Private Equity: 4 Lessons For Value Investors

Private Equity: 4 Lessons For Value Investors

Most individual investors pay very little attention to what’s going on in the world of private equity.

The shadowy world of private equity and buyout investing is seen as the province of large institutions and well-heeled big money types — and of little interest to those looking to catch the next 10 point move in Apple.

It’s of even less interest of those middle of the road investors who have some stock and mutual funds in their retirement plans and just do not spend a lot of time thinking about the markets. While most will never have big money invested in private equity funds, tracking this industry should be at the top of every investor’s regular activities list.

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Popularity Is Not Always Key

The first reason is that the private equity mindset is more successful than attempting to day or swing trade the well-known popular stocks. Study after study has shown that most traders will fail. The quoted number most often used is 90 percent of traders “just don’t make it.”


It’s extraordinarily difficult to be a good trader, much less a great one.

Related Link: 3 Reasons To Quit Trying For The Impossible With Your Investments

The simple truth is that, just like everybody who ever put on glove dreams of pitching in the World Series or playing center field in the big leagues, everyone who dreams of being a great trader probably is not going to make it.

Adopting the valuation sensitive, longer time frame of the private equity investor will help most investors earn much higher returns over time.

Opportunity Tends To Show Up Uninvited

The other reason investors should pay more attention to the private equity industry is that it will allow you to spot opportunities and trends before they make their way to Wall Street and into the mainstream media.

Private equity is the smart, patient money that is usually right behind the distressed investors in buying assets in out of favor industries that have long term potential. They are also among the first to start selling when valuations get frothy and it is time to start cashing in and building cash reserves.

Look At What Private Equity Folks Have Learned Recently

On Monday morning, Reuters had an article on global M&A activity was surging and valuations are surging to the highest level since 2008. The average EBITDA multiple is now up to 13 which in the eyes of most PE investors is too high for deals to make much sense right now. That’s part of the reason that dry powder in private equity funds is now nearing $1 trillion.

Investors tracking private equity news would have the articles about Gerald Schwartz that were in Bloomberg. The story about the Canadian-based founder of PE firm ONEX is interesting and there were some solid takeaways that investors can use right now to make money.

Schwartz has seen his funds generate a gross internal rate of return of 28 percent for more than 30 years by applying the private equity smart and patient mindset to investing. He attributes a lot of his success to being able to invest in smaller companies than his larger competitors that had a little more hair on them and more upside when the turnaround was effectively executed.

Schwartz is also quoted as saying that while he sees some signs of change as lenders cut back on aggressive lending it is still very much a sellers’ market right now.

Follow The Latest In The Private Equity Market

The article also mentions that the firm is making some efforts to move into credit and lending. This mirrors recent comments from Henry Kravis and George Roberts of Kohlberg Kravis Roberts (NYSE:KKR) as well as Leon Black of Apollo Global Management LLC (NYSE:APO) on the tremendous opportunities in direct lending as bank pull away from the market.

Related Link: Hetty Green – The Grandmother Of Value Investing

It is an easy stretch for investors to realize the business development companies, particularly those with ties to larger PE firms like Apollo Investment Corp. (NASDAQ:AINV), are going to be major beneficiaries of this opportunity and could provide outsized returns for smart, patient investors.

Following what is going on in the private equity industry can help make you more money.

If you followed the private equity market on a regular basis, for example, you would have been buying into the shipping stocks in early 2013 just before they exploded higher with many doubling and tripling in value since then.

Investors would be in tune with what the smart, patient money is thinking and doing in the current environment and be better equipped to find opportunities and avoid potential disasters.

Tracking the industry will also help you adopt the value sensitive long term private equity mindset that will make you a better investor.

Disclosure: The author currently holds a position in AINV.

© 2014 Benzinga does not provide investment advice. All rights reserved.


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