Private Equity

A: Private Equity

Q: Want to learn how to earn 44% annual returns from a portion of your investment portfolio?

If you want to boost the performance of your portfolio, then consider private equity. From 1992-2002, the top 25% of U.S. private equity managers returned 44.5% annually while the second 25% of private equity managers only returned 14.3% (Source: Venture Economics, Morningstar Principia). The returns of top private equity firms have been so solid that even private institutional endowments like that of Yale University expects almost a third of their portfolio return to come from the 17.5 % it had invested in private equity (Source: Yale Endowment 2003 report).

The risks of private equity are often misunderstood. Even though a lot of wealthy people have been investing in private equity for many years, it is still an investment vehicle surrounded by confusion and misunderstanding.

Benefits: More Transparent than Public Equity

Private equity funds cover a wide range of different sectors as well as a wide range of structures. There are leveraged buyout funds, venture capital funds, distressed debts funds and mezzanine financing funds to name several. If the investments of the Carlyle group, one of the most powerful private equity groups in the world, were more readily open to the public, I’d buy into almost every single one of their investments.

Often, private equity is mistakenly viewed as a murky industry. On the contrary, the companies that comprise private equity funds typically have much higher transparency than publicly traded companies. Forensic accountants that work for private equity funds receive the type of access to company’s accounting to search for weaknesses or hemorrhaging business units on a level that public equity analysts only dream about. Furthermore, many well known private equity firms attract top government cabinet officials and even ex-head of states to their boards, the benefits of which are quite self-explanatory.

One such example is the aforementioned Carlyle Group. At one point and time in recent history, the Carlyle Group could boast as board members or senior advisors, an ex-American president, a former British Prime Minister, an ex-Filipino president, an ex-U.S. Secretary of Defense and Deputy Director of the CIA, an ex-U.S. Secretary of State, and an ex-White House budget advisor. And this elite composition of board members is rather not the exception but more the growing rule of private equity firms. Because of the heavy political and corporate links of private equity funds, identifying those private equity firms with the most influential board members and advisors can be crucial to that particular private equity group’s performance.

So what’s the downside you ask?

High Minimum Buy-ins

Private equity is an exclusive club. Often minimum buy in levels are $250,000 and it is not rare for this level to be $500,000 or more. Also depending on the type of private equity fund you buy into, the liquidity may not be that great. For example if you buy into a leveraged buyout fund, investors often receive a return on invested capital after the private equity firm restructures a company and takes it IPO. This process could last six months for a quick turnaround or perhaps a couple of years. Obviously the reduced liquidity means that you have to be wealthy enough to afford longer timelines from the expected returns of private equity funds.

However, these drawbacks can be offset by the potential for phenomenal returns. If you can afford it, private equity is an investment vehicle worth a second look.

KAEHO’s Corner

In martial arts, just as in investing, there are things you can do to boost your performance. To become an exceptional martial artist, you have to train differently than the typical gym rat to develop superior hand eye coordination, flexibility and hand strength.   To develop exceptional hand strength, try these exercises:

(1) Get a big plastic container and fill it with sand. Put both your hands in the sand bin, open and fingers extended and   ball them into fists. Open and close them using this motion repeatedly until you reach the bottom of the bin, then repeat it as you work your way to the top. You can also improvise and use a bin full of rice (uncooked that is!) instead of sand.

(2) Get a canvas bag, fill it up with tiny metal ball bearings weighing about 7-10 kilograms, and toss the bag in the air repeatedly, grasping the bag from the air using your fingertips.

(3) When you have developed sufficient strength from the previous two exercises, start doing fingertip pushups. Then start bouncing on your fingertips during fingertip push ups (but do these exercises only after having developed sufficient finger strenght or you may end up breaking your fingers).