Invest Like the 1% Minus the Fees

Private equity stocks are a savvy way to track an investing style available only to the ultrawealthy. And the top three names are relatively cheap right now too.

- LARRY LIGHT

PRIVATE EQUITY FIRMS burst into the spotlight in the 1980s, as portrayed in the classic book on KKR's takeover of RJR Nabisco, Barbarians at the Gate. Investing with the barbarians can be very lucrative, but it's financially possible only for the megabucks crowd-institutions like pension programs and very rich individuals. That type of well-heeled investor can become what's known as a limited partner in one or more of a private equity (PE) firm's funds (each fund has a collection of companies in its portfolio). Plus, a limited partner must be an "accredited investor," meaning having a net worth of at least $1 million and annual income of $200,000 or more.

For limited partners, private equity beats the overall stock market and, in tough times, loses less. According to consulting firm Cambridge Associates, over five years ended in 2022, private equity funds earned an annual 18.6% versus 5.5% for the MSCI global stock index. In the snakebitten year of 2022, they lost just 4.3% as the MSCI index dropped 17.2%.

But those big-time investors pay exorbitant fees for entry to this exclusive club: Typical is the storied "two and 20," meaning 2% of assets in annual management fees and 20% of the profits when a portfolio company is sold. While those percentages have come down a bit lately, as competition has grown in the field, it's an expensive club to join.