would be immune from any changes to Greek law.

The English law bonds do contain so-called collective action clauses designed to force outliers into a deal -- but they state Greece would have to get 75 percent of creditors to back a deal, most likely higher than the threshold Athens would impose in domestic law bonds in its bid to get a deal done.

They also contain precise clauses that could help hedge funds sue or eke out a settlement if they are forced into an unfavourable bond swap, because they are not being treated equally to other creditors like the European Central Bank.

The English law bonds include pari passu clauses, which mean creditors have to be treated on an equal footing and could give them leverage over the ECB, which owns around 45 billion euros worth of Greek bonds bought in the secondary market.

So far the ECB has shown unwillingness to participate in the bailout, but if Greece can succeed in forcing funds to take losses, the holders of these English law bonds could argue the ECB's immunity is unfair.

One big worry is that hedge funds could buy up enough of the English law bonds to block the clauses from being triggered for specific bond issues, although none of the sources contacted by Reuters had evidence of this happening yet.

That would make an overall agreement with private creditors very hard to reach, and give hedge funds ways of resisting further deals if Greece were to default.

RESTORING REPUTATION

Suing bankrupt governments is still a risky game, however. Funds such as New York-based Elliott Management and its affiliates, which specialise in these types of tactics and have won court cases against Argentina, are still chasing the money they are owed.

That debt restructuring saga was also easier for hedge funds to play as the bulk of the bonds were under U.S. law, limiting Argentina's influence over them.

One hope in the far tougher game that is the Greek negotiations is that Athens, keen to restore its reputation as a reliable debtor, might prefer to settle with reticent creditors than head into years of courtroom battling.

That would echo strategies employed by Ireland to deal with unhappy bondholders when it restructured the debt of its banks.

"The primary strategy is unlikely to be a court judgement after protracted litigation," said Steven Friel, a litigation partner at Brown Rudnick.

"Bondholders are much more likely to work towards settlement, if necessary using the threat of litigation as leverage to negotiate a better deal."

Finally, Landon Thomas Jr. reports, Hedge Funds Scramble to Unload Greek Debt:

So much for that big fat Greek payday.

Hedge funds that loaded up on Greek bonds in the last month — betting on a quick gain — are now scrambling to sell those holdings, fearful that European policy makers will force them to take a deep and binding haircut on the debt.

But walking away from the trade may not be that easy. While the money managers had little problem snapping up the bonds from European banks eager to sell, the pool of potential buyers is drying up.

Hedge funds have few options. Although talks between Greece and its bondholders have stalled, European officials are pressing for a deal by the end of this month. Under the proposed debt restructuring plan, hedge funds and other private sector creditors would have to incur losses of 50 percent or more — whether or not the bondholders agreed.

“I think it’s going to be take it or leave it. And if you do not participate you will get massively beaten up,” said one hedge fund holder of Greek debt, alluding to the unpleasant prospect that if he did not take the deal — and the steep loss in value, or haircut — he would end up with nearly worthless Greek bonds and with virtually no legal protection.

The situation represents a significant shift in how Europe has approached the issue. Last year, when the idea of a Greek debt default seemed a remote possibility, the private sector agreed to a “voluntary” 21 percent loss on its bonds. The fear was that forcing mandatory losses would lead to a disorderly default and scare investors off European debt altogether.

But as Greece’s economic problems have worsened and the need for debt relief has become more acute, Europe, particularly Germany, has come around to the realization that the private sector must take a deeper loss. In a sign of the new direction, the region’s leaders have begun discussions with the European Central Bank on an arcane debt swap that would strip 55 billion euros ($72 billion) of Greek bonds from the central bank’s portfolio, thus removing the possibility that the central bank might share losses with the private sector in a debt restructuring deal.

Now, the smart money isn’t looking so smart. Starting in December, the counterintuitive, go-long Greece bet was one of the more popular pitches made to hedge funds in New York and London. Investment banks — Merrill Lynch was particularly aggressive in recommending the trade, investors say — argued that even though Greece was nearly bankrupt, those who bought the paper maturing in March could double their money when Greece received the next installment of its bailout, due that same month.

The theory was that the bulk of that money would be paid to bondholders to keep Greece solvent, just as was the case with past payments from the European Union and the International Monetary Fund. Greece might well restructure its debt, the bankers said, but added it was likely to happen later and would not affect the March payout.

The pitch worked. In the last month or so, hedge funds purchased an estimated 4 billion euros ($5.2 billion) of beaten-down Greek bonds that mature on March 20.

But the bonds have gone from bad to worse. “There was a lot of volume going in, but not a lot going out,” said one broker, speaking on condition of anonymity. The broker said prices for March 2012 bonds had slipped to about 35 cents on the dollar, from approximately 40 cents to 45 cents.

Brokers estimate that of the 14.5 billion euros worth of these bonds outstanding, the largest holder is the European Central Bank, which bought the securities in 2010 at a price of about 70 cents in an early, ultimately futile, attempt to lift Greece’s failing bond market. The brokers say that 4 billion to 5 billion euros of bonds are owned by hedge funds at an average cost of about 40 cents to 45 cents on the dollar, with some of the larger positions being held by funds in the United States that have large London offices.

“It was a very binary trade,” said one hedge fund executive who listened to the pitch but passed. “If you got paid, you double your money in a month. But you may also look like an idiot.”

As I stated, it's crunch time for Europe, and politicians will ram this deal down hedge funds' throats. Smart hedge funds will take the offer and walk. Those foolish enough to sue Greece will be taught a lesson. There will be no big fat Greek payday for them.

Below, Nobel laureate Michael Spence, a professor of economics at New York University, talks about the European debt crisis. He speaks with Tom Keene on Bloomberg Television's "Surveillance Midday" at the World Economic Forum's annual meeting in Davos, Switzerland.