By Harry Domash
Online Investing
With many stocks looking toppy, this might me a good time to consider private equity firms, a category that for the most part, hasn’t done much this year.
Private equity firms typically obtain controlling interests in publicly traded corporations that have stumbled. Often, the private equity firms buy all of the target corporation’s shares, and take it private.
Then they install new management in hopes of reinvigorating the company. When the business reaches their performance goals, which can take several years, they take it public again in an initial public offering, hopefully realizing a big profit.
While private equity firms used to be only available to the wealthy, there are now at least seven that are publicly traded, and hence, available to all investors. All seven are structured as limited partnerships, not corporations.
Although they trade just like stocks, as partnerships, they do not pay corporate federal income taxes. Consequently, all pay significant dividends (called distributions). Even better, their distributions are mostly classified as return of capital. That means that the return of capital portion is not taxable until you sell. However, the tax returns for partnerships are generally more complicated than for corporations.
Investors typically use the price/earnings ratio to value stocks. However, because private equity firms are investing for long-term asset appreciation, it’s better to value them by comparing the share price to book value (P/B), which is per share assets less liabilities (lower is better). As a secondary measure, it’s also useful to check return on assets, which compares income to total assets (higher is better).
Here are the seven publicly traded private equity firms. Besides for book value and return on assets, I’ve also included market capitalization (value of all outstanding shares), dividend yield (annual dividends percent of share price), and year-to-date (YTD) return (dividends plus capital appreciation). I’ve sorted the list with the largest market capitalization firms at the top. All else equal, that’s a good way to start your evaluation. MSN Money (www.msn.com/money) is a good resource for finding the data that I’ve listed which includes book value (P/B), return on assets (ROA) and year to date (YTD).
Blackstone Group (stock symbol BX): Market-cap $50.2 billion, P/B 4.1, ROA 6.0 percent, dividend yield 7.1 percent, YTD 28 percent.
KKR & Co. (stock symbol KKR): Market-cap $29.1 billion, P/B 5.1, ROA 0.8 percent, yield 7.6 percent, YTD 7.4 percent.
Icahn Enterprises (stock symbol IEP): Market-cap $10.4 billion, P/B 2.0, ROA -0.5 percent, yield 7.2 percent, YTD -7.1 percent. Icahn is the vehicle that activist investor Carl Icahn employs to take positions targeted corporations.
Carlyle Group (stock symbol CG): Market-cap $8.9 billion, P/B 18.4, ROA 0.3 percent, yield 4.8 percent, YTD 7.3 percent.
Oaktree Capital Group (stock symbol OAK): Market-cap $8.5 billion, P/B 13.6, ROA 0.2 percent, yield 4.7 percent, YTD 8.0 percent.
Och-Ziff Capital Management (stock symbol OZM): Market-cap $5.8 billion, P/B *, ROA 1.5 percent, yield 7.3 percent, YTD 8.9 percent.
Fortress Investment Group (stock symbol FIG): Market-cap $3.2 billion, P/B 5.2, ROA 6.0 percent, yield 4.4 percent, YTD -4.9 percent.
* Och-Ziff has a negative book value, that is, liabilities exceed assets.
If you’re interested, do your own research, starting with checking recent news stories about each candidate. The more you know about your stocks, the better your results.
Harry Domash of Aptos publishes the Winning Investing and the Dividend Detective websites. Contact him at www.winninginvesting.com or Santa Cruz Sentinel, 1800 Green Hills Road, Suite 210, Scotts Valley, CA 95066.
