Hot stocks to watch this afternoon: GPRO, HAS, MU >>> READ MORE

Private Equity Stocks: A Back Door for Playing the IPO Market

The returns can be even higher than open-market offerings


The IPO market has been pretty healthy this year.

Sure, last Thursday was tough for IPOs — three deals ended up pricing well below their ranges — but that was the exception to the rule. On Friday, SeaWorld (NYSE:SEAS) pulled off a highly successful IPO with a return of about 22%. And earlier in the week, Fairway (NYSE:FWM) posted a 33% return.

But the fact remains that institutional investors are the ones that get IPO deals at the offering prices. The retail crowd usually has no choice but to buy shares in the after-market. Unfortunately, prices have usually climbed much higher by then.

The Private Equity Game

But there is an interesting way to get a piece of the action: buying shares in private equity firms, such as Blackstone (NYSE:BX), KKR (NYSE:KKR) and Carlyle (NASDAQ:CG). These operators have long histories of taking companies private then getting their deals back onto the public markets via IPOs to generate return.

In fact, the returns are often magnified. Private equity firms will borrow large sums when buying companies. Over time, they pay down the debt with cash flows, which builds up their equity positions. And on top of that, private equity firms themselves often pay juicy dividends.

Keep in mind that this strategy is generally for a select few private equity firms that have strong teams and access to huge amount of capital. A mid-tier operator in the space simply wouldn’t have the scale to get pull of these types of deals.

IPO Power

The firm that has benefited the most from private equity is Blackstone. In the latest quarter, the economic net income spiked by 28% to $628.3 million, and assets under management increased by 15% to a whopping $218 billion.

No doubt, a key driver has been the fees generated from IPO deals. Recent deals include Pinnacle Foods (NYSE:PF), Kosmos Energy (NYSE:KOS), PBF Energy (NYSE:PBF) and Nielsen (NYSE:NLSN). Blackstone was behind the SeaWorld transaction as well.

But what about the companies being offered? How do they feel about the process?

I spoke to Jim Atchison, SeaWorld’s CEO, Friday morning. “We are very fortunate being partners of Blackstone,” he told me. “The firm made a significant investment in our growth and also provided lots of wisdom for our strategy.”

Hard to argue with when you’re up 22%.

Diverse Platform             

However, Blackstone is more than buyout shop; it is a powerhouse for alternative investments. For example, it has $60 billion in real estate assets across the globe, not to mention the thriving businesses with credit and hedge funds.

Institutions and sovereign-wealth funds like to focus on alternative investments because of the higher returns. But these operators also like to invest in private equity funds that have tremendous scale and stability. That makes Blackstone a prime candidate.

True, the firm has already seen a big move in its stock price, up 43% for the past year. But again, it’s a leader in a market that is likely to see secular growth. And at the same time, the firm has a healthy dividend yield — at the current rate, the full-year return will come to about 6% or so.

Blackstone offers a lot for investors: exposure to the alternative asset class, juiced returns from IPOs, real estate growth and a nice yield.

And as far as I can see, there’s plenty more to come.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities, and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC