Editor's note: This article was originally published on Sept.
The rich are different -- they invest in better companies than
the average investor.
But exactly how do they do this?
Well, rather than buyingshares on the stock exchange, savvy big
hitters write a very large check to a very special kind of firm. To
be eligible to invest like this, federal law stipulates that an
investor needs to have at least $200,000 a year in annual income
($300,000 for a couple) and more than $1 million innet worth ,
excluding a primary residence.
That is a very high bar. Those rules block 94% of investors.
And in reality, the entry point is much higher. A million
dollars isn't what it used to be. I don't say that to be glib: The
law that created these rules was passed in 1933, when $1 million
was the equivalent of $17.2 million in today's terms. When this law
was passed, a $200,000 annual salary was enough to keep a
Rockefeller -- or Mae West -- very happy.
While the law hasn't been updated, the marketplace has kept pace
with the times. Today, the unofficial minimum investment with these
special firms is typically $15 million to $20 million.
The "relationship" only increases from there...
The official name for these highly-exclusive firms is "private
That term probably sounds familiar. It's the area of the business
world where Gov. Mitt Romney, the Republican nominee for president,
made his fortune. Mr. Romney earned his paycheck by helping
companies expand, gain efficiency and increase profitability. As
the value of these companies grew under his leadership, so did
Romney's own net worth.
A private-equity firm has more than a pile of investor cash
tooffer . It also provides executive mentoring and business advice
-- often from some of the biggest names in corporate America. The
smartest, most capable finance geniuses and managerial wizards go
to work for companies like Bain Capital, which over the years has
invested in companies as diverse as the office products store
Staples and fast-food giant Burger King.
As these businesses grow, private-equity backers get
phenomenally rich. In some cases, the private equity firm is more
than happy to collect rich dividends from the company's profitable
operations. In other cases, the private equity firm sells its stake
in the company, sometimes to anothercorporation , sometimes to
investors. These can be, and often are, billion-dollar
Readers of my
newsletter pay me to read the fine print, and I love doing it. Let
me share with you something I've shared with them. It's something I
have seen in dozens of multi-hundred-page prospectuses of any
recent initial public stockoffering . After the description of the
business, a discussion of the risks of investing in the shares and
tons of financial charts, there is always a list of the major
shareholders. There is always -- and Imean always -- a private
equity company that is raking in an enormous pile of cash. It's not
uncommon at all for a $20 million investment to turn into a
ten-figure sum in just a few years.
I like private equity because a lot of private-equity firms do
the exact same thing I try to do with
. They try to find "the next big thing," and they seek to invest in
it before anyone else realizes that they've found the Golden
Here's the good news. Private equity doesn't have to be our
competitor. It can be our partner. In fact, you and I can put
private-equity and its consultants to work for us the same way the
That's because there is a way around the rules that bar ordinary
investors like you and me from investing in private-equity
Right now, there are 4,647 stocks on U.S. exchanges with amarket
capitalization of more than $50 million. Of those, only about two
dozen -- less than 1% -- are a special type of entity known as a
business development company, or "BDC ."
These companies, which Congress laid out the rules for in 1980,
operate in the same manner as private-equity firms: They invest in
and advise private companies, typically smaller "middlemarket "
ones, which are generally defined as companies with more than $100
million but less than $1 billion in annual revenue.
In addition to a BDC's potential for a huge payout -- when they
sell a company -- BDCs also pay huge dividends. It's not unusual to
see double-digit yields from these companies.
Here's a list of the Top-10 highest yielding BDCs on the
[Note: You can see a complete list of all the BDCs on the market
if you're a subscriber to my
As a matter of law, BDCs have to have a code of ethics. They're
disallowed from certain transactions, they have to maintain
diversity in their portfolio and, perhaps best of all, they are
limited in the amount of debt they can carry.
Add it all up, and BDCs offer a surprisingly safe way to invest
in high-risk areas on the cutting edge.
Unlike corporations, which only pay dividends when they want to,
BDCs are legally obligated to return cash to shareholders. The
reason is because, like apartnership or a trust, the entity itself
is not subject to incometaxes . Instead, income is passed directly
along to shareholders and is then taxed at their ordinary income
rate rather than thedividend rate. And not only do almost all BDCs
pay a dividend, but many pay monthly rather than quarterly.
Action to Take -->
Thebottom line is that strong BDCs can deliver a one-two
punch:Capital appreciation from harnessing the power of The Next
Big Thing and a strong, steady income stream.
The question I'm sure you're dying to ask, then, is this: Just
how do I pick the best BDC?
I've put together a special research report
Everything You Need to Know about BDCs
which is probably the single best way to educate yourself about
these special companies. To learn how to get this report,
follow this link
Andy Obermueller 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.
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