Private equity as an asset class had an outstanding run from 1998 to 2006. More recently, with the bear market and the forced unwinding of highly leveraged positions, many of the big private equity firms such as Blackstone Group and Fortress and others have taken a bit of a hit.
But the reports of private equity’s demise, to paraphrase Mark Twain, are exaggerated. In an MSNBC online article written by Kristin Graham of the Motley Fool, she argues that ordinary investors could learn a thing or two about investment success from studying private equity.
For instance, unlike public companies, PE firms don’t have to report short-term results, so they can stay better focused on long-term results. A PE manager knows his exit strategy upfront, so he’s ready to act swiftly when the time comes. And PE executives’ compensation (as well as a sizeable chunk of their own holdings) are usually tied to the performance of the business.
Graham suggests that investors look for similar qualities when investing in the stocks of public companies. Such as firms with outstanding corporate governance structures like Walt Disney. Or firms with a clear long-term perspective, such as Warren Buffet’s Berkshire Hathaway. And companies that tie executive compensation clearly to performance. Sergey Brin and Larry Page of Google, for instance, take home just $1 in salary with the rest tied to performance-based incentives.
Many private equity firms have done an outstanding job at extracting value from the companies they manage. In fact, as we’ve discussed in this blog before, PE firms have a better track record at managing their companies than family-owned and government-operated firms. Graham suggests that by looking for public firms that operate in a similar way, you can get a better value out of your equity investments.
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