Among villains, private equity has few equals…
Its critics say it’s responsible for more than 20,000 deaths in nursing homes. They also blame it for the loss of over 600,000 jobs in retail.
Health care wants it out of its business. And the NBA, the NFL, and professional sports can’t make up their minds about letting it in.
But if you really want to know who hates it, look no further than the mainstream media…
After all, private equity (“PE”) nearly killed the newspaper business. According to some sources, the percentage of PE-owned newspapers rose from 5% in 2001 to 23% in 2019.
You might’ve even seen the results in your area. Local newspapers are dying all over the country.
So it’s no surprise that when PE is in the news… it’s all doom and gloom.
PE isn’t winning any popularity contests.
But as I’ll show you today, it’s far from withering away. It holds the key for one big group of investors. And even better, the Power Gauge is flashing signs of opportunity in the space…
The PE industry is in a rough patch right now. Just look at some recent developments…
The Teacher Retirement System of Texas (“TRS”) reportedly pulled $9.7 billion from its PE investments last month. And last year, the Alaska Permanent Fund Corporation (“APFC”) said it would reduce its PE allocation from 19% to 15%.
According to the media, both moves signaled the end of PE.
But here’s the thing…
TRS isn’t actually abandoning PE. It’s simply slowing the pace of new investments. It now plans to just make smaller investments over time.
APFC isn’t getting out of the space, either. In fact, this year, the group reversed its decision. And it moved its target allocation back up to 18%.
Given all the negative publicity around PE, that might seem strange. But TRS and APFC understand something the media won’t tell you…
Pensions are in a bind. And PE might be the only way they can make ends meet.
You see, pension funds measure their health by the “funding ratio.” That’s simply a fund’s assets divided by its liabilities.
Equable Institute is a pension watchdog. According to its findings, the average funding ratio for U.S. public pensions was 78.1% at the end of 2023. And the deficit was $1.4 trillion.
That’s huge.
But importantly, PE holds the keys to solving the problem.
You see, to close a funding gap, a pension fund has three options…
First, it could cut benefits. It could also ask for more contributions from the sponsor. (That’s the company or employer who set up the plan.)
Neither of those options are popular. And in today’s cash-strapped world, both are long shots at best.
The third option is boosting returns. But only one investment vehicle can boost returns at scale…
Private equity.
The long-term historical return on stocks is 10%. And bonds’ long-term returns come in at around 5%. That includes periods when interest rates were up and down.
Hedge funds and real estate are other options for pension funds. But their expected returns are in the low single digits.
So none of these options would get pensions where they need to go.
But depending on the time frame, PE beats stocks by a significant margin. For example, pension consultant Cliffwater pegged the difference at 4.8 percentage points per year from 2000 to 2023.
When you compound that outperformance over time, it makes a big difference.
My point is simple…
Whether the media likes it or not, PE is here to stay.
And fortunately, the Power Gauge is coming around to the idea of opportunity in the space…
The SPDR S&P Capital Markets Fund (KCE) currently gets a “very bullish” overall rating. It’s one of the top-rated subsectors in the market today.
I’m also keeping my eye on one specific stock in the PE space…
Hamilton Lane (HLNE) is a gatekeeper for large institutional investors’ PE allocations. It’s a specialist in the space. That gives it an advantage in finding the best opportunities and avoiding risks.
Hamilton Lane also gets paid based on its clients’ success. It has “skin in the game” that benefits from positive outcomes.
To measure its success, I’ll look at Hamilton Lane’s assets under management (“AUM”).
At the end of March, its AUM totaled $124 billion. As long as its AUM grows, it means the company is investing well and gaining new customers.
So the next time you read bad news about PE, consider the source…
This business isn’t making friends across many industries. It’s a big villain.
But plenty of folks can’t live without it, either. They’re the people who matter most.
Good investing,
Joe Austin
