Fortune profiles Chris Flowers, one of the best-known private equity investors in financial services companies.

My working hypothesis, as I try to expand my manager selection skills from stockpickers to other platforms like real estate investing and private equity investing, is that these other platforms can and should also be viewed through the lens of value investing. Simply put, you evaluate a private equity fund manager the same way you evaluate a hedge fund manager: by trying to predict that individual's ability to generate superior risk-adjusted returns over time.

To evaluate investors one must evaluate how they evaluate their investments. One of the things I look for is what I call "elegance" in valuation. It' s hard idea to define; you kind of know it when you see it. Warren Buffett rarely discusses valuation, but when he does he almost always demonstrates this quality.

I guess what I mean by elegance is the ability to restate a problem (in the context of investing, the problem is most often "what is this asset worth?" or "is this asset undervalued?" or "what is the expected return of this asset?") in such a way that the solution presents itself with disarming clarity. Think of the legendary story of a precocious German schoolchild daydreaming in class in the 18th century. The dour schoolmaster commanded his students to sum all of the integers from 1 to 100, expecting the tedious calculation to occupy at least a half hour of his students' time.

My real estate self-education project continues. Again, I'm trying to see if I can apply value-oriented manager selection to real estate investing. There will likely be a lot to do in real estate in the next few years, both in public and private markets. Many new funds have been and will be formed to take advantage of all the bargains that are widely assumed will be available. My suspicion is that many of those hoping to take advantage of the bargains will be the same people who "took advantage" of all the non-bargains in the last days of the boom by buying overpriced properties. I want to stay away from those people.

Steve Roth of Vornado (VNO) alluded to this in his 2008 letter to shareholders, under the heading "Price Does Matter":

The last one urged people to "buy American" stocks. This one is a warning about the side effects to be expected from the extraordinary fiscal and monetary measures that have been taken to turn around the economy.

A little background: Buffett's father Howard was kind of a psychopath about inflation--he thought FDR would turn the US into the Weimar Republic. His son was never as bad, but throughout his career the specter of inflation has always guided his investment decisions. In 1977 he wrote an essay for Fortune called "How Inflation Swindles the Equity Investor" which is the best analysis of the effect of inflation on corporations I've ever read.

My initial working hypothesis (it will evolve, so bear with me) about investing in existing real estate (as opposed to new development) is that success is largely a function of successful financing. Just as a good banker knows that his job largely consists of borrowing at 3 (%), lending at 6 (%), and hitting the golf course at 3 (o'clock), real estate investors know that if you can just borrow low and rent high, the battle is half won.

Check out this chart from April's Economist. Among other things it shows that in Japan and Switzerland, house prices are more affordable than they have historically been, as expressed both by the price-to-rent and the price-to-income ratios. Both ratios are indexed to 100 rather than expressed in absolute terms, but it's a fair bet that in those two countries, cap rates are also higher than they have been historically.* High cap rates are the "lending at 6" part of real estate investing.

One of my current projects is to learn about the venture capital industry. Specifically, I want to answer this question: Can venture capital investing be practiced in accordance with value investing principles as I define them?

Marc Andreessen is a very successful entrepreneur who has recently "moved to the dark side" and raised a venture capital fund. In this Tech Ticker interview he speaks candidly about how the industry actually works. Novice student that I am, I tried to take good notes:

The WSJ reports that Vornado Realty Trust (VNO) is seeking to raise a $1bn distressed real estate fund to use as its "exclusive vehicle for real-estate and real-estate-related investments."

The article wonders why a publicly-traded REIT like Vornado would choose to raise money from private investors rather than in the public market. To do the former, the article argues, "risks dismaying shareholders who hoped Vornado would use its investing expertise to do deals on its own balance sheet," and quotes Mike Kirby of Green Street Advisors as follows:

Long-time readers (Hi Mommy!) know I've written about the beer industry a few times in the past. The idea is that in order to evaluate investors, you have to be able to evaluate their investments, which means you have to know a little about business. One business that's fun to know about is the beer business. Check out the oeuvre so far, there's no quiz at the end:

Thai Bev

Michael Lewis reviews 'The Snowball' in the New Republic. I don't want to write a long review of a very long review of a very, very long review of Buffett's life - that's too much reviewing. I will say two things though:

1) Lewis and Buffett have a weird history.

A story in Tuesday's FT quoted heavily from a letter sent by PE firm TPG to its investors:

Last month's letter, obtained by the Financial Times, made the case that the leveraged buy-out was "an investment structure which is useful at some times during the cycle but not at other times".

In January I linked to a WSJ interview with David Swensen in which he attacked hedge funds of funds. Here is the relevant excerpt:

Mr. Swensen: Fund of funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital. If an investor can't make an intelligent decision about picking managers, how can he make an intelligent decision about picking a fund-of-funds manager who will be selecting hedge funds? There's also more fees on top of existing fees. And the best managers don't want fund-of-fund money because it is unreliable. You need to be in the top 10% of hedge funds to succeed. In a fund of funds, you will likely be excluded from the best managers. [Mr.] Madoff also relied enormously on these intermediaries. He wouldn't have had nearly as much resources were it not for fund of funds.

Richard Beales of breakingviews.com writes about Berkshire's (BRK.A) post-Buffett future:

Other big units are important too, including the Mid-American electricity business run by David Sokol and Greg Abel. And of course the post-Buffett investing team will matter, as well. But with Buffett planning to separate the top executive and investing jobs he currently fills, both roles seem certain to be narrower in the future.

Leo Kolivakis publishes a great blog called Pension Pulse, and recently wrote a long post about the brewing scandal involving alternative managers and the placement agents they hire to secure public pension fund capital.

It seems a middleman's work is never done: Feeder funds like Fairfield Greenwich charged investors exorbitant fees for "access" to Madoff; while placement agents like Searle & Co. did it the other way, charging funds like Quadrangle exorbitant fees for "access" to pension fund investors. I await the logical next step: the revelation that one firm played both sides.

Warren Buffett may be the most well-connected businessman around. In the past, some have argued that it's this quality that enables his great success, even more than his own intelligence and judgement. His investment results are better, this rather sinister argument goes, because his information is better.

From the Fortune interview, here's Buffett on how he evaluates John Stumpf, CEO of Wells Fargo (WFC):

Bloomberg has an article on William Ackman. Read it here.

Ackman fascinates me. No other hedge fund manager challenges the skills of the manager selector more than he does. He's smart and well-pedigreed and very philanthropic, a hedge fund celebrity, extremely persuasive in both written and spoken communications, closely aligned with value investing, can point to an excellent track record, is backed by some of the best in the business, and is very rich. And yet his first investment vehicle, Gotham Partners, was forced to close amid a lawsuit and massive redemption requests, while his latest, formed solely to invest in Target, at one point was down 90%.

Another case study in investor seduction. Dreier swindled some very sophisticated people.

As far as I can tell, the foundation of Dreier's (short-lived) success as a con artist, the reason he got in the door to see all those hedge funds, was his mere reputation as a high-profile attorney representing high-profile clients.

Via ZeroHedge: Howard Marks of Oaktree wrote another memo in March, addressed only to clients and their consultants, in which he detailed his funds' failures at using leverage in 2008. The money quotes for me:

• There's a big difference between value investing and absolute-return investing, and we've learned it fully. A fund that's truly capable of consistently producing positive results may be well-suited to leverage. On the other hand, even though value investing represents the best way to achieve excellent results in the long term, it's still subject to large enough short-term fluctuations that the use of leverage has to be examined critically. It's interesting to note that the Emerging Markets Fund, Oaktree's only absolute return fund, achieved positive returns in 2008 even though it relies on leverage to let it hold long and short positions exceeding 100% of its equity capital.

• Finally, once you decide to lever a fund, "risk management" becomes more important than "portfolio management." Many more people know how to pick securities than know how to restrict a levered fund's risk to the amount that can be withstood. And the ability to pick securities for an unlevered fund isn't nearly as critical as the ability to manage risk in a levered fund.

End of excerpt

Peter Tanous is one of the manager selectors better-known to the public, having written a book of interviews with successful money managers. In an op-ed in yesterday's WSJ, he argues that it will likely take longer than expected for US stocks to re-reach their October 2007 highs.

The reason for this is firstly, that stocks have fallen a lot. If you assume the bottom occurred on March 9, the S&P has to go up by 131% to reach its earlier high.

According to this article about Deutsche Bank's (DB) annual Alternative Investment Survey, over 50% of hedge fund investors will only invest in funds with $1 billion or more in assets under management:

“It means that smaller hedge funds will disappear,” observes Andrew Ang, professor of finance and economics at Columbia University’s business school. Bigger funds are in a better position to have good risk management and can borrow more cheaply, he points out, and are more likely to have a track record.

According to this article about Deutsche Bank's (DB) annual Alternative Investment Survey, over 50% of hedge fund investors will only invest in funds with $1 billion or more in assets under management:

“It means that smaller hedge funds will disappear,” observes Andrew Ang, professor of finance and economics at Columbia University’s business school. Bigger funds are in a better position to have good risk management and can borrow more cheaply, he points out, and are more likely to have a track record.