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:
June 29, 2016
Diana Johnstone
European Unification Divides Europeans: How Forcing People Together Tears Them Apart
Andrew Smolski
To My Less-Evilism Haters: A Rejoinder to Halle and Chomsky
Jeffrey St. Clair
Noam Chomsky, John Halle and Henry the First: a Note on Lesser Evil Voting
David Rosen
Birth-Control Wars: Two Centuries of Struggle
Sheldon Richman
Brexit: What Kind of Dependence Now?
Yves Engler
“Canadian” Corporate Capitalism
Lawrence Davidson
Return to the Gilded Age: Paul Ryan’s Deregulated Dystopia
Priti Gulati Cox
All That Glitters is Feardom: Whatever Happens, Don’t Blame Jill Stein
Franklin Lamb
About the Accusation that Syrian and Russian Troops are Looting Palmyra
Binoy Kampmark
Texas, Abortion and the US Supreme Court
Anhvinh Doanvo
Justice Thomas’s Abortion Dissent Tolerates Discrimination
Victor Grossman
Brexit Pro and Con: the View From Germany
Manuel E. Yepe
Brazil: the Southern Giant Will Have to Fight
Rivera Sun
The Nonviolent History of American Independence
Adjoa Agyeiwaa
Is Western Aid Destroying Nigeria’s Future?
Jesse Jackson
What Clinton Should Learn From Brexit
Mel Gurtov
Is Brexit the End of the World?
June 28, 2016
Jonathan Cook
The Neoliberal Prison: Brexit Hysteria and the Liberal Mind
Paul Street
Bernie, Bakken, and Electoral Delusion: Letting Rich Guys Ruin Iowa and the World
Anthony DiMaggio
Fatally Flawed: the Bi-Partisan Travesty of American Health Care Reform
Mike King
The “Free State of Jones” in Trump’s America: Freedom Beyond White Imagination
Antonis Vradis
Stop Shedding Tears for the EU Monster: Brexit, the View From the Peloponnese
Omar Kassem
The End of the Atlantic Project: Slamming the Brakes on the Neoliberal Order
Binoy Kampmark
Brexit and the Neoliberal Revolt Against Jeremy Corbyn
Doug Johnson Hatlem
Alabama Democratic Primary Proves New York Times’ Nate Cohn Wrong about Exit Polling
Ruth Hopkins
Save Bear Butte: Mecca of the Lakota
Celestino Gusmao
Time to End Impunity for Suharto’’s Crimes in Indonesia and Timor-Leste
Thomas Knapp
SCOTUS: Amply Serving Law Enforcement’s Interests versus Society’s
Manuel E. Yepe
Capitalism is the Opposite of Democracy
Winslow Myers
Up Against the Wall
Chris Ernesto
Bernie’s “Political Revolution” = Vote for Clinton and the Neocons
Stephanie Van Hook
The Time for Silence is Over
Ajamu Nangwaya
Toronto’s Bathhouse Raids: Racialized, Queer Solidarity and Police Violence
June 27, 2016
Robin Hahnel
Brexit: Establishment Freak Out
James Bradley
Omar’s Motive
Gregory Wilpert – Michael Hudson
How Western Military Interventions Shaped the Brexit Vote
Leonard Peltier
41 Years Since Jumping Bull (But 500 Years of Trauma)
Rev. William Alberts
Orlando: the Latest Victim of Radicalizing American Imperialism
Patrick Cockburn
Brexiteers Have Much in Common With Arab Spring Protesters
Franklin Lamb
How 100 Syrians, 200 Russians and 11 Dogs Out-Witted ISIS and Saved Palmyra
John Grant
Omar Mateen: The Answers are All Around Us
Dean Baker
In the Wake of Brexit Will the EU Finally Turn Away From Austerity?
Ralph Nader
The IRS and the Self-Minimization of Congressman Jason Chaffetz
Johan Galtung
Goodbye UK, Goodbye Great Britain: What Next?
Martha Pskowski
Detained in Dilley: Deportation and Asylum in Texas
FacebookTwitterGoogle+RedditEmail