It's an idea that the richest and most powerful people in the
business world almost never say out loud.
Buttakeover king Wilbur Ross knows it. So does Herb Allen, the
most exclusive banker in the world. And you can bet your boots
that billionaireWarren Buffett knows what I'm about to tell you.
In fact, he's often said these are the types of deals he wants to
Here'sWall Street 's dirty little secret: The bestinvestments
in the world -- those with the biggest returns and some of the
highest yields -- are not listed on anystock market .
They'reprivately held .
According to aninvesting trade group, as of September 2012,
the private market outperformed the S&P 500 by 2.5 percentage
points, 5.5 percentage points and 5.7 percentage points for
three-, five- and 10-year periods.
And it's not limited to just recent performance. A study by
professors at Duke and Ohio State covering a period from 1984
through 2010 found that
private market investors earned 18% more than the S&P
It's proof that when it comes to investing, the rich really
are different -- they invest in better companies.
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 ayear 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.
The official name for these highly exclusive firms is
A private equity firm has more than a pile of investorcash
tooffer . It also provides executive mentoring and business
advice -- often from some of the biggest names in corporate
I like private equity because alot of private-equity firms do
the exact same thing I try to do with my newsletter,
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
ticket. (For example, Amazon founder Jeff Bezos invested $250,000
in Google in 1998 -- years before it even thought aboutgoing
Here's the good news: Private equity doesn't have to be our
competitor. It can be our partner. In fact, you and I canput
private equity and its consultants to work for us the same way
the billionaires do.
That's because there is a way around the rules that bar
ordinary investors like you and me from investing in
And as these businesses grow, their private equity backers can
get phenomenally rich.
For example, between 1973 and 2011, Yale University'sendowment
fund generated average annual returns of 30.3% in private equity.
That includes a monster return of 168.5% in the year 2000, when
Yale made $2.1 billion on its private-equity investments.
Compare that 30.3% figure with the averagegain of just 10.2%
per year for the S&P over the same time period, and you start
to see the type of impact that private equity could have on your
Given the returns they've generated, it should come as no
surprise that private equity now ranks as Yale's single largest
holding. In fact, Yale invests twice as muchmoney in private
equity as it does in regularcommon stocks .
And Yale's performance isn't unique -- as you'll see in a
Thebottom line is that private equity firms have made
countless fortunes over the years.
But until 2007, you couldn't invest directly in private equity
unless you were either an elite institution like Yale, or you
ranked among the richest 6% of all Americans.
Fortunately for us, all of that changed in June 2007 when one
of the largest players in this notoriously secretive industry
made a surprising decision. It decided to list its shares on the
New York Stock Exchange.
Thanks to these recent developments, you can now invest
directly in a handful of the world's biggest and most lucrative
private-equity firms. And with each and every deal they make, you
can reap the same rewards that the ultra-wealthy have already
been enjoying for decades.
Not to mention, you could enjoy the
sky-highdividend yields many of these firms pay out each
Just look at the returns and yields of these five
private-equity firms available to buy on the public market:
Fortress Investment Group (
The Blackstone Group (
The Carlyle Group (Nasdaq: CG)
KKR & Co. LP (
Apollo Global Management (
*Yield calculation based on company's last dividend payment
Compared with the S&P 500's total return of just 25% over the
same period, private equity certainly looks tempting.
Action to Take -->
You won't become a multimillionaire overnight by investing in
private equity, but you'll have a chance to bank a tidyprofit
from some of America's fastest-growing private companies. And
most importantly, you'll tap directly into the private market --
a market that's cheaper and more lucrative than regular, ho-hum
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