The business media like to cover the private equity industry as if it’s some newfangled thing that’s revolutionizing finance. The truth is, private equity has been around for centuries, operating under different names such as merchant banking, leveraged buyouts (LBOs), etc. However, only after some of the largest firms in the industry went public in recent years and private equity stocks began trading on stock exchanges worldwide did the subject gain traction.
How big has the private equity industry gotten?
Private Equity International puts out an annual list of the world’s largest private equity firms. To make the 2021 PEI 300, a private equity firm had to raise at least $1.55 billion over the past five years.
The 300 names on this year’s list raised a total of $2.25 trillion over the past five years, 13% more than the total from 2020. To make the top 10, a firm had to raise at least $37.5 billion over the past five years. At almost $8 billion a year, the pitching for new funds is practically 24/7.
If you want to invest in private equity stocks, several big ones are public. Or you can spread your bets around by buying one or more of the ETFs that exist. Either way, the firms that deserve your hard-earned cash are the ones that are the best capital allocators.
Here are seven private equity stocks to ride your way to riches:
- Brookfield Asset Management (NYSE:BAM)
- Blackstone (NYSE:BX)
- EQT AB (OTCMKTS:EQBBF)
- LVMH (OTCMKTS:LVMUY)
- Compass Diversified Holdings (NYSE:CODI)
- 3i Group (OTCMKTS:TGOPY)
- Blue Owl Capital (NYSE:OWL)
Private Equity Stocks to Buy: Brookfield Asset Management (BAM)
The Toronto-based alternative assets manager reported its Q2 2021 results on Aug. 12. As always, CEO Bruce Flatt’s shareholder letter is a must-read.
Flatt reported that the company grew its funds from operations (FFO) in the quarter to $1.6 billion, 37.8% higher than a year earlier. He reminded investors that since it reported first-quarter results in May, it has raised $24 billion in private capital, and that number will grow exponentially as it launches more funds.
This is important because Brookfield generates ongoing management and performance-related fees, so the higher the assets, the higher the potential fees. But it still has to perform, or it doesn’t get performance fees, and if it disappoints long enough, it would see its investors pull capital permanently.
Fortunately, Flatt and company have performed for decades.
Brookfield had trailing 12-month (TTM) fee-related earnings (before performance fees) of $1.6 billion in the second quarter, 2.3x higher than in 2017. They’ve increased for four consecutive years since then.
As Flatt said in the shareholder letter, Brookfield now has flagship funds for real estate, infrastructure, private equity, transition — with a focus on investments related to reducing greenhouse gas emissions and other related goals — and credit.
Amazingly, it has 2,000 institutional clients who invest, on average, in 2.1 of its funds. In 2016, it had 425 clients averaging 1.8 funds.
Progress all around.
The number one name on the 2021 PEI 300 list is New York-based Blackstone. It raised $93.2 billion over the past five years. It finished the second quarter with $684 billion in assets under management (AUM).
On Aug. 9, the Blackstone Real Estate Income Trust announced that it would acquire WPT Industrial Real Estate Investment Trust (OTCMKTS:WPTIF) for $3.1 billion, including the assumption of debt. Blackstone is paying a 17.1% premium to WPT’s Aug. 6 closing price.
WPT has 110 properties in the U.S. across 20 states, providing 37.5 million square feet of industrial and warehouse space.
Of the alternative asset manager’s distributable earnings in Q2 2021, private equity accounted for 35%, with real estate generating the lion’s share (45%). Credit & Insurance, along with Hedge Fund Solutions, accounted for the remaining 20%. Distributable earnings per share in the quarter grew by 40%.
The private equity segment increased AUM by 21% to $223.6 billion in the quarter, bringing in new assets of $7.3 billion and $24.1 billion over the past quarter and 12 months respectively. The segment’s distributable earnings during the quarter increased 137% over last year to $446.9 million. Revenues during the quarter grew 129% to $804.1 million.
The bigger the ball, the larger the profits.
Private Equity Stocks to Buy: EQT AB (EQBBF)
A few months ago, I signed up for a free newsletter from Swedish-based EQT, and it’s one of my favorite quick reads whenever news arrives. If there’s one thing you learn about private equity, it’s that a lot of balls are up in the air at any given time. So how you manage them is the difference between success and failure.
EQT CEO Christian Sinding reported the company’s first-half report in July. In the letter, Sinding reminded investors that it was the first private equity company in the world to issue a sustainability-linked bond. I’m sure we’ll see a lot more from other industry players in the months to come.
One common theme of private equity firms is that they generally don’t use permanent capital for their investments. But, ultimately, they must exit these investments to return capital to their investors. For example, EQT had 9.9 billion EUR ($11.7 billion) in exits in the second quarter, up considerably from the first half of 2020.
EQT went public in 2019. In two years, it’s grown its AUM by 78% to 71.3 billion EUR ($84 billion). As a result, revenues have grown by 136% over the two years.
In April 2021, EQT announced that it would acquire the U.S. subsidiaries of UK-based transportation company FirstGroup plc (OTCMKTS:FGROY) for $4.6 billion. EQT bought the two businesses — First Student and First Transit — because it believes it can add value to both by differentiating what each does. It may take both companies public in the future.
Reuters reported on July 16 that L Catterton, the Paris-based private equity firm was considering an IPO, or it might consider a merger with a special purpose acquisition company (SPAC). Perhaps Bill Ackman would be interested now that his SPAC, Pershing Square Tontine Holdings (NYSE:PSTH), isn’t buying 10% of Universal Music Group.
In July 2020, I discussed L Catterton’s investment in Vroom (NASDAQ:VRM), the used car e-commerce platform. L Catterton owned 16.8% of the company after it went public at $22 in June 2020. As of March 31, the private equity firm still owned 14.5% of the stock.
“L Catterton was created in January 2016. It was the combination of Catterton — a private equity firm focused on consumer-facing companies — in partnership with LVMH and Groupe Arnault, Bernard Arnault’s family holding company,” I wrote in 2020.
Almost everything LVMH and Bernard Arnault touch turn to gold. Last year at this time, Arnault was worth $90.9 billion. Bloomberg puts his current wealth at $180 billion.
If there’s a private equity firm whose IPO you should buy, L Catterton is definitely it.
Private Equity Stocks to Buy: Compass Diversified Holdings (CODI)
Connecticut-based Compass Diversified Holdings is the smallest of the seven names on this list. It has a market cap of $1.8 billion.
Over the past 22 years, it has taken controlling positions in private equity-style holdings while utilizing permanent capital, which allows it to be both opportunistic and disciplined at the same time about its prospective and existing investments.
On its website, it provides three case studies about past investments. Fox Factory Holding (NASDAQ:FOXF) would likely be its most successful investment over the years. It acquired the company in January 2008 for $80 million. In August 2013, Fox Factory went public. It reduced its shares between 2014 and 2017, netting more than $527 million in proceeds, an almost six-fold return on its investment.
In 2021, it generated a total return of 43% through Aug. 16, considerably higher than the 18.4% total return for the U.S. market as a whole.
CODI currently owns nine businesses, including 5.11, which recently filed a confidential submission of its Draft Registration Statement for Proposed IPO. The company designs and manufacturers outdoor gear for both the consumer and law enforcement/military markets. It acquired 5.11 in August 2016 for $408 million.
This could be another Fox Factory in the making.
3i Group (TGOPY)
3i Group is a London-based private equity and infrastructure investor. It has 16.9 billion GBP ($23.3 billion) in AUM split between private equity (68%), infrastructure (29%), and Scandlines, a Danish ferry service (3%).
Breaking this down further, three pieces of its business account for approximately 61% of its AUM. So you can either believe this is a “best ideas” concept of investing or that it’s putting too many of its eggs in one basket. I choose to believe it’s the former, not the latter.
Action is the firm’s largest investment, accounting for 40% of its portfolio. Action is a leading European discount retailer. In fiscal 2020, Action had 10% revenue growth and a 14% increase in its operating EBITDA (earnings before interest, taxes, depreciation and amortization) to 616 million Euros ($722.8 million).
Action’s business model revolves around store openings. In 2020, despite the pandemic, it opened 164 new stores in eight countries. It plans to continue rolling out stores across Europe.
Since 2012, 3i Group shareholders have experienced an average annual return (dividends plus appreciation) of over 20%. I’ll take that return 10 times out of 10.
Private Equity Stocks to Buy: Blue Owl Capital (OWL)
In January 2020, I recommended Owl Rock Capital Corp. (NYSE:ORCC) as one of seven high-yield investments to consider that yielded 5%. My argument centered around the idea that it did a good job lending to the middle market, provided an excellent quarterly distribution and added an 8-cent special dividend for every quarter in fiscal 2020.
Since then, its business has changed a little bit.
On May 20, 2021, Owl Rock Capital Group, the investment adviser to ORCC, merged with Dyal Capital Partners, an investment firm that buys minority ownership positions in investment managers. The merged entity, Blue Owl Capital, merged with Altimar Acquisition Corp., a SPAC, to become a publicly-traded company.
ORCC is one of five business development companies (BDCs) managed by Blue Owl under the same advisory agreement terms as before the merger.
As an alternative asset manager with $62 billion in AUM, Blue Owl provides its institutional clients a wide array of investment opportunities, including ORCC.
In the first half of 2021, Blue Owl generated $275.3 million in total adjusted revenue from management fees, etc., along with $144.5 million in fee-related earnings, $125.4 million of which were distributable.
Of its $62 billion in AUM, 97% is permanent capital, with an undefined holding period. Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) is an excellent example of permanent capital.
I urge you to learn more about this private equity investment vehicle.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.