Wall Street titans are racing to build the next Berkshire Hathaway. Emulating Warren Buffett won't be easy.
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- Bosses of KKR, Brookfield, and Apollo want to build their own versions of Berkshire Hathaway.
- KKR is placing long-term bets and Brookfield expects insurance to be central to its ambitions.
- The Warren Buffett approach requires smarts, patience — and the discipline to do nothing at all.
Wall Street heavyweights are vying to become the next Warren Buffett — or at least build their own versions of Berkshire Hathaway. Pulling pages from the Buffett playbook is one thing — having the smarts, patience, and discipline to succeed is another.
Float to fortune
The legendary investor and Berkshire CEO turned a failing textile mill into one of the world's biggest companies in part by acquiring insurers such as GEICO and National Indemnity.
Buffett took their "float," or the difference between the premiums they collected and the claims they paid out, and used it to buy stocks and make acquisitions.
The strategy spared Buffett and his team from having to raise money from outside investors and then feeling pressure to deliver a return to them in a few years.
Instead, they could be patient and prudent, only buying when the price was right, and purchasing businesses intending to own them forever — not strip them for parts or flip them for a profit.
Berkshire's access to "permanent capital" has made it the envy of the financial world. It's also structured as a vast web of decentralized, autonomous subsidiaries, enabling Buffett to run a company with nearly 400,000 employees while only having a couple dozen staff at its Omaha headquarters.
"We delegate almost to the point of abdication," Buffett wrote in his "Owner's Manual" for Berkshire shareholders. By trusting day-to-day responsibilities to an army of CEOs, the investor is free to focus on the critical task of deploying capital within and outside the company.
Berkshire's float-fueled model "enables optimal capital allocation across multiple alternatives — acquiring or reinvesting in majority-owned businesses, public equities, fixed income, share buybacks, and more," Larry Cunningham, the director of the University of Delaware's Weinberg Center on Corporate Governance and the author of several books about Buffett and Berkshire, told Business Insider.
"The scope for conferring autonomy, decentralization, and permanence adds more value," Cunningham said. "It does require both intelligence and patience, which are scarce resources."
Heirs to the throne
When KKR co-CEOs Joseph Bae and Scott Nuttall first joined the private equity giant in 1996, Berkshire was worth about $40 billion.
"You fast-forward 28 years, they have a trillion-dollar market cap on the back of long-term compounding of their balance sheet and their investments," Bae said at the Bloomberg Invest conference in New York on Wednesday. "Some version of that is what we're going to be doing at Strategic Holdings."
KKR manages about $650 billion of assets in its core business and owns the life insurer Global Atlantic, which has another $190 billion or so of assets under management. Last year, it introduced a third division, Strategic Holdings, which Bae hoped would become "in some ways a mini Berkshire Hathaway."
The new segment owns large stakes in 18 businesses that Bae and his team view as highly defensive with healthy long-term growth potential, and which they expect to own "literally forever."
KKR plans to invest its free cash flow in more of these kinds of ventures, spanning not just private equity but other sectors and real assets such as infrastructure, Bae said.
Speaking at the same summit on Wednesday, Brookfield CEO Bruce Flatt said his company's insurance business could eventually own its $1 trillion asset management arm and its investment operations, "which is really what Berkshire Hathaway is."
Flatt added that Brookfield's "special ingredient" is its $150 billion of capital that it can use to grow its insurance arm, invest in other divisions, or fund stock buybacks over the next 20 years.
"The attraction to investing inside an insurance company is the zero cost of float. It is effectively a margin account with zero interest," Bill Smead, the founder and chief investment officer of Smead Capital Management, told BI.
"These companies are increasingly looking to invest in long-duration, illiquid assets, in things like infrastructure and private credit, where the prices are not printed each day in the newspaper," Smead continued, adding that "long-duration assets are best suited to compound on the balance sheet rather than in a fixed-period fund."
Hunting for permanent capital
Apollo Global Management's CEO and cofounder, Marc Rowan, has also emulated the "Oracle of Omaha" in using insurance to finance investments.
"There are elements of Berkshire Hathaway," Rowan said about the private equity titan's takeover of Athene, a specialist in annuities and life insurance, in March 2021.
Kevork Djansezian/Reuters
Rowan's cofounder, Joshua Harris, said on an earnings call in 2019: "Next to Berkshire Hathaway, we have the largest amount of permanent capital out there in this business." Harris also described Apollo as an "asset-light Berkshire Hathaway" at a forum in 2020.
"It's not surprising to see others try to emulate Berkshire — after all, Berkshire has proven to those paying attention that these concepts work," Adam Mead, the author of "The Complete Financial History of Berkshire Hathaway," told BI.
At 94, Buffett is nearing the end of his career, which could leave room for a new generation of permanent-capital allocators. But "it's one thing to buy forever. It's quite another to buy and leave largely alone like the Berkshire model," Mead said.
"I'd be surprised if these 'newcomers' to the Berkshire way of buying for keeps can resist meddling with management or business models," he added.
