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:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

January 18, 2017
Gary Leupp
The Extraordinary Array of Those Questioning Trump’s Legitimacy (and Their Various Reasons)
Charles Pierson
Drone Proliferation Ramps Up
Ajamu Baraka
Celebrating Dr. King with the Departure of Barack Obama
David Underhill
Trumpology With a Twist
Chris Floyd
Infinite Jest: Liberals Laughing All the Way to Hell
Stansfield Smith
Obama’s Hidden Role in Worsening Climate Change
Ron Leighton
Trump is Not Hitler: How the Misuse of History Distorts the Present as Well as the Past
Ralph Nader
An Open Letter to President-Elect Donald Trump
Binoy Kampmark
NATO and Obsolescence: Donald Trump and the History of an Alliance
Zarefah Baroud
‘The Power to Create a New World’: Trump and the Environmental Challenge Ahead
Julian Vigo
Obama Must Pardon the Black Panthers in Prison or in Exile
Alfredo Lopez
The Whattsapp Scandal
Clancy Sigal
Russian Hacking and the Smell Test
Terry Simons
The Truth About Ethics and Condoms
January 17, 2017
John Pilger
The Issue is Not Trump, It is Us
John K. White
Is Equality Overrated, Too?
Michael J. Sainato
The DNC Hands the Democratic Party Over to David Brock and Billionaire Donors
John Davis
Landscapes of Shame: America’s National Parks
Andrew Smolski
Third Coast Pillory: Politicians and Rhetorical Tricks
Chris Busby
The Scientific Hero of Chernobyl: Alexey V. Yablokov, the Man Who Dared to Speak the Truth
David Macaray
Four Reasons Trump Will Quit
Chet Richards
The Vicissitudes of the Rural South
Clancy Sigal
“You Don’t Care About Jobs”: Why the Democrats Lost
Robert Dodge
Martin Luther King and U.S. Politics: Time for a U.S. Truth and Reconciliation Commission
Jack Sadat Lee
I Dream of Justice for All the Animal Kingdom
James McEnteer
Mourning Again in America
January 16, 2017
Paul Street
How Pure is Your Hate?
Jeffrey St. Clair - Alexander Cockburn
Did the Elites Have Martin Luther King Jr. Killed?
Robert Hunziker
Global Warming Clobbers Ocean Life
Patrick Cockburn
The Terrifying Parallels Between Trump and Erdogan
Kenneth Surin
The Neoliberal Stranglehold on the American Public University
Lawrence Davidson
Is There a Future for the Democratic Party?
Douglas Valentine
Who Killed MLK Jr?
Robert Fisk
The Foreign Correspondent in the Age of Twitter and Trump
Dale Bryan
“Where Do We Go from Here?”
David Swanson
The Deep State Wants to Deep Six Us
Dan Bacher
Obama Administration Orders Speedy Completion of Delta Tunnels Plan
Mark Weisbrot
Obama Should Make Sure that Haitian Victims of UN-Caused Cholera are Compensated
Winslow Myers
The Light of the World
Bruce Mastron
My Latest Reason to Boycott the NFL: Guns
Weekend Edition
January 13, 2017
Friday - Sunday
Gregory Elich
Did the Russians Really Hack the DNC?
Jeffrey St. Clair
The President Who Wasn’t There: Barack Obama’s Legacy of Impotence
Anthony DiMaggio
Ethics Fiasco: Trump, Divestment and the Perversion of Executive Politics
Joshua Frank
Farewell Obummer, Hello Golden Showers
Paul Street
Hit the Road, Barack: Some Farewell Reflections
FacebookTwitterGoogle+RedditEmail