Anyone who watched the Vancouver Olympics knows about Whistler, the resort two hours north of Vancouver where many of the events took place. It's less likely they know that its owner, Fortress Investment Group (NYSE:FIG), is in a battle with lenders to hang on to its prized possession. Fortress' story is the same old song - private equity firms paying too much for an asset (almost all of it in debt), putting the acquired company in jeopardy before the inks dried on the deal. While I'm not a fan of private equity, if you invested in any listed private equity company one year ago when we were at market lows, you'd be a very happy person indeed. The question is whether the good times will continue.
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Investopedia's Arthur Pinkasovitch wrote in February that private equity firms are doing more deals now that consumer spending is slowly expanding and banks are loosening their grip on capital. As the deal flow increases, so too should stock prices. At least that's the theory. The table below shows the one-year return for the PowerShares Global Listed Private Equity ETF (NYSE:PSP) along with those of some of its holdings. You'll notice that none underperformed the S&P 500 in the past year. However, triple-digit returns seem unlikely in 2010, especially when you consider the S&P 500 is up just 2.1% year-to-date. (For related reading, check out What Does Private Equity Indicate?)
Listed Private Equity Stock Returns Past 52 Weeks
|PowerShares Global Listed Private Equity ETF (NYSE:PSP)||151.3%||7.1%|
|American Capital (NASDAQ:ACAS)||674.4%||85.7%|
|Apollo Investment (NASDAQ:AINV)||345.8%||26.6%|
|Fortress Investment Group (NYSE:FIG)||303.7%||-2.0%|
|Blackstone Group (NYSE:BX)||151.3%||13.6%|
|Leucadia National (NYSE:LUK)||130.0%||4.9%|
|Onex Corp. (TSX:OCX)||88.9%||16.5%|
Close To Home
I believe in transparency. Companies that provide investors with a clear picture of their business and how it's doing always jump to the top of my list. That's the point of investor relations.
Of all the private equity firms listed above, no one does it better than Onex Corporation, located in Toronto right in my own back yard. The first page of the investor information section at its website is so straightforward you could almost make an investment decision based on nothing else. For instance, its shares have grown 14% annually over the last 20 years and its realized private investments and publicly traded stocks have generated a 29% annual internal rate of return since 1984.
Most impressive, and rarely revealed, is the page showing its record for share repurchases over the past 12 years. It's saved shareholders $941 million buying them back at prices lower than today. In its 2009 annual report, it says this about repurchases, "Onex believes that it is advantageous to Onex and its shareholders to continue to repurchase Onex' Subordinate Voting Shares from time to time when the Subordinate Voting Shares are trading at prices that reflect a significant discount to their intrinsic value."
That's what you want in an asset manager. Someone who understands the valuation of assets is critical to its success.
We're into the third month of 2010 and listed private equity continues to blaze ahead of the markets as a whole. If you're a momentum investor, you're likely to continue riding this horse. If you're a value investor, my bet is you're a little concerned about the rapid rise in the last 15 months of both good and bad listed private equity. My suggestion is to look at Onex. They have a long history as a publicly traded private equity asset manager, a productive one at that. (Find out who manages the companies you own. Read Top 9 Questions Investors Should Ask Management.)
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