Right now is one of the best times to invest in some of the most
hated companies in U.S. history.
And while they may be "hated," they're also some of the most
Their roots trace back to the corporate raiders of the 1980s.
Tycoons such as Carl Icahn, Victor Posner and T. Boone Pickens are
part of their lore. They've morphed into somewhat tamerasset
managers since then, but they still find creative ways to generate
high returns on capital.
I'm talking about private equity firms.
While privateequity shops have drawn the ire of some ofWall
Street 's hallway monitors -- they've been accused of stripping
companies down and costing American jobs -- they're also experts at
What's their secret?
They sometimes act as knights in shining armor -- helping
troubled businesses turn things around -- while lendingmoney at
exorbitant interest rates of around 16%, even in a near-zero
interest rate environment.
Other times, these companies may deploy billions of dollars into
an unconventionalinvestment -- like single family homes, for
example -- as I explained in
Private equity is how the "1%" invests. Only the richest people
and businesses in the country -- the Mitt Romneys and Goldman Sachs
of the world -- trust these companies with theirmoney .
They are a go-to vehicle for charities, university endowments
and pension funds that need at least 8% in annual returns to meet
obligations. Yale University, for example, keeps roughly one-third
of itsendowment funds with them.
The good news is you don't have to be a part of the wealthy
elite to participate in private equity's outsized returns. That's
because about a dozen of them now trade onstock exchanges...
They've become an oxymoron --
publicly listed private equity firms
And now is an opportune time to invest in them...
Private equity funds are not for all markets. They tend to do
well inbull markets, when the value of their equity holdings rises
and they canliquidate their holdings through initialpublic
offerings (IPOs) or by selling them to other companies.
Low interest rates are also a positive. Cheap debt makes
leveraged buyouts less costly and thus potentially more
Private equity firms generally commit capital for the long-term,
usually five to ten years. The key is to buy them early in an
economic recovery, as appears to be the case right now, and be
prepared to hold them for several years as the recoverygains
Blackstone Group (NYSE:
reported blowout fourth-quarterearnings , 43% above 2011's levels.
Apollo Global Management (NYSE:
did even better,
boosting fourth-quarterearnings an astronomical
higher than a year earlier.
Dividend yields vary widely. Giants like
The Carlyle Group (NYSE:
and Blackstoneoffer trailing 12-month yields below 4%.
Others, however, are set up as business development companies,
or BDCs. BDCs must return 90% of profits to investors -- which is
great news for dividend lovers. These companies can make for great
--stocks that pay safe, rising dividends that can give
retirement-age investors the potential second income we all dream
With a little digging, private equity yields of better than 6%
can be found, including Apollo and
In fact, after Apollo's announced fourth quarter earnings, the
company boosted its quarterlydividend 162% to $1.05 per share.
While Apollo's dividend varies every quarter based on earnings, if
it maintains its $1.05 distribution, then it would have an
effectivedividend yield of 19%.
While their structures may differ, Apollo and THL Credit share
one thing in common. Theywill go just about wherever they can make
KKR and Apollo, for example, recently made
significantinvestments inreal estate . And as readers of my
newsletter know, I think there is money to be made in the
rentalmarket as the country becomes a "
Carlyle bought controlling interests in a commoditieshedge fund
. KKR also launched ahigh-yield bond fund targeted at individual
investors. Apollo entered the distressed debtmarket in India.
While there's a big difference in their focus areas, mostoffer
financing to mid-sized businesses to develop new products, expand
into new markets orrestructure operations.
These are typically not start-ups, but more
mature companies with operatingcash flow
. THL Credit, for example, focuses on companies with revenue
between $25 million and $500 million.
Middle-market companies are a particularly attractive niche now
that banks have pulled back from lending to them as they seek to
reduce risk in the wake of the financial crisis.
As a result, private equity can demand interest rates of between
14% and 20%. Despite this high rate, companieswill still use
private equity because they can borrow more capital than if they
were to use traditional bank loans.
However, if you buy shares of these companies, beware ofbear
markets... Down markets and high interest rates can be tough
because there's less deal-making activity and the value of the
holdings tends to decline. This pattern can lead to volatile
Action to Take -->
My top two high-yield picks are THL Credit and Apollo Global
Management. Either one of these could make ideal Retirement Savings
Stocks. Both provide yields of more than 6% and appear to be riding
thewave of an improving economy and strengtheningstock market.
If you want to know more about
, then I invite you to check out this special presentation. These
stocks are a smarter, safer, and more profitable approach to
incomeinvesting . Simplyput , if you're looking for a second income
stream for your retirement, then it's the only way to go.
Click here to learn more
-- Carla Pasternak
Carla Pasternak does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.