Warren Buffet

By Nick Baker and Jason Kelly

Warren Buffett free pursue of debt-free deals that have helped make him the world's richest person.

Buffett's Berkshire Hathaway and Schwarzman's Blackstone Group, which runs the biggest private equity fund, take a different approach to the same goal: finding companies they consider undervalued.

Investors are betting Buffett's model will prevail, at least for now. Berkshire has climbed 5.4 percent since the subprime lending crisis sent the Standard & Poor's 500 index tumbling as much as 19.7 percent from its October 9 peak. Blackstone has dropped 43 percent.

"There's a massive, massive advantage for Buffett in this kind of market," said Guy Spier, the chief investment officer of hedge fund Aquamarine Capital Management. "All the leveraged finance has dried up, so he's going to have a much better time finding things to buy."

Buffett has $59 billion (R474 billion) in cost-free money from insurance premiums to invest, according to Berkshire's annual report. Buffett wrote in the report that the float was "free as long as insurance underwriting breaks even".


Earlier this month Blackstone announced that fourth-quarter profit had plummeted 89 percent. Banks started pulling back from leveraged buyout lending in June after as much as $400 billion in debt sat unsold on their books and losses from the subprime mortgage market grew.

Buyout firms such as Blackstone and Kohlberg Kravis Roberts relied on free-flowing debt to announce a record $745 billion of transactions last year, according to Bloomberg data. Blackstone led some of the top deals, including the $39 billion purchase of Equity Office Properties Trust.

But this year the pace stalled: its $1.8 billion takeover of mortgage and car leasing firm PHH with General Electric fell apart after banks reneged on a financing agreement.

Schwarzman "just won't do any of these deals for a few years", said Whitney Tilson, the founder of T2 Partners. "Blackstone still has a great business model. Buffett just has a much better one."