This 'Hidden' Market Is Waiting For Obama -- But You Can Invest Now


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The presidency of the United States is a position of privilege and power. 

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 private equity. 

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 ( GM ) and Chrysler. 

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 money to Obama's 2008 presidential campaign than to any other candidate.

Flickr/Daniel Borman
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 similar ways. 

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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This article appears in: Investing , Investing Ideas , Stocks

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