The world of private equity involves some of the world’s most prominent asset managers.
The investment was the first from the asset manager’s new private-equity fund, Long Term Private Capital, which finished raising $2.75 billion in April from several cornerstone investors. Authentic Brands is the fund’s first significant investment.
What makes BlackRock’s private equity fund different is that it intends to make investments for the long haul.
“For institutional investors who want equity exposure, there’s a need for an additional type of investment on the continuum between publicly traded equities and leveraged buyout style private equity – one that is potentially more rewarding than public equities but less risky than highly-leveraged buyouts,” said Mark Wiseman, Chairman of BlackRock’s alternative investors division in April.
Most private equity firms buy a company, add leverage to help pay for the acquisition, find some growth either organically or through bolt-on purchases, and then sell it of five to seven years later for several times the original equity investment.
Private equity investing can be very lucrative.
However, unless you’ve got billions to invest, many of the best opportunities are unavailable to the retail investor.
To gain access to these private equity deals, there are some ways a regular Joe can do it. Here are seven options on how to invest in private equity without being a billionaire.
Ways to Play Private Equity: BlackRock (BLK)
For those investors who aren’t familiar with BlackRock, it’s one of the largest asset managers in the world with $6.8 trillion in assets under management (AUM) as of the end of June. It operates iShares, the largest ETF provider in the world, with $2 trillion in AUM.
iShares provides ETFs at relatively inexpensive management expense ratios. However, when you have $2 trillion in assets to generate fees from those ETFs, the revenues accumulate pretty quickly. In BlackRock’s Q2 2019, iShares ETFs accounted for 39% of the company’s base fees in the quarter.
The company’s ongoing foray into alternative investments such as private equity is going to take a long time to catch up to iShares’ fee generation. In the second quarter, alternative investments accounted for just 8% of BlackRock’s $2.9 billion in base fees.
So, if you buy into BLK stock because of its Long Term Private Capital Fund, it’s important to remember that it’s but a small piece of the BlackRock pie; albeit a very interesting and innovative approach to private equity investing.
Buying into BlackRock is a great way to play private equity while still hedging your bets.
Brookfield Business Partners (BBU)
Brookfield Business Partners (NYSE:BBU), the private equity arm of Toronto-based Brookfield Asset Management (NYSE:BAM), announced Aug. 13 that it was buying Genworth Financial’s (NYSE:GNW) 57% stake in Genworth MI Canada, one of Canada’s largest mortgage insurance providers.
Brookfield is paying C$48.86 a share for the C$2.4 billion controlling interest. Genworth MI Canada is one of just three companies that provide mortgage insurance in Canada.
This is the kind of deal Brookfield likes to make. It’s paying a reasonable price for an asset that’s got a lot of upside outside of Canada.
“This hints at potential global expansion of MIC (Genworth MI Canada) operations … which could drive enhanced growth and profitability,” National Bank of Canada analyst Jaeme Gloyn wrote in a note to clients.
Under Genworth Financial’s ownership, the Canadian unit was unable to operate in any countries where the parent operated. Now, it will be able to head south with a strong financial backer in its corner.
Brookfield is known for adding value to its investments while remaining patient about its exit. The company will do what needs to be done to deliver excellent returns for shareholders.
BAM is one of my favorite stocks to hold forever because they understand capital allocation better than most.
Blackstone Group (BX)
New York-based Blackstone Group (NYSE:BX) is one of the world’s largest alternative asset managers with $512 billion in assets under management. On July 1, it completed its conversion from a publicly-traded partnership to a corporation.
The company made the switch to make it easier for investors to own its stock. By converting, investors no longer need to file a Schedule K-1 for their taxes, making the paperwork from the investment far less cumbersome.
Of the 150 largest U.S. public companies, Blackstone ranks first in terms of its long-term 10-year growth rate for revenues and earnings as well as its pre-tax margin and dividend yield. So, despite being one of the best-run businesses in the country, its partnership structure limited the market for its stock.
For example, 58% of the largest 150 companies referenced above are included in U.S. long-only and index ETFs. By comparison, BX is only included in 21% of the U.S. long-only and index ETFs.
That’s all because it wasn’t a corporation.
As far as private equity goes, Blackstone has $171 billion in assets under management. Those assets are invested in more than 97 companies with combined revenues of more than $76 billion and employing more than 400,000 people around the world.
At the current moment, it has $75 billion in available capital.
One of two Canadian private equity companies on the list, Onex (OTCMKTS:ONEX) has been in the news a lot lately for its acquisition of WestJet Airlines (OTCMKTS:WJAFF), Canada’s second-largest airline behind Air Canada (OTCMKTS:ACDVF).
On Aug. 13, the Canadian Competition Bureau OK’d the transaction. Previously, Canada’s Transport Minister, Marc Garneau, approved the C$3.5 billion deal. Originally, Onex was prepared to pay C$35.75 a share. However, the ongoing troubles with the Boeing 737 Max reduced the price by C$4.75 to C$31.
The deal’s expected to be approved by the remaining Canadian regulators who have yet to render a decision. The transaction should close in the fourth quarter of 2019.
Although WestJet is one of Onex’s highest-profile acquisitions in its 35-year history, it manages more than C$39 billion in assets including C$6.9 billion of its own capital. Of the $39 billion, approximately 69% is invested in private equity with the rest in cash (18%), credit (12%) and fixed-income investments, as well as a small amount in real estate (1%).
Onex’s private equity investing has generated a gross multiple of capital invested of 2.6 times and a 27% gross IRR (internal rate of return) on realized, substantially realized, and publicly traded investments.
Like Brookfield, it’s a patient investor.
Compass Diversified Holdings (CODI)
Compass Diversified Holdings (NYSE:CODI) is by far the smallest of the private equity stocks listed in this article with a market cap of just $1.1 billion.
Not only does CODI take majority-ownership stakes in middle-market businesses in North America, it also provides debt and equity for its subsidiaries to grow. It currently owns eight different companies.
2019 has been a hectic year for CODI selling two of its businesses for large amounts.
On July 1, it announced the sale of Clean Earth, one of the largest specialty waste processors in the U.S, for $625 million. The sale netted Compass Diversified $200 million which it used to eliminate the outstanding debt on CODI’s revolving credit facility.
Compass Diversified will turn around and find one or two new platform companies on which to grow. Once upon a time, CODI owned Fox Factory Holding (NASDAQ:FOXF), makers of bike and truck shocks, until it took FOXF public in 2013.
With just eight businesses owned, it has a much easier job managing its investments. If you’re patient, CODI will reward you over the long haul.
Ways to Play Private Equity: Invesco Global Listed Private Equity ETF (PSP)
The first of two available private equity ETFs, the Invesco Global Listed Private Equity ETF (NYSEARCA:PSP) has an exceptionally high management expense ratio of 2.03%.
The ETF tracks the performance of the Red Rocks Global Listed Private Equity Index. The index typically invests in 40 to 75 private equity companies including BDCs, MLPs, and other investment vehicles. Currently, PSP has 68 holdings with 41% allocated to U.S. companies, another 16% to the UK, and Switzerland at 6%.
If you like to invest in mid-cap and small-cap stocks, PSP allocates just 29% to large caps. Of its top 10 holdings, one of the companies listed in this article (Blackstone) is held in its largest holdings. Brookfield Business Partners, Onex, and Compass Diversified are also held.
Over the past 10 years, PSP has generated an annualized total return of 9.5%, which is a decent, if not great return over the period.
If you’re wondering why the fee is so high, it incorporates the fund fees of the 68 holdings in the ETF. The management fee itself is 0.50%.
ProShares Global Listed Private Equity ETF (PEX)
Not nearly as large an ETF in terms of assets with just $18.8 million, the ProShares Global Listed Private Equity (BATS:PEX), the ETF tracks the performance of the LPX Direct Listed Private Equity Index, a diversified global portfolio of listed private equity companies whose primary business is direct investments in private enterprises.
It currently owns 30 stocks, including Onex, which is the ETFs second-largest holding, accounting for almost 10% of the entire portfolio. The largest holding in PEX is Ares Capital (NYSE:ARCC), a BDC with nearly $8 billion in market cap.
It’s hard to believe, but PEX is 75 basis points more expensive than PSP at 2.78% annually. Excluding the acquired fund fees from the ETFs 30 holdings, it charges 0.60%.
There’s no mystery why private equity ETFs haven’t grown their net assets beyond $220 million.
You’re probably better off just putting money into an ETF that holds some of the companies listed above.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.