From ai5000 Magazine: Wealth in Sin | Chief Investment Officer

During the best of times and the worst of times, people will continue to drink, smoke, gamble and fight. Here’s an assessment of the Vice Fund portfolio, firsthand. Paula Vasan reports.

The night started at 2:45 on a Thursday afternoon. I arrived for Off-Track Betting in midtown Manhattan, eager to learn what made gambling stocks a necessary part of the Texas-based Vice Fund (VICEX). It was apparent as soon as I approached—men in wrinkled suits ready for a hiatus from their workday, retirees, others who had lost their jobs in need of a quick thrill. The dark room was quiet and smelled of body odor. People stared at bright monitors in a zombie-like daze, longing for a miracle. It was soon obvious The Inside Track was a breeding ground for addiction. Flipping through one of the OTB magazines, the first page featured a large ad. In all bold, capitalized letters: “GAMBLING PROBLEM?” The question mark was emphasized. Thirty minutes after entering, Grey Heart’s Girl and Hidden Value had lost me $20, yet won me my first insight into investing in vice.

While stock markets fluctuate, people worldwide continue to drink, smoke, and gamble as their nations defend themselves. Thus, the genesis of the Vice Fund: Dan Ahrens, its founder and former manager, says that, after the market’s severe dip in early 2000, he found alcohol, tobacco, and gaming ranked among the top industries for 1-, 3-, and 5-year performance. What began as a joke turned into the creation of the now $77 million investment vehicle, a mutual fund targeting about 30 “sin stocks”—in contrast with socially responsible investing (SRI).

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In 2007, Stephen Schwarzman, the chairman of the private equity giant Blackstone Group, completed the largest leveraged buyout in history for Equity Office Properties, threw himself a $3 million 60th birthday party, took Blackstone public with a $31/share IPO that closed out the day trading at $35, and was named the new “King of Wall Street” by Fortune magazine. That same year, private equity, along with hedge funds, Asian sovereign capital, and petroleum exporters, were named the four “new power brokers” on the international financial scene by McKinsey’s Global Institute think tank, which predicted that the Fab Four’s assets (which had tripled in the previous seven years to $8.4 trillion) would grow to more than $20 trillion by 2012 if things went well, and to at least $15 trillion if they went poorly.

Such innocent days. Following that high point, Blackstone’s stock price quickly tumbled to the mid-low teens, where it has more or less stayed. Schwarzman’s birthday party has come to be seen as an exemplar of the excesses of a dying empire, like Michael Milkin’s 1980s “Predators’ Ball” high-yield bond conferences, or Marie Antoinette’s playing peasant in mock village she built at Versailles. Private equity firms have languished as tightened lending and valuation cuts brought the market to a near standstill. Even people like James Kilts, a partner at Centerview Partners, one of the fastest growing boutique firms in the business, was saying that you could make an equally strong case for the private equity world dying off as you could for it surviving and growing as it did after the declines of the late 1980s and the early 2000s.

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