Warren Buffett ignored his own private equity advice – and paid the price
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Illustration: Sarah Grillo/Axios
Warren Buffett is renowned for his investment advice. If only he'd listened to it when it came to private equity.
Why it matters: Buffett's Berkshire Hathaway on Saturday took a $3.8 billion writedown on its 27.5% stake in Kraft Heinz, which now is weighing various breakup plans to salvage value.
- It's a bad deal that just keeps getting worse for Berkshire, more than a decade after it partnered with 3G Capital Partners to buy H.J. Heinz for $28 billion.
- Two years later, Heinz merged with publicly traded Kraft Foods, with Berkshire and 3G initially owning a majority stake in the combined company — which since has seen both its revenue and market cap sag.
Catch up quick: Both before and after the Kraft Heinz deal, Buffett was a vocal critic of private equity.
- He argued that fees and leverage were excessive and that the reporting to limited partners was dishonest.
- Perhaps more importantly, he believed that private equity investors "don't love" the companies they buy, viewing them more as cash cows than family pets.
Zoom in: For some reason, though, Buffett felt that 3G Capital was an exception to his rule.
- Maybe it was because the firm was founded in Brazil rather than Manhattan. Or because he felt it had a long-term investment philosophy, even though much of its timing record looked indistinguishable from vanilla private equity firms. Perhaps he was pleased by early returns from a Berkshire loan that helped 3G-backed Burger King buy Tim Hortons.
- Whatever the cause, Buffett looked the other way and partnered with 3G on the mega-deal for Kraft Heinz, deflecting when asked if 3G's early and brutal cost cuts contributed to the company's later troubles.
- 3G even installed one of its partners as CEO in 2019, but by the end of 2023, he was out. So were the "long-term" investors at 3G, which quietly exited its entire 16% stake — leaving Buffett holding the bottle.
The bottom line: It's reductive, and downright false, to argue that private equity usually destroys value at the businesses it buys. Even at Kraft Heinz, there are plenty of secular challenges, including changing consumer nutrition trends, and it's been publicly held since the 2015 tie-up.
- But if you proclaim that private equity is malevolent, asking it to the prom could become a self-fulfilling critique.
