Private Equity Could Boost Domestic Market

 |  Includes: IVV, IWB, IWV, SPY, VTI
by: Richard Shaw

Barron’s reported last week that Bridgewater Associates estimates private equity firms to have $300 billion of undeployed cash that with usual leverage could support $1 trillion in transactions.

The Investment Company Institute also reported that total money market fund assets are $2.4 trillion ($1 trillion retail and $1.4 trillion institutional).

We calculate the current market capitalization of the S&P 500 (proxy (NYSEARCA:SPY) or (NYSEARCA:IVV)) at just over $13 trillion and the Russell 1000 (proxy (NYSEARCA:IWB)) at about $16 trillion.

Putting those figures together could make for a rosy domestic stock market (proxy (NYSEARCA:VTI) or (NYSEARCA:IWV)). If the private equity firms deploy their cash with usual leverage (and do not take any of their portfolio companies public at the same time), they would reduce total available domestic stock by something in the vicinity of 6% to 8%.

That alone would tend to boost prices, but there’s more. That $1 trillion of purchase money would effectively increase money market assets by 40% ($1 trillion / $2.4 trillion).

We would think that if there were 40% more buying power and 6% to 8% less domestic stock to buy, basic demand and supply forces would lift stocks handsomely. Other forces come into play, of course, but in the short term, private equity is a powerful bullish force.

Private equity firms, in turn, are fueled by interest rates below the earnings yields of the companies they buy. As long as earning yields are significantly higher than interest rates, the private equity crowd should continue to provide an uplift for the market.

Full Disclosure: As of this writing author owns IWV.