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How Berkshire Could Make Use of Excess Liquidity

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Jul. 25 2018, Updated 10:30 a.m. ET

Rising liquidity

Berkshire Hathaway’s (BRK.B) liquidity of over $115 billion is rising at a faster pace owing to strong cash flow generation from its BNSF, Manufacturing, Services, Insurance, and Energy segments.

The company’s buyback or payout strategy implies that in the absence of rewards, unless there are big-ticket acquisitions, Berkshire’s liquidity could rise to $150 billion by the end of the current year.

Berkshire can target return generation and deploy liquidity through the following methods:

  • continual big-ticket acquisitions
  • expanding portfolio
  • targeting global markets
  • reducing subsidiary leverage
  • shareholder payouts
  • financing subsidiary-level acquisitions
  • organic expansions
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The Trump administration’s push for domestic manufacturing with lower corporate taxes and higher duties allows manufacturers to expand organically as well as inorganically. Berkshire can either deploy capital for subsidiary-level organic expansion or look to add companies positioned closer to these companies.

Strategies by other peers

Berkshire’s peers BlackRock (BLK) and Vanguard are focusing on multiple strategies, including active and passive fund management, across product categories. Berkshire could target acquisitions in China and India, which offer high growth prospects, or even in the European region across the engineering, automobile, and banking sectors.

On the other hand, alternatives (XLF) such as Blackstone (BX) and Apollo Global Management (APO) are investing in credit, private equities, and real estate. Berkshire could add utilities and real estate in other developed countries to its portfolio, offering value buys.

Another area in which Berkshire could deploy excess liquidity is via a “fund of funds” strategy and investment in existing mutual funds and institutions. However, this option may not be preferred by select investors, as they may prefer CEO Warren Buffett and Charlie Munger to finalize on companies and asset classes.

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