Return on S&P Listed Private Equity Index Over Five Years: -44%
Howard Marks, CEO of private-equity firm Oaktree Capital Group, described his company's going public last month as a "humbling experience." Oaktree's initial public stock offering hit the market at the bottom of its proposed range and has fallen 8 percent since (the stock was offered at $43 and this week was trading for $39.70). "Humbling" would be putting it mildly if you were to describe the performance of private-equity firms that have gone public over the past few years. The S&P Listed Private-Equity Index, made up of 25 public firms that buy stakes in privately held companies, is down 44 percent over the past five years. The S&P Index, by comparison, is flat.
Photograph by Thomas Lee/Bloomberg
Why It Matters
The private-equity business has been in the spotlight because of the attention swirling around presidential contender Mitt Romney, who co-founded Bain Capital. The industry historically has been a big money-maker for the ultra-rich: the Cambridge Associates U.S. Private Equity Index, which tracks private-equity holdings that aren't traded publicly (invested instead through private partnerships that own a portfolio of companies), returned 41 percent from 2007 to 2011 -- after fees, which typically amount to 2 percent of principal and 20 percent of profits. Stocks of private-equity firms themselves -- the Oaktrees, Blackstones, and Apollos of the world -- haven't done so well.
Graphic by Charlos Gary/Bloomberg
What It Means for Your Portfolio
Smaller investors sometimes get excited about the opportunity to own the stock of a private-equity firm. It's one of the few ways to gain entree to a world that would often otherwise require a stake of $1 million and a typical commitment of at least five years. And it can pay off. Its five-year record aside, the S&P Listed Private Equity Index has gained 232 percent since the stock-market bottom of March 2009, roughly double the performance of the S&P 500. Private-equity stocks can be volatile, so small investors need iron stomachs -- and plenty of diversification.
Photograph by Scott Eells/Bloomberg