Pensions seem to be over indulging. Major players seem to be in distribution. Retail investors seem to be coming in late to the party. That resembles top of cycle behavior.
Private equity is headline material lately. As part of our mildly contrarian approach to investing, we prefer to invest away from the headlines.
Perhaps because of pending IPOs of other private equity firms, and perhaps due to enthusiasm being overdone, two large publicly traded private equity firms, American Capital Strategies (ACAS) and Apollo Investment Corp (AINV) have declined significantly as of late. This may also be a sign of the party being closer to the end than the beginning. The easy money in private equity has probably been made.
Private equity depends on low cost financing. Low cost debt and equity has abounded in recent years, but may not be as available going forward as in the past. The current sub-prime mortgage bust could eventually impact credit availability and borrowing rate generally.
We believe that contrarian approaches that lean moderately against the wind of popular opinion trend to create value over time by scaling out of appreciated assets and committing new money to assets that are not in the limelight. Private equity has appreciated and is in the limelight. We are scaling out and deferring new commitments.
We suggest caution toward public private equity vehicles at this time in the market.
Disclosure: Author has a position in ACAS