Public Shares in Private Equity: Should You Buy?
"Long-term growth prospects are very good for these guys," says Scott Appleby, founder of Appleby Capital, a financial advisory firm. He likens investing in a company like Fortress to investing in a mutual fund, because the company invests in other companies that it thinks will grow. Fortress recently said it would buy into a Florida real-estate company and a casino operator.
Private-equity shares, though, are likely to be more volatile than those of mutual funds, because their profits rely heavily on when company partners decide to sell off investments. "Some years they will have big wins, and some years they won't have any," says Steven Kaplan, a professor at the University of Chicago Graduate School of Business.
Costly. While Morningstar analyst Jeffrey Ptak thinks private equity is "prodigiously profitable," he warns against buying such pricey shares. Fortress was trading near $24 last week, but Ptak values it at only around $17, based on his estimation of the company's future cash flows. Plus, Fortress shares' price-to-earnings ratio is about twice that of investment banking giant Goldman Sachs, making Goldman a cheaper buy.
Ptak also notes that private-equity firms go public when they think they'll snag the top price. Hence, investors in Fortress and Blackstone now may be buying at the market's peak. And don't think for a second that your 100 shares will put you on equal ground with the guys in the $1,000 suits. Investors have limited voting rights and claims on the firms' profits. "I'd love to be a general partner, but they're not letting you invest at that level," says Peter Cohan, president of a management consulting and venture capital firm that bears his name.
Private-equity firms are untested on the stock market. Blackstone, priced at $31 per share before it went public on June 22, shot up to $38 during its first day of trading, generating plump returns for those who bought and sold quickly. Shares have since dropped back down to the $30 area. Fortress, priced at $18.50 a share for its initial public offering, doubled to $37 on its first day, February 8. It has since settled in the mid-$20s, no bargain for many who bought in the aftermarket. Research suggests that investors who trade in companies after their debut don't fare well.
So, caution is advised. "You have some of the smartest minds in the world trying to get these things public before Congress doubles the tax and lenders tighten capital," says Ken Kamen, president of Mercadien Asset Management. "Right now is a time for buyer beware."
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