Dennise Williams
Contributor
Investors looking for interest income have had to widen their scope as repurchase agreements are no longer a viable option. Bank savings rates are less than 1 percent and for investors who want another option besides bonds, private equity firms have become an increasingly attractive option.
The concept of private equity firms is established in the more developed regions with the United States leading the way. Warren Buffet’s Berkshire Hathaway is the major example. In Jamaica, companies such as Proven Investments have established that the business model can work in Jamaica.
So what exactly is private equity? Matthew Williams, investment analyst at Stocks & Securities Limited (SSL) explains, “PE Firms earn money by purchasing equity in small to medium enterprises (SME’s), offering guidance, resources, and providing strategic growth opportunities with the hope that in a few years they will be able to turn around and sell their stake in the company at a profit.”
Another local firm that has made news for its foray into private equity is Norbrook Equity Partners (NEP). According to the NEP website, “NEP successfully owns and operates fourteen companies in the Caribbean, the United States and West Africa. Our companies operate in four main sectors – Logistics, Transaction Processing, Healthcare and Business Process Outsourcing with a team of over 250 employees.”
So the key to private equity is that the business retain their individuality rather than become absorbed into the brand name of the parent. This separates private equity firms from companies like Jamaica Teas or GraceKennedy which take over brands to build the existing brands.
That said, how does the average investor profit? For investors of companies listed on markets such as the Jamaica Stock Exchange, there is the idea that the stock price will move as the spin off businesses add value to the holding company. Investors who bought into Proven Investments in 2010 at US$0.10 per share have seen their investment now valued at around US$0.24. Williams from SSL adds, “If we take a look at Blackstone Group (NYSE: BX) and Apollo Global Management (NYSE: APO), two of the top PE Firms in the world, we can see that over the past five years both have experienced volatile stock prices due to market conditions as well as public sentiment about their future performance. Digging slightly deeper into the numbers, both have had fluctuating revenues, at times rather high debt levels, and inconsistent margins. These would be, and still are red flags when evaluating whether or not to purchase a stock. However, the fact is that an investment made in each company five years ago would have appreciated by 129.66% and 104.98% respectively, not factoring in dividend payments; not bad at all.”
Despite the business model making waves in Jamaica as a new way to invest, Williams advises caution. “SSL believes that when considering whether or not to invest in a PE firm, you should ask yourself the same questions that you would of any other stock. What is the financial health of the company? Are their debt levels dangerously high? How has the stock been performing over the last 6 months, 1 year, 5 years? What is going to turn around any negative performance, or drive continued growth if the stock has been performing well? And most importantly, Are you comfortable with the answers to the previous questions. One should also ensure that they evaluate the company within the context of the overall sector or industry in order for a fair comparison. If investors are comfortable with the answers to the previous questions then they can add a position to their portfolios, but as always SSL recommends a diversified approach to investing.”
Private equity is big in the US and since Proven’s listing 7 years ago, slowly becoming a part of our local financial landscape. With investors painfully weaned off of the easy interest income from repurchase agreements, there is the question of what next? And so with the share price of Proven doubling in the last 7 years based on that firm’s strategy of buying a new company What is SSL’s views on private equity firms as an investment strategy for small retail investors who are seeking higher returns.
Most of the hype surrounding Private Equity (PE) Firms is due to the high profile nature of the job and the exorbitant compensation packages. PE Firms earn money by purchasing equity in small to medium enterprises (SME’s), offering guidance, resources, and providing strategic growth opportunities with the hope that in a few years they will be able to turn around and sell their stake in the company at a profit. While there are success stories that will make the news and garner media attention, there are also a lot of failures which PE firms will try and hide. PE Firms by the nature of their business model can be somewhat risky investments due to the ‘hit-or-miss’ aspect of their operations. If we take a look at Blackstone Group (NYSE: BX) and Apollo Global Management (NYSE: APO), two of the top PE Firms in the world, we can see that over the past five years both have experienced volatile stock prices due to market conditions as well as public sentiment about their future performance. Digging slightly deeper into the numbers, both have had fluctuating revenues, at times rather high debt levels, and inconsistent margins. These would be, and still are red flags when evaluating whether or not to purchase a stock. However, the fact is that an investment made in each company five years ago would have appreciated by 129.66% and 104.98% respectively, not factoring in dividend payments; not bad at all.
SSL believes that when considering whether or not to invest in a PE firm, you should ask yourself the same questions that you would of any other stock. What is the financial health of the company? Are their debt levels dangerously high? How has the stock been performing over the last 6 months, 1 year, 5 years? What is going to turn around any negative performance, or drive continued growth if the stock has been performing well? And most importantly, Are you comfortable with the answers to the previous questions. One should also ensure that they evaluate the company within the context of the overall sector or industry in order for a fair comparison. If investors are comfortable with the answers to the previous questions then they can add a position to their portfolios, but as always SSL recommends a diversified approach to investing.
