Why Equity is Something You Can Take to the Bank

Who hasn’t heard about the big bailouts that are going to be forthcoming for large pension funds? The PBGC (a federal agency) will guarantee these pensions if they can, when they go bankrupt. However, the fact is, they might not be able to guarantee them forever. However, these failing pensions are overshadowing the fact that there is still a significant amount of pensions and other large sums of money which are still available and being invested. For those of you who trade in stocks, you realize that these big players at large mutual fund corporations are the ones that that make the big moves in the market.

Stocks Aren’t Everything, Per Se

Cash-Rich pension funds are investing in private equities. This means that besides buying your public stocks and mutual funds, pensions are making money by using the new math. Read the article to get more details, but this is how it works in a nutshell:

A large sum is invested to own either all or part of a private company. Then, the company takes on debt and begins paying dividends, effectively diluting the value of the company. Then once the time comes that the pension either doesn’t want to hold the equity, or cannot take anymore dividend payments, or some other issue arises, the company is resold or brought public. If it goes public as part of an Initial Public Offering, it may take a while so that is generally a last resort. However, now the pension has effectively divided the company in two by adding debt to its balance sheet. However, during the IPO this will likely be covered as part of the costs and then the pension is free and has the capital (plus some) to start the process again.

Like pretty woman’s Gere, dividing companies multiplies profits

Pension companies are operating under the same idea as Richard Gere’s character in Pretty Woman. Who says you can’t learn about finance from the movies? The only issue with this situation is that as the pensions and the companies they invest in grow large, over 1Billion dollars, it can become difficult to resell these companies. Furthermore an IPO is problematic because it will take a very long time to get all of the interested buyers lined up and also make sure that there is enough interest to sustain the number of shares to be issued. That is a very important item for these IPOs to consider.

Average Investors Isolated

Since this sounds like a great idea and easy way for people to make a significant return on their investment, I was considering that it might be a great idea for me to get into this as well. However, as far as I know, this is more of what you might consider a sophisticated investment. And as people who are in charge of managing large sums of money will tell you, the more money you have, the greater number of options you have as well. Therefore, it is unlikely that you will get into private equities at this level anytime soon unless you or your friend plan to become involved in a startup. Still, you can’t blame me for dreaming.