Private Equity: a Primer
If private-equity firms truly believed that private ownership was the best road to riches, they'd remain private themselves. But the fact that a number of private-equity firms are now going public may be a reflection that these firms think the environment for raising money is becoming more challenging. For example, borrowing costs for private-equity funds are rising, as market interest rates creep higher. By going public, these firms will be able to tap into a huge resource–i.e., the stock market–to raise funds quickly and efficiently to help finance some of their deal activity.
How can individual investors join the private-equity party?
At present, it's really wealthy individuals and institutions that invest in the buyout funds created by these private-equity firms. And chances are, you'd have to be a big investor to be allocated shares in the IPOs of these private-equity firms. To be sure, if you're a mutual fund investor, your fund may be in on a private-equity IPO. But the funds themselves won't divulge this information until after the fact.
Is there a way for individuals to invest in these funds after their IPOs?
Of course. After the initial public offering, shares of publicly traded private-equity firms will be bought and sold on stock exchanges like any other equity. Of course, this means that you will have to pay the market price for those stocks. So if there's a decent run-up in a private-equity firm's shares on the day of its IPO, you may have to pay a premium for the stock.
Recently, an exchange-traded fund was launched that in turn invests in a basket of publicly traded private-equity firms. It's called the PowerShares Listed Private Equity Portfolio. This ETF invests in public private-equity firms that are in the Red Rocks Capital Listed Private Equity Index. Stocks include such names as Fortress Investment Group, Apollo Investment Corp., and KKR Financial Holdings.
This ETF is less than a year old, so there's not much of a track record–and so far, the fund's performance hasn't been great. Between January 1 and July 11, this ETF has returned 3.6 percent, which is about 4.5 percentage points less than the rise in the S&P 500.
Is there an indirect way to benefit from the private-equity boom?
Yes; you might consider investing in a traditional value-oriented stock mutual fund. Private-equity firms are interested in many of the same companies that value funds target–in other words, overlooked or beaten-down companies that are worth more than the stock market currently values them at. And as more private-equity firms take these companies private, they are buying out the stock at a premium to their trading price, which benefits value-minded funds that already own those companies.
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