Ever wonder how the super-rich manage their investments and retire on that private island with afternoon mojitos? A big part of it is investing in the assets not available to regular people like you and me.
I'm talking about private equity
. Yes, the same asset class that made Mitt Romney and Carl Icahn
mega-superstars of finance.
The problem is, unless you have a net worth in excess of seven figures or a salary above $200,000, then you are not allowed to invest in private equity deals.
These investments in struggling or new companies can go bust or can produce triple-digit returns in a matter of years, but you and I are not allowed on the playground.
An analysis of 146 public pension funds over the past year showed that private equity investments have earned a 10% annualized return over the past decade, well above the 5.8% return the funds made on the general stock market. The pension for Texas' Teacher Retirement System scored a whopping 15.5% annual rate over the past 10 years.
In fact, even the worst quartile of private equity returns outperformed almost all (75%) of manager returns for stocks by 2.9%.
I am not saying private equity is the only way the smart money makes its fortune. This chart illustrates an important tenet of investing: asset diversification. Stocks have done poorly over the past 10 years, but the diversified investor has been able to keep making money through other assets like bonds and private equity.
But what happens when you are shut out of an entire asset class? It turns out you may actually be able to get in on some of these deals after all.
KKR & Co. L.P. (NYSE:KKR)
is one of the few private equity firms with shares available to regular investors. The company has more than $90 billion in assets under management and operates in three segments: private equity, public markets and capital markets (broker-dealer and balance sheet investments).
The company reported earnings recently, beating Street estimates on higher fees on private equity deals and strong growth in Asia and real estate. Shares pay a 7.2% dividend yield and have returned an annualized 37% since it started trading in 2010.
Economic net income (ENI), which is the sum of the company's income from fees, carried interest and investments, is the preferred metric to measure worth for private equity firms. This is generally what the companies report instead of the standard earnings per share like companies in other sectors.