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Where to find value in an overheated market

Private equity firms can help a struggling company get by and even supply growth capital and management expertise.



Private equity firm

“Private equity” can conjure entertaining mental images. I’ve often asked friends to describe what comes to mind for them when I mention the phrase.

Here’s a sampling of what they’ve said: An older man in a fancy suit enjoying a single-malt scotch in a private New England club…who takes perverse pleasure in looting a company of its assets before firing all the employees and selling whatever’s left for spare parts. (It’s the old “buy, strip, and flip” routine.)

Or, perhaps that same guy is enjoying a Churchill cigar while playing a round of golf and casually plotting the same fate for some honest manufacturing plant in the Midwest.

Hey, stereotypes are stereotypes for a reason, and, it’s true, successful private equity fund managers, the people who run companies like Blackstone or KKR, tend to make good money. But they’re generally not the cynical villains they’re made out to be.

Dollar bills

Private equity firms assist companies by giving them growth capital and also management services. (Source)

In fact, private equity firms fill a critical void in the markets

They provide growth capital to companies that would have a hard time getting it otherwise. But more than just growth capital, they also often provide management expertise to the companies they fund, regularly taking an active, strategic and tactical role.

Think of it like this: When you buy a stock, you’re a passive owner. You take no active role in running the business.

Well, that’s not at all how a private equity manager operates. When they plow money into a company, they’re in the trenches with management.

In a nutshell, private equity firms invest in non-public (i.e., not traded on the stock market) companies. The typical investment is a multi-year deal in what you might think of as a “middle market” company, larger than a startup but generally much smaller than your typical public company.

Perhaps the highest-profile company in the world that still depends on private equity funding is the ride-hailing service Uber. But Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), Snapchat (NYSE:SNAP), and a host of other companies you might use on a daily basis all depended on private equity financing earlier in their lives.

Making the move from the stock market to private equity

I don’t regularly read The Wall Street Journal. Nothing against the venerable old rag, but I don’t find it to be particularly helpful for how I invest.

I’m a value investor, and I enjoy digging through company financial statements for gems. I’m unlikely to find them by reading a recap of yesterday evening’s earnings announcements or a generic analysis of the most recent jobs report.

But I do occasionally skim the Journal’s headlines. This recent one really got my attention: “Investors Pile into Private Equity at Greatest Clip Since 2013.

It’s interesting and telling that, as the U.S. stock market hits all-time highs on a nearly daily basis, a lot of smart money is pulling out of the stock market and piling into private equity.

I get it. I’ve said for months that stock-market bargains are getting harder to come by. Things are just overvalued in the U.S., which is why I recommended investing in Europe earlier in the year and why you see guys like Adam recommending recent trades in places like China, Canada, and Mexico.

And while I’m certainly not selling yet, I’m keeping my stop-losses tighter than usual to lock in profits and avoid a potential bear-market mauling.

It’s also worth noting that, with the stock market shrinking (yes, you read that right), private equity is increasingly taking the place of traditional stock market equity.

In the past 20 years the number of companies traded on the stock market has dropped by 37%. Increased regulation following the 2000-to-2002 and 2007-to-2009 bear markets has made it more of a hassle to go public, and many companies are choosing to avoid the game and stay private.

The thing is, very few mom-and-pop investors have access to private equity. But, as I shared with my Peak Income readers earlier this month, rather than recommend they invest in a typical private equity fund – which could involve a minimum investment of tens of millions of dollars and a total lack of liquidity and transparency – I’ve got an alternative.

It’s designed for regular, everyday investors, and gives you access to investing in middle-market American companies. Think Main Street, U.S.A., instead of Wall Street.

What’s more, even if these companies run into trouble, you’ll be protected and still enjoy a constant revenue stream, with an attractive 7% dividend, and special tax breaks to boot.

And from what I’ve seen from this private equity fund, you might even get a couple pleasant surprises to boost your returns too. Its disciplined management team likes to reward its shareholders steadily and responsibly.

That’s hard to beat.

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

(Featured image by Arnapoli via Wikimedia Commons. CC BY-SA 4.0)

Charles Lewis Sizemore, CFA is a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post and is a frequent contributor to Forbes, GuruFocus, MarketWatch and His academic and real-life experience has given him a unique approach to investing, combining his insights into global macro trends with in-depth investment research, and he has developed a reputation for taking complex issues and making them understandable. Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar.