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

December 05, 2016
Bill Martin
Stalingrad at Standing Rock?
Mark A. Lause
Recounting a Presidential Election: the Backstory
Mel Goodman
Mad Dog Mattis and Trump’s “Seven Days in May”
Matthew Hannah
Standing Rock and the Ideology of Oppressors: Conversations with a Morton County Commissioner
Kevin Zeese - Margaret Flowers
#NoDAPL Scores Major Victory: No Final Permit For Pipeline
Fran Shor
The End of the Indispensable Nation
Michael Yates
Vietnam: the War That Won’t Go Away
Robert Hunziker
Huge Antarctica Glacier in Serious Trouble
John Steppling
Screen Life
David Macaray
Trump vs. America’s Labor Unions
Yoav Litvin
Break Free and Lead, or Resign: a Letter to Bernie Sanders
Norman Pollack
Taiwan: A Pustule on International Politics
Nick Pemberton
Make America Late Again
Kevin Martin
Nuclear Weapons Modernization: a New Nuclear Arms Race? Who Voted for it? Who Will Benefit from It?
David Mattson
3% is not Enough: Towards Restoring Grizzly Bears
Howard Lisnoff
The Person Who Deciphered the Order to Shoot at Kent State
Michael Uhl
Notes on a Trip to Cuba
Weekend Edition
December 02, 2016
Friday - Sunday
John Pilger
The Coming War on China
Jeffrey St. Clair
Roaming Charges: The CIA’s Plots to Kill Castro
Paul Street
The Iron Heel at Home: Force Matters
Pam Martens - Russ Martens
Timberg’s Tale: Washington Post Reporter Spreads Blacklist of Independent Journalist Sites
Andrew Levine
Must We Now Rethink the Hillary Question? Absolutely, Not
Joshua Frank
CounterPunch as Russian Propagandists: the Washington Post’s Shallow Smear
David Rosen
The Return of HUAC?
Rob Urie
Race and Class in Trump’s America
Patrick Cockburn
Why Everything You’ve Read About Syria and Iraq Could be Wrong
Caroline Hurley
Anatomy of a Nationalist
Ayesha Khan
A Muslim Woman’s Reflections on Trump’s Misogyny
Michael Hudson – Steve Keen
Rebel Economists on the Historical Path to a Global Recovery
Russell Mokhiber
Sanders Single Payer and Death by Democrat
Roger Harris
The Triumph of Trump and the Specter of Fascism
Steve Horn
Donald Trump’s Swamp: Meet Ten Potential Energy and Climate Cabinet Picks and the Pickers
Louis Proyect
Deepening Contradictions: Identity Politics and Steelworkers
Ralph Nader
Trump and His Betraying Makeover
Stephen Kimber
The Media’s Abysmal Coverage of Castro’s Death
Dan Bacher
WSPA: The West’s Most Powerful Corporate Lobbying Group
Nile Bowie
Will Trump backpedal on the Trans-Pacific Partnership?
Ron Ridenour
Fidel’s Death Brings Forth Great and Sad Memories
Missy Comley Beattie
By Invitation Only
Fred Gardner
Sword of Damocles: Pot Partisans Fear Trump’s DOJ
Renee Parsons
Obama and Propornot
Dean Baker
Cash and Carrier: Trump and Pence Put on a Show
Jack Rasmus
Taming Trump: From Faux Left to Faux Right Populism
Ron Jacobs
Selling Racism—A Lesson From Pretoria
Julian Vigo
The Hijos of Buenos Aires:  When Identity is Political
FacebookTwitterGoogle+RedditEmail