Private Equity Investments
The Investing Elite Added 926 Companies to the "Private Stock Market" Last Year:
Here's Why... And How To "Get In" on the Private Equity Investing Boom Before They Spend Their Next $378 Billion
An Investment U White Paper
From the Investment U Research Team
According to The Wall Street Journal, the returns from private equity investments triple the S&P 500 every year.
In fact, the exclusive market is now worth an estimated $1.3 trillion - enough money to pay off more than 10% of the national debt. And the world's most savvy stock picker is paying attention...
While it hasn't always been the case, private equity has quietly become the cornerstone of Warren Buffett's investing strategy at Berkshire Hathaway in recent years... a private company, mind you, which pulled in $16.9 billion dollars in 2006 alone...
If you suspected that Buffett's success and status as America's 2nd richest man was due to something more than buying shares of publicly traded companies like Coke and Gillette, you would be right. As he wrote in his 2006 address to Berkshire shareholders:
"In our early years, we put most of our retained earnings and insurance float into investments in marketable securities. Over the years, however, we have focused more and more on the acquisition of operating businesses [private companies].
"Large gains from here on in will come only if we are able to make major, and sensible, acquisitions [on the Private Stock Market]..."
Strong Words from Warren Buffett...
What he's saying is that large gains will "only" come through acquiring and profiting from whole companies.
Last year, Buffett added three private stocks to his portfolio...
- BusinessWire, and
- Applied Underwriters
He paid $6 billion for the companies. If past performance is any indicator, he will pocket at least $1.8 billion from these three stocks over the next 12 months, applying this private equity investing model.
|The Top 5 Private Equity DealsNew deals are being announced at a breakneck pace. But not just ordinary deals takeovers of historic size commonly referred to as "mega-deals."Take a look at a recently compiled list of private equity investments from Fortune Magazine:
1. $45 billion - TXU: Acquired by Kohlberg Kravis Roberts and Texas Pacific Group in 2007
Amazingly, this was the third time in only four months that the record for largest private equity buyout was broken. According to MSNBC, the investors behind the deal plan to save Texas residents money by cutting electricity rates, cancel controversial plans for new power plants and still turn a profit.
2. $38.9 billion - Equity Office Properties Trust: Acquired by Blackstone in 2007
The announcement of this deal prompted Matthew Ostrower, an analyst with Morgan Stanley to say, "now every public company out there is going to have to some degree examine their capitalization, whether being public makes sense." The huge price tag was the result of a last-minute bidding war between Blackstone and Vornado Realty Trust.
3. $32.7 billion - Hospital Corp. of America: Acquired by Bain, KKR, Merrill Lynch in 2006
It wasn't only private equity firms getting in on the action here. Also staking a claim in HCA were relatives of Senator Bill Frist, whose father and uncle were the original founders of the company.
4. $31.1 billion - RJR Nabisco Acquired by KKR in 1989
This landmark deal held the record for largest buyout for almost two decades. It was the basis of the book and then subsequent film "Barbarians at the Gate: The Fall of RJR Nabisco."
5. $27.4 billion - Harrah's Entertainment: Acquirers: Apollo, Texas Pacific, Year: 2006
Under the terms of the deal, investors will receive $90 per share that's a 36% premium from where the stock was trading just before Apollo and Texas Pacific announced their intentions.
While Buffett obviously invests through his holding company, Berkshire Hathaway, how do other big-name investors profit from the trading of whole companies on the private equity market?
How Private Equity Investments (the "Private Stock Market") Work, and How You Can Get in on the Action, Too...
Last year, 926 companies were removed from the New York Stock Exchange, the AMEX and the Nasdaq. They were added to the Private Stock Market.
Investors like President George H.W. Bush, former Prime Minister of England John Major, and Paul Hewson (better known as Bono, the lead singer of U2) have invested through private equity firms - Blackstone, Apollo Management, Kohlberg, Kravis and Roberts, and Carlyle Group...
They sink millions of dollars at a time into these private equity investment funds - totaling $378 billion in the last 12 months alone. And the funds turn around and buy up whole companies like Hertz, Equity Office Properties and Orangina.
Here's how it works...
The rich investors put their money into a private equity fund and thus become a "limited partner" in the fund, while the fund's manager - known as the general partner - handles all the investments for the wealthy individuals.
Once an acquisition is made using the billions of dollars gathered by the fund, the company goes into the portfolio. Once acquired, the company can provide its new owners with profits in any number of ways... here are the top 5:
1) Apply Leverage: First, you can leverage the company's cash flow into an enormous loan to cover the purchase of the company So if you agree to buy Company X for $10 billion, you might put up $3 billion of your own money and finance the rest with the company's strong cash flow as collateral. That keeps you from putting up all your own money.
2) Pay Yourself a "Dividend": In the process, you can pay yourself a "recapitalization" dividend worth hundreds of millions or even billions of dollars, by further leveraging the company's strong cash flow.
3) Add Value: Next, private equity firms seek to add value to Company X by improving operations through managerial changes, new strategies, and changes to the structure and focus of the business.
4) Profit from Operations: You can then draw 20%-30% off the operating profits of the business every year as it grows in value in your portfolio...
5) OR Cash Out: Or you can turn around and sell Company X to another player on the private market... or you can sell the company back to the investing public through an "Initial Public Offering" (You've heard of making a mint by investing in the right IPO's? Try being on the other end, as the owner of the company going public)
Generally, holding times for private companies are long-term, often up to 10 years. That explains why it's generally only a good idea if you have a ton of money you can park and forget for a long time
In any event, the advantages of the shareholders owning the company outright are obvious...
Private Equity Investing=Complete Ownership... And All the Profits
When you buy the entire company, you have total power - including the power to hire and fire the CEO and the entire board - the shareholders can suddenly get rich in any number of ways not available to investors in public companies.
(This explains why powerful men like Bush and Buffett prefer the control private equity gives them over their investments...)
You control the company and don't have to worry about pesky public shareholders. Nor do you have to concern yourself with government regulations that often hold back public companies, such as Sarbanes-Oxley and the SEC, and reformer politicians like Eliot Spitzer.
That also means you don't have to obsess over the coming quarter's earnings reports. Instead you can focus on strengthening the company away from the public spotlight. And that means you can make the tough decisions that are necessary to get things moving forward quicker - without having to consult with the public relations department beforehand.
That's why some call the private equity market "pure capitalism."
Private companies are governed by a whole different set of rules from publicly traded companies. Rules that give them greater operational freedom, and the leeway to focus on long-term productivity and profitability instead of short-term goals like quarterly earnings...
Bloomberg even calls this private stock market a "miracle of Wall Street."
But what's so important here is that they are making great returns without taking the same risks you'd take when investing in public stocks.
In short, it's now the fastest way for early investors to get rich on Wall Street. But how does the average guy get in? Here are two ideas...
Individual investors can now buy shares in the private equity firms themselves.
Blackstone Group (NYSE: BX), for example, one of the largest private equity firms in the world, recently went public. It was the largest U.S. IPO in five years, raising more than $4 billion.
American Capital Strategies (Nasdaq: ACAS), another private equity firm, specializes in leveraged buyouts and venture capital. ACAS maintains interests in more than 100 growth companies looking to expand their businesses. Including its 8% dividend, the stock has averaged annual returns of 21% for 10 years now.
The Investment U Research Team