The presidency of the United States is a position of privilege
Although presidential power is tightly controlled by the
Constitution and Congress, the office remains the most
influential position on Earth. This political and social
influence enables the president to strike up friendships and
business relationships with powerful leaders in the banking,
finance andprivate equity arenas.
This fact remains true for nearly every U.S. president. Even
our current commander in chief, Barack Obama, is tightly
connected to the world of high finance. Despite running his
re-election campaign with a populist, anti-Big Business theme,
Obama's actions tell a different story.
I'll never forget the series of Obama campaign ads attacking
his Republican challenger, Mitt Romney, for his work for the
private equity firm BainCapital . The ads attacked Romney's
connection to high finance, alleging a history of draining the
life out of companies and the working class. Obama was trying to
appeal to the average voter, who might not have a sophisticated
understanding of macroeconomic realities. In fact, Obama's
actions make him something of a major player in the world of
A look at Obama's actual record reveals hissupport and
connection to the financial world. As an Illinois state senator,
Obama was a supporter of theventure capital business: He
introduced two bills and one resolution intended to benefit his
state's private equity businesses.
Not only did Obama show legislative support for private
equity, but his actual deeds have been similar to the private
equity leaders he admonished in his presidential campaign. The
primary example is hissaving of the U.S. auto industry. By
retaining Steven Rattner, a powerful private equity kingpin, to
lead his task force on the auto industry, Obama was able to
revitalize the industry by restructuring
General Motors (
Obama's private equity connections go beyond the world of
business. One example is the nearly $8 million Martha's Vineyard
home rented by the Obamas, which is owned by Obama donor David
Schulte of the private equity firm Chilmark Partners.
According to the nonpartisan research groupOpen Secrets,
private equity andhedge fund donors gave more
to Obama's 2008 presidential campaign than to any other
Private equity and hedge fund donors gave more
money to Obama's 2008 presidential campaign than to any
other candidate, according to the nonpartisan research
group Open Secrets.
It's clear that even a populist president like Obama retains
close ties to the world of private equity and high finance. Let's
look at how the average investor might be able toprofit in
Obama'sinvestments include three different accounts between
$50,000 and $250,000 in the
Vanguard 500Index Fund (Nasdaq: VFIAX)
. He also has positions in U.S. Treasurys, four collegesavings
accounts, as well as a steady stream of book royalties in the
range of $50,000 to $1 million.
While it's exciting to discover the president's financial
holdings, this is all chump change compared with the private
equity deals Obamawill likely be privy to after he leaves office.
Fortunately, business development companies (BDCs) provide a way
for individual investors to play in the same sandbox as the
private equity kings and venture capitalists of high finance.
BDCs are firms that lend money to small- and mid-size
companies with the goal of participating in the company's growth.
Investors can buyshares in the company with the goal of profiting
from theBDC 's portfolio of company's success.
My favorite BDC right now is
Fifth Street Finance (Nasdaq: FSC)
The company calls itself an alternativelender . It
providesfunds to proven small and mid-size companies alongside
top private equity companies. Its business strategy is powerful.
A leading private equity company locates a company it wants to
purchase. The private equity investors look for untapped
potential or other value inherent within the targeted company,
with the goal of selling the company at a profit. Once the
private equity firm provides theequity to purchase the company,
Fifth Street Finance gets involved by providing the neededdebt .
Fifth Street's profits come from interest and capitalgains
Fifth Street is widely diversified and boasts amarket cap of
slightly more than $1.2 billion. Thestock has a five-year
averagedividend yield of 11.5%. The majority of Fifth Street's
debt investments are in floating-rate securities, so the prospect
of rising rates could actually help Fifth Street.
Technically, shares of FSC recently spiked downward below the
50- and 200-day simple moving averages. This sets up a great
breakout buying opportunity.
Risks to Consider:
Fifth Street Finance'sbusiness model is risk-averse and well
diversified. However, this does not eliminate market andeconomic
risk from the equation. Like all BDCs, the company isdependent on
economic growth and a stable market. Always use stops and
position size properly wheninvesting .
Action to Take -->
Fifth Street Finance provides the average investor a way to
participate in the venture capital/private equity arena just like
top-tier investors. The stock gapped down recently due to the
pricing of a 15.5 million-shareoffering at $10.31 a share. This
creates a buying opportunity for savvy investors. Buying on a
breakout close above the 200-day simplemoving average at $10.20
makes a great entry level.
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