When I first got into the financial industry some two decades ago, the hottest career was in investment banking, the home of the financial "Masters of the Universe."
Hedge funds in particular were all the rage.
A good gig at a company like Goldman Sachs (NYSE: GS) was the place to be, so I joined Goldman in their hedge fund group to learn the business from some of the best and brightest minds.
Working for a hedge fund quickly became Wall Street's glamor job, the new address for the Masters of the Universe.
Then, after the financial crisis hit and many hedge funds took their licks, the smartest minds and smartest money moved elsewhere -- and unlike investment banking, this isn't off limits to you, the retail investor.
As always, the smartest minds and the smartest money will find the right place to prosper, and these days the new Masters of the Universe have found that place in private equity.
For you, the new home of the best and brightest is something to celebrate, because there's now the opportunity to make money from many high-quality, publicly-traded private equity firms that are generating income and delivering big share-price appreciation for shareholders.
Earn Twice as Much
Let's face it, in a rising interest rate environment, you need both high dividends and strong growth potential-and both of these attributes can be found in spades in the best publicly-traded private equity companies.
So, who are these new Masters of the Universe? Two firms in particular can work wonders for your financial future.
What makes these firms so compelling from an investor's perspective is their extremely attractive yield and their outstanding share price performance. Investing in their shares will give you the opportunity to profit alongside the firm's billionaire managing partners.
For example, Blackstone offers a current yield of 3.90%. So far in 2013, that yield has come complete with a 48.2% share price surge. KKR offers a higher current yield of 5.30%, along with a stellar year-to-date gain of 35.6%. Some other firms offer even higher cash yields.
What makes these funds so profitable for investors?
Generally speaking, private equity firms make money three different ways.
- Investment income. By putting together the right deals and bringing them to market via IPOs, private equity firms can deliver big investment income profits for shareholders.
- Management fees. Managing assets for large institutions and select high-net-worth clients, private equity firms collect substantial management fees of about 2% per year on total assets.
- Incentive allocations. Private equity groups usually charge their customers a percentage of profits, and this percentage is known as an incentive allocation. This percentage on profits varies depending on the firm, but a 20% cut of all the profits earned is a round number that's typical in the industry.
These varied revenue sources feeding private equity firms are in large part what makes them such a great asset class for both income and growth investors. Yet it's the structure of these funds that also ensures their place in your portfolio.
You see, private equity firms are structured as limited partnerships, which means their earnings must be distributed to shareholders.
The recent boom in the equity market has helped private equity firms enjoy a stellar 2013. I expect this boom in the sector to continue, as improving global economic metrics continue to be favorable to private equity.
I also expect private equity firms to continue capitalizing on the shrewd investments they made during the 2008-2010 recession.
Many private equity firms were able to buy assets on the cheap during the bust times following the onset of the Great Recession, and they're beginning to reap that fiscal harvest now that equity prices have rebounded.
In these situations, fund managers take their portfolio companies public in an IPO to cash out their investments.
For instance, some of the companies in Blackstone's portfolio that went public, or plan to go public this year, include amusement park operator Sea World, shopping mall giant Brixmor and hotelier Hilton Worldwide.
If you want to have world-beating returns in your income portfolio, it's time to tap into the new Masters of the Universe in private equity.
Robert also busts the most dangerous myth about retirement investing here.