What is the most profitable business on Wall Street? Is it brokerage firms, investment banking, insurance companies, mutual funds, ETFs or hedge funds? asks Mark Skousen, editor of Forecasts & Strategies.
In truth, there is one success that has overwhelmingly beaten all the rest since the mid-1980s: private equity. Private equity funds started out in the 1980s when leveraged buyouts were popular.
They are famous for acquiring businesses, usually with borrowed money, holding them for the long term as they add value and improve their profitability, and then take monstrous profits.
Private equity firms now control over $3.3 trillion in assets. They now control an estimated 37% of all mergers & acquisitions in the world, compared to 7% in 2009. For this service, they charge a 2% annual administration fee and 20% of the profits.
Their clients are institutional investors, pension funds, endowments and wealthy investors. But average investors have also profited; the stocks of several publicly traded private equity firms have increased ten-fold over the past 10 years, when you include dividends.
Some of the wealthiest people in the Forbes 400 Richest People list run private equity firms. Stephen A. Schwarzman's Blackstone (BX) has been the most successful private equity firm, with a market cap of $119 billion. It has outperformed all the competition.
Despite criticism over the years, the performance of private equity firms, on net balance, has been positive, resulting in better products and services and a more efficient, productive business world. Government could learn a thing or two from private equity.
Private equity firms are not normally like hedge funds, which engage in alternative speculations and short-term trading, including shorting the market from time to time. Private equity takes a long-term approach. I believe they are a valued institution that is here to stay.
Blackstone has been the most successful private equity firm in recent times, with a market capitalization of $119 billion. It has outperformed all the competition.
Blackstone generated over $2 billion in distributable earnings ($1.49 per share) for its investors in the recently reported second quarter — marking its second-best quarter ever — driven by 45% growth in fee-related earnings and record realizations.
Despite recent weakness in real estate, Blackstone is doing well in its recent purchases of real estate investment trusts. While shares of public REITs declined 17% in the second quarter, Blackstone's core plus real estate funds were up 2.3%. Therefore, I'd like to add Blackstone — yielding 5.3% — to our model portfolio.