Evan Vitale

Accounting Professional

Evan Vitale – Individual Investors Take a Bigger Role in Private Equity Space

by

Wall Street’s private equity firms are raising an increasing share of their capital from individual investors, according to a new report published by Triago, a private equity advisory firm. Triago gathers its data from funds it works with or has knowledge of, and extrapolates from there.

Typical private equity firms have traditionally depended on pension funds and other institutional investors to raise capital. These institutions are compatible with private equity because they can afford to lock away their capital for as long as a decade, the time frame often required.

However private equity firms are seeing an opportunity to raise capital from individual investors in order to fund their deals. According to Triago, in the first 10 months of this year, individuals with more than $1 million in investable assets provided 10 percent of the capital raised by private equity firms globally. By contrast, such wealthy individuals provided just 6 percent of the industry’s capital in 2008.

Institutions are still the primary source of private equity capital, but some of the biggest firms now view individual investors as a potentially lucrative source of additional assets under management. When private equity firms gather more capital, they can earn more in management fees.

This shift comes at a time when institutional investors are wielding significant leverage, Triago noted in its report. Major institutions can sometimes demand, for example, that their money be placed in separate accounts that charge lower fees. Individuals, for the most part, have no such bargaining power.

Private equity firms have established “well-oiled partnerships” with brokerage firms in order to raise capital from individuals. Demand appears to be extremely robust. As an example, Blackstone, the biggest private equity firm, is using its partnership with Morgan Stanley to raise capital from individuals for a new energy fund.

Another major firm, the Carlyle Group, is introducing a new way to give individual investors direct access to a selection of its private equity funds. That program, called Carlyle Private Equity Access 2014, is intended to recur annually.

Evan Vitale – Private Companies’ Stock Hard to Access on Secondary Market

by

SecondMarket continues to dominate secondary trading volume during 2014. The company has already traded almost four times more in 2014 than it had for all of the previous year. The 900 million dollars that SecondMarket has traded in secondary stock sales continues to rise as the year wears on.

This year’s secondary market transactions are expected to total over $17 billion, a number that is nearly 30 times greater than the secondary volume from a decade ago. It’s also double the volume of the 2011 peak – when a variety of internet companies (such as Facebook and LinkedIn) went public.

Secondary market volume continues to rise, nearly doubling the volume of the 2011 peak when Facebook went public.

Secondary market volume continues to rise, nearly doubling the volume of the 2011 peak when Facebook went public.

SecondMarket has carved out a niche in the trading world, facilitating the trades of private-company stock — mostly shares that are pre-initial public offering. Barry Silbert, founder and chairman of SecondMarket, says that he “wouldn’t be surprised if turnover among its private stocks was similar to turnover in some publicly-traded stocks.”

Many are attributing the Jumpstart Our Business Startups Act of 2012 as a reason for why the secondary market has been so active. The act helped raise the number of shareholders in a private company, increasing its threshold from 500 shareholders to 2,000. By also expanding investors ability to buy private company stock, the JOBS Act helped startups raise more money. However, companies started placing restrictions on secondary trading by placing a right to veto trades in the contracts.

This changes the landscape of the secondary market as private companies are hosting the secondary transactions – setting their own price and choosing those who can buy the stock. This limits the startup employees’ ability to cash in on shares while also shutting out retail investors. Since the secondary market doesn’t raise capital for startups, they can afford to be picky. These companies are choosing buyers who are respectable institutions, acting as a “stamp of approval” for the startup. They are also looking for shareholders who will offer valuable, unique advice to the company.

As a result, the most desirable technology companies are the hardest for the average Joe to access. The ones that are accepting anyone’s money are the companies that are young and desperate.

Evan Vitale – Private Equity Firms are Linking Up With the Insurance Industry

by

Over the past few years, private equity firms are moving further and further away from home runs; instead, they’re deciding to play small ball with some singles and doubles. During the late 1990s and into the early 2000s, this would have been nearly unheard of. Private equity firms were known for their high-risk, high-reward strategies. These firms would take on massive amounts of debt to acquire companies and then change the structure by eliminating unprofitable operations while also putting more efficient management strategies in place. This allowed private equity firms to knock it out of the park when it came to the initial public offering (IPO).

Since 2011, firms such as the Ares Private Equity Group, Blackstone Group and Apollo Global Management have moved into a more secure sector – insurance. By purchasing these insurance companies, there is much less risk involved.

Private equity firms are purchasing more and more insurance companies due to interest rates and the baby boomers.

Private equity firms are purchasing more and more insurance companies due to interest rates and the baby boomers.

There is some speculation, however, as to why these companies are investing in fixed annuities in this sector – ones that have a lower rate of return. However, the payoff seems to be evident; by establishing themselves in the life and annuity insurance sector, these private equity firms are adding billions in assets. This allows firms to put their investment expertise to use, allowing fairly predictable and steady returns.

One reason why these private equity firms are jumping into insurance now is because of the realization by insurers that interest rates are remaining low, squeezing their profit margins. Thus, these insurance companies need to inject more capital into their businesses. This need for capital is where private equity firms come into play.

While interest rates are currently low, they are expecting these rates to take off in the near future. Because of new capital coming in the door, better return on investment will be achieved through the rising interest rates. Combined with the fact that the baby boomer generation is due to retire soon, insurers could see much greater investment returns than usual.

A problem that private equity firms are running into, however, is the fact that insurance is highly regulated. States must approve changing ownership within the insurance industry – giving these firms another hoop to jump through.