FacebookTwitterGoogle+RedditEmail

Private Equity’s New Strategy

by

Since the end of the financial crisis and the stock market’s climb out of 2009′s deep hole, the S&P 500 has been on a tear. The run-up in the bull market has pushed that stock market index to new heights, and at Friday’s close of 1,863 it continues to hover near its peak. As an asset class, private equity has been unable to get ahead of the market during the past five years. Sure, the private equity (or PE) funds have done well — but so has my IRA. But that’s not good enough. Pension funds and other PE fund investors pay high management fees to private equity firms in exchange for the promise of hefty returns far in excess of what they could get on their own through less risky investment in a stock market index fund. Private equity has not been able to deliver.

PE’s response? If you can’t beat the market, you might as well join it. The PE industry’s bread and butter — using lots of debt to buyout companies (LBOs), take them over, and sell them a few years later at a huge profit — is taking a back seat to PE’s new strategy of betting on the stock market. So-called PIPEs, purchases of stock in publicly-traded companies by private equity firms, are on the rise, up 42 percent in the first quarter of 2014 compared with 2013. Private equity funds are loading up on small-cap companies — publicly-traded companies too small to be included in the S&P500. These companies typically do beat the S&P500, allowing PE to beat its stock market benchmark. But pension funds and other investors don’t need private equity, they can make these investments themselves.

Private equity has also stepped up its investments in companies that will soon go public in an IPO and be listed on a stock market. Even private equity giants such as The Carlyle Group and TPG are making these so-called growth investments. They are buying shares in young companies and betting they will make money when the companies go public. Carlyle has invested $500 million in Beats, and TPG has invested $475 million in Airbnb. Just last week TPG provided a loan of $750 million to Chobani, the popular Greek-style yogurt company, that will convert to shares of stock and presumably yield a high return when the company goes public.

But betting on the stock market is something pension funds can do on their own — at little or no cost.

Private equity funds are sitting on piles of cash including accumulated unspent funds from prior years — so-called dry powder — that they are unable to put to work. Despite mediocre returns compared with the stock market and the massive build-up of un-invested dry powder, pension funds and other investors still pay millions of dollars in management fees to private equity each year.

Pension funds have increased their investments in private equity and are paying high management fees in the expectation that returns will beat the stock market and enable them to fund retirees’ pensions. With LBOs taking a back seat to investments in the stock market, however, it’s not clear how PE will make the high returns pension funds are betting on.

Eileen Appelbaum is a senior economist at the Center for Economic and Policy Research. 

This article originally appeared on Huffington Post.

 

More articles by:
July 28, 2016
Paul Street
Politician Speak at the DNC
Jeffrey St. Clair
Night of the Hollow Men: Notes From the Democratic Convention
Renee Parsons
Blame It on the Russians
Herbert Dyer, Jr.
Is it the Cops or the Cameras? Putting Police Brutality in Historical Context
Russell Mokhiber
Dems Dropping the N Word: When in Trouble, Blame Ralph
Howard Lisnoff
The Elephant in the Living Room
Pepe Escobar
The Real Secret of the South China Sea
Ramzy Baroud
Farewell to Yarmouk: A Palestinian Refugee’s Journey from Izmir to Greece
John Laforge
Wild Turkey with H-Bombs: Failed Coup Raise Calls for Denuclearization
Dave Lindorff
Moving Beyond the Sanders Campaign
Jill Richardson
There’s No Such Thing as a “Free Market”
Patrick Cockburn
Erdogan Moves Against the Gulen Movement in Turkey
Winslow Myers
Beyond Drift
Edward Martin - Mateo Pimentel
Who Are The Real Pariahs This Election?
Jan Oberg
The Clintons Celebrated, But Likely a Disaster for the Rest of the World
Johnny Gaunt
Brexit: the British Working Class has Just Yawned Awake
Mark Weisbrot
Attacking Trump for the Few Sensible Things He Says is Both Bad Politics and Bad Strategy
Thomas Knapp
Election 2016: Think Three’s a Crowd? Try 2,000
Corrine Fletcher
White Silence is Violence: How to be a White Accomplice
July 27, 2016
Richard Moser
The Party’s Over
M. G. Piety
Smoke and Mirrors in Philadelphia
Jeffrey St. Clair
The Humiliation Games: Notes on the Democratic Convention
Arun Gupta
Bernie Sanders’ Political Revolution Splinters Apart
John Eskow
The Loneliness of the American Leftist
Guillermo R. Gil
A Metaphoric Short Circuit: On Michelle Obama’s Speech at the DNC
Norman Pollack
Sanders, Our Tony Blair: A Defamation of Socialism
Claire Rater, Carol Spiegel and Jim Goodman
Consumers Can Stop the Overuse of Antibiotics on Factory Farms
Guy D. Nave
Make America Great Again?
Sam Husseini
Why Sarah Silverman is a Comedienne
Dave Lindorff
No Crooked Sociopaths in the White House
Dan Bacher
The Hired Gun: Jerry Brown Snags Bruce Babbitt as New Point Man For Delta Tunnels
Peter Lee
Trumputin! And the DNC Leak(s)
David Macaray
Interns Are Exploited and Discriminated Against
Brett Warnke
Storm Clouds Over Philly
Ann Garrison
Rwanda, the Clinton Dynasty, and the Case of Dr. Léopold Munyakazi
Chris Zinda
Snakes of Deseret
July 26, 2016
Andrew Levine
Pillory Hillary Now
Kshama Sawant
A Call to Action: Walk Out from the Democratic National Convention!
Russell Mokhiber
The Rabble Rise Together Against Bernie, Barney, Elizabeth and Hillary
Jeffrey St. Clair
Don’t Cry For Me, DNC: Notes From the Democratic Convention
Angie Beeman
Why Doesn’t Middle America Trust Hillary? She Thinks She’s Better Than Us and We Know It
Paul Street
An Update on the Hate…
Fran Shor
Beyond Trump vs Clinton
Ellen Brown
Japan’s “Helicopter Money” Play: Road to Hyperinflation or Cure for Debt Deflation?
Richard W. Behan
The Banana Republic of America: Democracy Be Damned
FacebookTwitterGoogle+RedditEmail