A Solid Private Equity Play With Killer Yield

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A Solid Private Equity Play With Killer Yield

By Zach Scheidt, CFA, Income Strategist

It’s easy to see why the “private equity” business stirs up a fair bit of controversy.

These companies are able to invest in ways that certainly aren’t accessible to the average investor.

And they can use this unfair, insider advantage to their benefit – time and time again.

The good news is, the average investor can trade alongside these insiders – and generate income at the same time.

To do so, here’s the best course of action . . .

An Insane Competitive Advantage

Private equity companies gather money from investors – much as mutual funds do.

At that point, they could use that money to buy an entire company, install a new management team, suck capital out of the firm, load it up with debt – and then sell it at a profit to the public.

I know. The practice might not be entirely honest, but this type of “corporate raiding” can certainly be profitable.

Plus, since these private equity companies often own an assortment of entire companies in various industries, they have an information advantage, as well . . .

These groups know everything about the individual companies that they own – even the stuff that doesn’t get reported on balance sheets and income statements. They also have an insider’s perspective in terms of general market conditions.

Again, it might not be fair, but these groups are in a position to generate killer gains – quarter after quarter. And their information advantage allows them to sidestep risk when it comes to industry downturns.

Fortunately for us, a handful of these private equity groups are traded publicly, allowing us to invest in the parent company, and profit when the private equity groups cash in on their investments.

Use the Unfair Advantage to Your Benefit

Kohlberg Kravis Roberts & Co. (KKR), for instance, is a private equity group that holds a wide portfolio of profitable investments. And it’s currently in the process of ringing the register on some of its recent lucrative trades.

You see, when a private equity group sells a position, it’s entitled to a percentage of any profits that its investors make.

And KKR has been selling out of some healthcare and technology positions, like Sunrise Senior Living, HCA Holdings, and NXP Semiconductors.

Its biggest recent score comes from its ownership of Oriental Brewery. KKR recently sold this company to Anheuser-Busch for $5.8 billion, booking five times its 2009 investment cost.

Now, with KKR cashing in on large profitable deals, it’s very likely that we’ll continue to see the company pay generous dividends.

Over the last four quarters, KKR has paid out $1.81 per share in dividends. This nets out to a 7.8% dividend yield – making it one of the most attractive income opportunities on my radar right now.

With the U.S. stock market at or near historical highs, KKR will likely have an opportunity to sell more investments at high prices, giving it even more income to pay out to investors.

Better yet, even if the market heads lower, the company should still be in good shape. The company currently boasts fee-paying assets under management of $79.7 billion. And its recent sales should give KKR plenty of cash to invest at lower prices if challenges arise and stocks trade lower.

With a 7.8% yield and a lucrative business model, KKR is worth considering for your income investment portfolio.

Regards,

Zach Scheidt

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By Zach Scheidt