Private Equity: Overvalued And Overrated?

Ted

FYI: America is in the grips of a speculative frenzy. Investment bankers, private investment firms, and even a few dozen recently graduated MBAs labelling themselves “searchers” are calling, emailing, wining, and dining small business owners. Their goal is to translate prosaic small businesses into the poetry of private equity.

The great postcrisis private equity gold rush is on, fueled by cheap debt and enthusiastic investors. A lawn care chain might get half a dozen calls and emails a week from business brokers and “searchers.” A regional bank auctioning off a business with $15 million in profits might pitch two hundred prospects, receive fifty letters of intent, and take twelve separate private equity firms to management meetings, ending in a sale price which the majority of bidders considers crazy. And the greatest prize of all—a software company—could sell for many multiples of revenue, regardless of profitability.
Regards,
Ted
https://americanaffairsjournal.org/2018/02/private-equity-overvalued-overrated/

Old_Skeet

Within my portfolio, I gain my private equity exposure through the mutual fund LPEFX.

http://www.morningstar.com/funds/XNAS/LPEFX/quote.html

Note: the close to 9% yield.

Ted

@Old_ Skeet & MFO Members:: I get my private equity exposure from APO. BX, and KKR.
Regards,
Ted

Yields:
APO=6.01%
BX=7.88%
KKR=3.10%

Mark

Given the returns over the last 10 years by the S&P 500 index and the World Small/Mid Stock index why would you even bother. But hey, it's not my money.

Old_Skeet

Hi @Mark,

Apparently you are not a yield seeker?

One of the things that attracted me to LPEFX is its ability to generate income along with some capital appreciation. With this, it is part of my well diverisfied income generating portfolio. Through the past six years that I have owned LPEFX my average annual return has been better than 15%. So with a current yield of about 9% it, for me, has been better than most income funds. Now what is the yield on the S&P 500 Index? I finding it currently to be back of 2%. Hey, that is a pretty big dividend to yield spread of 1.7% vs. 8.9%. Compared to S&P 500 Index through my years of ownership I probally gave up some total return capacity but gained much more income over what I otherwise would have over holding the 500 Index. Don't get me wrong ... from time-to-time ... I've owned the Index too.

Form my perspective it has been worth it because of its ability to generate income. For others, like yourself, it might not have been.

catch22

SPY and LPEFX about a draw even for past six years for "total return".

http://stockcharts.com/freecharts/perf.php?LPEFX,SPY&n=1509&O=011000

Mark

Skeet, as I have noted many times on this board almost all of my investment portfolio is geared toward income be it interest or dividend payments but primarily the latter. I find it interesting that you used the last six years in your investment claims since two of those years had returns of roughly 41% and 27% while the other 4 did basically squat. Furthermore, you use this years projected S&P yield of 1.7% to show disparity rather than it's historic 2.0% average for the last 6 years. Tell me, has LPEFX always had an 8.9% yield? I couldn't find anything in all of the records I was able to locate. I'm glad the fund has worked for you but I think uncle Warren is right for most folks.

By the way, I see that the 10-yr average return of this fund is right around 3.0% so you might want to be keeping a close eye out for the exit doors.

bee

@Skeet, LPEFX has 32 holdings. Have you ever thought of creating your own portfolio of these holdings?

2.21% ER seems steep. Also, are you investing in LPEFX in a taxable account? Dividends are more tax efficient in a taxable account where tax loss harvesting could be employed along with the income tax benefits of dividends.

Old_Skeet

Hi @Mark,

Actually my annual payout including dividends, interest and capital gains distributions has averaged since I have owned the fund 12.9% based upon my cost basis. My total return per share has an averaged annual return of 15.4%. In addition, I am finding that the pent up unrealized capital gains within the fund are just under 20%. So if you buy now you'll be buying your distribution, so-to-speak.

That's one of the reasons I have been building cash for the past couple years. Stock are currently richly priced by my standards. And, if you pay too much your returns will be thin. That's one of the reasons I like to buy the downdrafts. While the weak investors are selling I'm putting my buying britches on as I did when I purchased this fund.

Thus far my buying strategy has worked well for me.

Old_Skeet

Hi @bee,

Actually, no I have not given much thought to buying stocks in the companies the fund holds. The turnover for the fund is listed at about 30%. So, in holding an average of 32 positions means they sell on average about ten positions per year and buy about ten more. This, thus far has created a good income stream in the form of fund distributions from their profits. In another year or so with the payouts I have received and anticipate receiving if the fund share price went to zero I would not have lost capital as I will have received in payouts a sum equal to what I have invested. That amounts to a distribution roll of eight to ten years. You want find that in real estate.

For me, based on my cost basis and distribution roll for Income Fund of America was 12 years to recoop my capital and for Franklin Income Fund it was about thirteen years. Folks, for what these funds have paid out if their value went to zero I'd be well ahead based upon the number of years I have owned them.

So ... How can I go wrong with that?