Before investing in stocks, here's some advice to help beginners choose the right ones.
If you've always dreamed of working in private equity but lack the experience, education, capital, or connections to make it happen, there is another way to get your foot in the door.
No, you won't get a business card, but you can at least indirectly take part in a private-equity firm. You can buy shares of a publicly traded PE firm.
Want in? Here are six of the top private-equity firms you can buy today.
Option 1: Firms that invest private equity on behalf of others
We can break down your private-equity stock choices into three broad categories, the first of which are firms that manage other people's money in private-equity funds. These companies make their money from the fees and profit shares that come from the various funds under their management.
Leading this segment of the industry are firms such as KKR & Co. (KKR -1.23%). KKR is massive, with $101.6 billion of assets under management as of the second quarter. On a trailing-12-month basis, the company has returned 13.2% on equity. KKR also sports an attractive 7.3% dividend yield.
Being as large as it is, KKR isn't a pure private-equity play, even though that's where the company has its roots. KKR also manages funds that are invested in hedge funds, bonds, real estate, and other asset classes.
KKR trades at 14.4 times its trailing-12-month earnings.
The Blackstone Group (BX) is another choice in this space. Blackstone is larger than KKR, but otherwise its metrics and business models are fairly similar. Blackstone had $333 billion in total assets under management as of the second quarter, reported a trailing-12-month 13.8% return on equity, and has a 7.7% dividend. Blackstone is slightly more expensive that KKR, with a P/E ratio at 15.2.
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Option 2: Firms that invest their own capital in private equity
When TV pundits speak of private-equity firms, they're most likely referring to fund managers such as KKR and Blackstone. However, there are other types that invest their own capital directly into companies instead of investing on behalf of others through a fund.
Looking at the private-equity industry through this lens, companies that wouldn't necessarily come to mind can now come into focus. For example, two notable value investors operate businesses that fall into this category -- Tom Gayner at Markel and Warren Buffett at Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%).
Both of these companies are rooted in the insurance business but have investment wings led by Gayner and Buffett that invest in stocks and private companies. They tend to get attention for their stock-picking abilities and the occasional large deal -- i.e., Buffett.
In the private-equity sphere, Berkshire owns a huge portfolio of private-equity investments. There's Burlington Northern, the Kraft-Heinz Company, Geico, and the Nebraska Furniture Mart. Markel isn't all that far behind, with private-equity stakes in Eagle Construction of Va., Havco, PartnerMD, and Alterra Capital Holdings Limited. There are numerous others in the portfolios of both companies.
Option 3: Private-equity firms that invest equity and debt to do deals
Technically, Berkshire Hathaway could fall into this next category as well, now that Buffett has provided debt financing for a few deals alongside the Brazilian buyout firm 3G Capital. There are other, purer examples, though.
American Capital Ltd. (ACAS) offers a case in point. It deals in private equity and venture capital, and it's also willing to provide debt financing to help other deals get done. This ability gives American Capital more flexibility in how it structures its deals. Instead of relying on a third-party bank, it can pull the equity and debt levers all on its own.
American Capital has $23 billion in assets under management as of the second quarter, and return on equity has been just 4.2% on a trailing-12-month basis. The stock trades at a P/E of 17.5.
Another option for those interested in firms that do debt and equity financing is Prospect Capital Corp. It is a business development company, meaning it enjoys certain tax benefits similar to a real estate investment trust so long as it follows specific accounting rules. One of those rules is that the company must pay out a large percentage of its returns as dividends, similar again to the more commonly known REIT.
The BDC currently has a dividend yield of 13.8%, $7.2 billion in assets under management, and has returned 8.9% on equity on a trailing-12-month basis. The company trades at 7.98 times earnings.
So, which one should you buy?
Now that you're armed with this introduction to six of the top private-equity firms you can buy today, it's time for the real work to begin. Use this list as a place to start your own research to find the one that best fits your investing philosophy.
You can start by giving the firms' most recent regulatory filings a read and listening to their latest earnings conference calls. Make sure you understand the firms' unique strategies and tactics, their positions in the market, and why they will or won't thrive in the future.
If you like what you find and a company has a reasonable valuation, then odds are you've found the private-equity firm that's right for you.
