What Private Equity Firms Do and How They Will Make You Money

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Private equity (PE) firms have made the headlines recently, most notably with the Silver Lake Management and Michael Dell buyout of Dell and the 3G Capital and Berkshire Hathaway acquisition of Heinz. These firms and their roles can be quite hazy to the average investor, who may not be in tune with alternative investment strategies.

Essentially, PE firms seek to acquire, make profitable, and sell companies that are on their last leg or not operating at maximum potential. The firms typically raise capital through funds designed for foundations, pensions, and wealthy investors.

This type of alternative investment is typically way out of the reach of your everyday investor. However, PE firms typically generate boatloads of cash and are excellent at returning that cash to shareholders -- in other words, there is a lot of opportunity in the secondary capital markets. Three major PE players that are also publicly traded are Blackstone Group (NYSE: BX), Kohlberg Kravis Roberts & Co (NYSE: KKR) and The Carlyle Group (NASDAQ: CG).

The Blackstone Group operates five segments: private equity, real estate, hedge funds, credit businesses, and financial advisory. Its private equity segment is divided into five general funds and one specialized fund. This private equity arm engages in various transactions including leveraged buyouts of established companies, start up businesses, and distressed companies.

Kohlberg Kravis Roberts & Co specializes in acquisitions, leveraged buyouts, management buyouts, and growth equity or start-up businesses. Kohlberg Kravis & Roberts typically exits its position in a company in five years, either through an initial public offering (IPO), secondary offerings, or strategic minority positions.

The Carlyle Group seeks management led buyout opportunities, privatizations, divestures, and distressed companies. The company typically exits its investments within three to five years. Recently, The Carlyle Group lowered its threshold for new investors to $50,000, in order to attract additional capital.

Let's examine the fundamentals side by side to identify which one of these PE firms could find a potential home in your portfolio.

 

KKR

The Carlyle Group

Blackstone Group

Share Price

$18.69

$30.50

$20.08

Market Cap

4.88 billion

1.32 billion

11.15 billion

PE (ttm)

8.46x

73.67x

48.98x

Return on Assets

18.93%

3.24%

3.27%

Diluted EPS

2.21

0.41

0.41

Book Value/Share

7.91

24.72

9.83

Dividend Rate/Yield

1.22/6.30%

1.12/3.70%

0.72/3.50%

Wrap-up

When compared side by side, Kolhberg Kravis & Roberts seems to stand out above the rest. The company currently trades at the most attractive price with the highest earnings and return on assets. Kolhberg Kravis & Roberts also boasts the highest dividend rate and subsequent yield.

However, I would not write off Blackstone or The Carlyle Group. The two firms are expected to grow at 25% and 45% over the next year, which will outpace the industry’s expected 17%. Kolhberg Kravis & Roberts, on the other hand, is expected to see a decrease in earnings of up to 18%, which makes its lower valuation expected.

If you are beefing up the financial portion of your portfolio, private equity firms warrant your attention. However, when evaluating these companies, it is important to consider factors outside of the very basic fundamentals when deciding which is right for you.


Daniel Paterson owns shares of The Blackstone Group L.P.. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure