State of the Private Equity Market

I decided that I would contribute what I see happening in the private equity markets. There are so many things going on, but I’ll focus on a couple issues at present and then some forecasts of future movements.

Presently, I think the hottest issue in private equity is what are people doing with their money, LPs and GPs alike. LPs just finished off commitments for the year, but aren’t in nearly the rush to commit that they have been the last couple years. I believe this is fueled generally by market turmoil, but more importantly it’s a matter of portfolio allocation. As the public markets were hot portfolios increased, in addition a number of institutional investors also increased their asset allocation to the PE class, this created the need to rebalance portfolios and put money to work in places other than traditional equity and bonds. GPs on the other hand are flush with cash for the most part, coming off the last couple years that were great for fundraising, but with credit in its present state they are less aggressive and the deal sized have come down. The question is, there are still a large number of funds who need to put their money to work.

For the future, there are a couple things happening that I see developing more down the line. For one, secondary interest have increased. This is not new, but what it leads to is something quite interesting. There are a number of banks who have already put together trading platforms for unregistered equities. These include companies that want to have liquidity for their equity, but don’t want to have the restrictions and regulations of publicly traded companies. This may have a large effect on the private equity market, giving GPs another route to exit companies. How it affects me in my job, is I can see the day that when a private equity fund wants to raise money they will do it through one of these unregistered equity platforms instead of the traditional fund raise. Why would they do this? For the liquidity of course. There are a number of funds that are already displaying how much they want liquidity, take The Blackstone Group, or Fortress, don’t forget that KKR still wants to take his fund public, but now at the “right time.” If this becomes the norm, we might see a market develop for hedge funds and private equity funds where they become like mutual funds in the public markets. Of course this is a ways away, but that’s the purpose of forecasting.

I welcome any comments and questions,

-Michael

Economic Indicators Most Sensitive to Stocks

I have recently read a new book that is very interesting. It is titled The Secrets of Economic Indicators and is written by Bernard Baumohl. One of the things that I found interesting is on page 12 and is a table showing economic indicators that stocks are most sensitive to. I've updated the website with these and can be found on the homepage on the right of the page title "Stocks, Economic Indicators." I'll be doing more research on each of these indicators and hopefully writing more on them. I hope to have time to write a little on these, but if not enjoy the links on the right.

Damodaran Online

Introducing...Damodaran Online. This website, by one of the most intelligent financial minds in the world, is incredible and will keep you busy for days. Not only can you find loads and loads of information regarding valuation, but you can also find all the books that he has written and podcasts of his classes at NYU. (From his homepage, on the lefthand column, click on "Books and Support" or "Web Casts")

One of my favorite books is Investment Philosophies. If you are looking for a good general overview of strategies this is the book. After reading this book, not only will you better understand different strategies, but you'll better understand what strategy is best for you.

I highly recommend spending some time on this website. Read some books. Watch some webcasts. You'll be happy you did and you'll be smarter after doing it!

Keyword Searches

I was contemplating the other day a good way of finding stocks that will benefit from industry growth, or shortages of some kind and I thought about doing a google search for "shortages 2010 forecasts." The search brings up some interesting things and it's a good way to find interesting articles about demand and supply. I haven't tried it yet, but searching for increase supply or increase demand might be good too. The next couple posts will probably be using this method. So long for now. Look forward to the coming posts.

The Size of the IPO Company Matters When Investing

So in class today we had an interesting conversation about IPO investments. Based on the conversation, IPO investments for the first 4 years seem to significantly underperform the market. Here's the catch though, if the IPO company is venture backed that works in favor of the IPO company and if it is a large company going public, then that is positive for the company. There is an ETF that looks for these criteria and has done very well. It mirrors the IPOX-100. It's ticker is FPX. Something else that is interesting to read is an article in the Journal of Finance, Dec. 1997, called Myth or Reality? The Long Run Underperformance of IPOs: Evidence from Venture and Nonventure Capital Backed Companies. It's definitely a good read.

Industries with the most IPOs

This may also lead to be very interesting. In order to determine what I think are some of the hottest industries, I'm looking to see what industries are having the most IPO filings. I'm getting this information from Yahoo Finance. From what I saw, the industries with the most IPOs are: Commercial Banking, Insurance, Investment Funds, Leisure, MANUFACTURING, Natural Resource, REITS, Radio, Retail, Telephone, and Transportation. These are the industries I saw with just a quick scan. CNNMoney had an interesting article on IPO markets to watch. Really they're what you would think. Finance, Healthcare and technology, and alternative energy. Another sight you might find interesting is MSNBC Money. They have a section for IPOs, In and Out of Favor Industries, best and worst performing industries over the last month. It might be a good place to start for 'dashboard investing.'

Freight andTransportation

Today I read something very interesting and it may lead to an investment idea, my good friend Stephen Jeffries pointed it out to my investment class. I never knew the amount of freight that is transported by trains. In addition, I never knew that trains were such technological giants. If you don't know what I'm talking about read this article that was on the cover of Popular Mechanics.