Tom Wolfe popularized the phrase "Master of the Universe" in his 1987 book Bonfire of the Vanities. The phrase referred to the Wall Street elite of the 1980s who at that time were making their millions as bond traders on Wall Street. In the intervening 20 years, many "Masters of the Universe" on Wall Street have migrated to the mysterious world of private-equity funds. As Mitt Romney's recent financial disclosures confirm, along with the recently disclosed $94 million 2011 salary of Kohlberg Kravis Roberts (KKR) founders Henry Kravis and Jerome Kolhlberg, private equity has been a mighty profitable game.
Spurred by cheap money and financing over the past two decades, the very best private-equity firms have been remarkably successful. Large allocations to private equity and venture capital have been a key reason for the strong performance of the Yale, Stanford and Harvard Endowments since the mid-1980s. I recently met with the head of the Stanford endowment in London, and he told me that the university's early investment in Facebook is set to make Stanford a ten-figure profit when it goes public. A handful of venture capital firms along Sand Hill Road in Silicon Valley are set to make even more.
Private equity had been a "no go" zone for retail investors until the advent of the PowerShares Listed Private Equity (PSP) ETF in 2006 — also an important part of my firm's "Ivy Plus" investment program, which mimics the investment strategies of the top university endowments.
The PSP tracks the Global Listed Private Equity Index, a benchmark composed of publicly listed private-equity firms around the world. The index comprises between 40 and 60 publicly listed private-equity companies, including business-development companies and other financial institutions or vehicles whose principal business is to invest in and to lend capital to privately held companies. Because the world of private equity is so dynamic and changing, the index is rebalanced and reconstituted quarterly.
Two of PSP's biggest and best-known -- albeit small -- holdings are Blackstone (BX) and KKR. (Bain Capital, Mitt Romney's shop, is not publicly traded.} Today, PSP maintains a 27.22% allocation in U.S.-listed companies. But its largest allocations outside the U.S. include the U.K., France and Sweden.
Another unheralded advantage of PSP is its remarkable diversification. Although PSP invests in approximately 60 companies, these in turn have investments in more than 1,000 firms. Because each of these component holdings has interests in dozens (if not hundreds) of additional companies, PSP is significantly more diversified, in terms of both underlying holdings and industries covered, than it would first appear.
PSP it has been on fire in 2012, having risen 17.77% since Jan. 1. If you believe the current rally is sustainable, then it could be a good bet for the rest of the year. PSP shot up 146.6% from the March 9, 2009 market bottom through Dec. 31 of that year. Throw in a dividend yield of 7.16%, and PSP could be a big winner in the months ahead.
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