Private equity (PE) investment dramatically over the past 5 years has been, and private equity funds have produced excellent returns for investors. Private equity funds very popular and trendy "alternative investments" that many large investors (high net worth families and institutional investors) had felt like to be involved with have become. Private equity fund companies or businesses try to get in cheap. They use lots of debt to leverage your profits tax, to cut costs to improve short-and long-term benefit, try and sell assets to carry out capital. Sometimes they own property owned by the company to pay out a dividend, and they eventually (after 2-5 years) to sell out to another buyer or a higher valuation to take the company public.
Favorable conditions that helped drive the recent private equity boom dramatically changed compared to last year. Future private equity returns much lower than they might have been the last 5 years and may prove to be quite disappointing for many investors. I believe that private equity summit was the first half of 2006 and 2007. Private equity boom very cheap loans, equity in a bull market was driven by a strong global economy, the benefits of private equity firms, massive capital inflows are rising, Sarbanes / Oxley rules for public companies, and strong initial reporting returns. Some of the largest private equity firms Blackstone, Carlyle Group, Kohlberg Kravis Roberts, Texas Pacific, Thomas H. Lee, Cerberus Capital and Bain are.
Private equity's historical returns:
Large private equity funds have been pretty good past returns, the stock market beating returns. According to Fortune magazine in 10 years between 2006 (peak probability for PE) SP500 stock market index returns on private equity to 6.6% versus 11.4% average. Long-term (20 years) results show that private equity investing in a 4% -5% premium on the public equity markets have returned. Of course the better returns investing that much more exposure and "off" for many years with are receiving.
Private equity investment and my fears about the future returns:
1. Debt is more expensive for leveraged buyouts. Cheap and plentiful credit is an important factor that private equity firms were allowed to succeed. Private equity often just a leverage buyout (the LBO) is one of the companies. Last 5 or high-yield "junk" credit is very cheap and a very small premium to Treasury debt was traded over the years. Junk bond debt in the last 6 months, premium costs have jumped significantly (from 3% to 8%), and the availability of high-yield debt has decreased dramatically because of the credit crisis. PE future returns will suffer the high cost loans, and they will not use as much leverage. Less leverage means lower returns for investors.
2. Now the economy is weak. We may be in a recession right now. Recession in general are highly leveraged companies is not bad. Given how much debt these companies for their investments in private equity investing layer of risk to take a fairly high level. Private equity firm Cerberus Chrysler in the current economic downturn and GMAC (home and auto loans, 589M 1Q08 loss of $) is struggling with the leveraged ownership.
3. There are a number of private equity firms and private equity capital invested in the dollar has risen dramatically, all chasing the same deals, and pay higher prices. Above average returns almost always get competed away as tons of new supplies or capital market enters. Acquisitions are now more competitive and expensive. Private equity firms companies "cheap" not any more with all the competitors can bid to buy the property. Many large hedge funds also got last several years in private equity business, making it an even more crowded place. Offers lower returns than chasing players just "put money to work" to do?
4. Many large private equity firms has recently publicly. Why would they? The inconsistent and their companies to improve how it is run privately with the whole philosophy is hypocritical. Do they have a "top" in the sense of the private equity market? I think so. Industry Insider "smart money" was selling, so why should we be buying? PE firms that go public have seen their shares much of the private equity industry concerns about the recent drop. Blackstone (BX) a private equity business is one of the largest players. His stock has fallen 40% since they went public (peak) and their fourth quarter earnings (announced March 10) were below 89%.
5. Private equity firms are having trouble in some of the recent big deal is. Some big buyout deals than new atmosphere, a slow economy, or inability to obtain financing with less attractive terms because of the fallen. Big deal is less and less attractive conditions for private equity investors means less future returns.
6. Private equity firms out of necessity after the deals are smaller and less profitable. Now smaller companies are investing public, the (pipe) to support small growth companies have been investing in private companies, and purchase convertible debt. These types of deals past the traditional big LBO deals that are likely to result in lower returns. Blackstone chief James says, "We are seeing deals that are not dependent on leverage. Joshua Lerner of Harvard Business Professor Says LBO duration is a bit obsolete when neither benefit nor a buyout is at hand. Many of the big PE firms find good investment if they cash currently, many of which does not produce a return on lots that are not able to sit on.
7. Fees are too high for investors. Private equity fees are typically 2% per year, plus 20% of any profits earned. It is very expensive, especially if they are invested in cash, converts, pipes, small low-leveraged deals and lower expected returns than they have been in the past.
8. Best funds and private equity firms have limited penetration. If you million with only a small investor in private equity investing, are you the biggest or the best private equity firms and funds are not likely to be used. Past performance of a particular PE manager a great indication of future performance may not be. A less experienced private equity fund or an additional layer of fees with a "fund of funds" might settle for.
I think that there are still large institutional investors, private equity investments have a place, but that's somewhat disappointing return for everyone can be in the next 2-3 years. In my opinion, most individual investors should avoid the area now investment.
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