How to Add Private Equity to Your Portfolio

February 10, 2020

How to Add Private Equity to Your Portfolio with Greg Anderson

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How to Add Private Equity to Your Portfolio Show Notes

Have you ever wanted to buy a company that’s doing well or get involved with turning a struggling company around? It’s what private equity investors do every single day. They partner with businesses, build teams, and create plans with an aim to transform the company and generate serious returns. However, few individuals outside the world of finance know that it’s possible to invest side by side with private equity firms to make their work a real part of your portfolio.

Greg Anderson, a fixed income and private equity specialist join today’s podcast to explain how to do it. Greg has extensive experience in estate, tax, and personal financial planning for high net worth individuals, and he knows what an incredible opportunity private equity investing can be for the right person.

In today’s episode, Greg and I discuss what makes private equity so special, how to break into this world at a low cost, and how to find private equity funds that might make sense as a part of your portfolio. With millions of privately traded companies in the world, private equity can help you become a part of the story of great businesses while seeing great, tax-friendly returns.

To find out if you qualify for Accredited Investor status, click one of the buttons in this post or email your full name, phone number, and zip code to [email protected] and we will get back to you.

In this podcast interview, you’ll learn:

  • Why private equity is a major opportunity to diversify portfolios for wealthy investors.
  • Why the barrier to entry for private equity investing and associated risk is much lower than you think.
  • The reason publicly traded companies often go private – and how this can lead to better returns in the long run.
  • How returns work in private equity, and why they’re actually tighter than the S&P 500.
  • How to find private equity funds that make sense for you – and how much of your portfolio you should consider for private equity.
How to Add Private Equity to Your Portfolio-Accredited Investor Status

Inspiring Quote

  • When I’m private equity, I’m not worried about share price because I’m not listening on exchange. I’m typically focused on a long-term view.” – Greg Anderson
  • Oftentimes, investors are either afraid of being wrong or afraid of missing out. The nice thing about private equity is that because they have that control in the investment, they kind of eliminate those fears for you.” – Greg Anderson

Interview Transcript

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[00:00:09] Dean Barber: Welcome to The Guided Retirement Show. I’m your host, Dean Barber, Managing Director at Modern Wealth Management. Have you ever thought how great it would be to just go out and buy your own Walgreens, buy a company that’s already in existence that’s thriving, or maybe you’ve identified something within an industry or a company and you could just say, “Well, I’m going to go buy that company and I’m going to turn that thing around because I know how to do it.”

Now, you and I both know that there are a lot of investors out there, private equity specialists that thrive on buying these companies, fixing them up, turning them around, and then selling them for big bucks. I’m not saying it works all the time but it’s an interesting concept. Most people don’t know that you have the ability to invest side by side with some of the best private equity investors in the country.

Today’s show, The Guided Retirement Show, we’re joined by Greg Anderson. He is a fixed income and private equity specialist. I’m sure that you’re going to enjoy everything that he has to say and remember, share this episode with your friends and your relatives. Make sure and subscribe to The Guided Retirement Show so that you get an alert every single time we have a new episode out. Enjoy the show.


[00:01:24] Dean Barber: All right, here we are in The Guided Retirement Show. I’ve got Greg Anderson, fixed income and private equity specialist. Greg, welcome. It’s really, really good to have you here and I know that we’re doing this remotely, so hopefully, people can get through maybe not the most great sound quality, but I think the content that we’re going to go over today is going to be amazing. Welcome.

[00:01:46] Greg Anderson: Well, thank you, Dean. It’s really my pleasure to join you today.

[00:01:49] Dean Barber: You know, you and I’ve talked a lot over the years and you bring a pretty unique perspective to investing in the fixed income space and we’re going to get to that maybe in another episode here of The Guided Retirement Show. But today, I really want to talk about a space that most people I don’t believe even realize exists.

Now, the ultra-wealthy know it exists because a lot of ultra-wealthy people, a lot of big pension and endowment funds, they do this already and that is something called private equity. And so, if you could, Greg, give us a little bit of lay of the land of the definition of private equity, and then we’ll start talking about some of the ins and outs and why that can be such a great place to invest if you qualify to invest in.

[00:02:41] Greg Anderson: Well, thank you, Dean. And I’m really excited to join the call and talk about private equity because we think it’s a very unique investment space. And private equity simply means that you’re investing in companies that are not publicly traded on traditional market exchanges. So, these are companies that could be at one time public companies that have been taken private.

It’s now owned by one group instead of by a broad public market where shares are traded on exchanges. It could simply be companies that have been started up by maybe a lot of people listening to this phone call, where they have an idea. And from that idea, they built a company and over time that company has grown up, and now someone’s investing in that company.

And so, private equity simply means it’s just not publicly traded. It’s not an unlisted exchange. And I think what’s really unique about it is I think it gives people a tremendous opportunity set to really diversify their portfolio in terms of a unique way to add investments to it.

[00:03:44] Dean Barber: So, what you’re talking about almost sounds like what the venture capitalists do. They go out and they buy up companies or they buy a portion of companies and kind of take control and revamp that company. Is that similar to private equity?

[00:03:59] Greg Anderson: Dean, that’s actually part of private equity. So, when you look at private equity, you can look at someone who’s more of a venture capitalist and what they may be looking as, they may be working with somebody that has an idea and they’re providing kind of seed money to help them develop that idea, figure out if that idea will work, and can I make a business out of it.

Then you can have someone who’s invested in startup companies. So, this is a company that’s kind of brand new. It’s getting off the ground and effectively, you’re helping them to begin to develop and grow the business where they can really start to sell a product. It’s interesting. Right now, while we’re talking, I was at CNBC on my screen, and I’m listening to look at the gentleman who founded Salesforce and he founded Salesforce in a garage back in 1999. So effectively, he’s another example of someone who built a company and now it’s grown to very different sizes.

[00:04:56] Dean Barber: So, it reminds me, I just want to – so I think about the show on CNBC called Shark Tank where these people are coming in and giving a pitch of their idea and then the sharks get to make a determination of, “Do I want to buy into that company? Do I want to own a portion of that company?” Are they essentially doing the same thing? Are they creating private equity for themselves in that transaction?

[00:05:20] Greg Anderson: Yes, they’re exactly doing that. They are basically a private equity investor who’s helping someone that has an idea and that idea could be just, “I formulated it. I have this idea, but I haven’t really built it out yet. I haven’t went to production,” to they’re kind of bringing the money to them, take them into production to really grow the business. And then you can move into a different side of private equity. It’s where now also I’m kind of moving along, but I need more money to expand my business.

So, in one sense, private equity could be then providing money to expand an existing business to help it grow. It could be where you’re taking an existing business and you’re saying, “You know, we could really improve this business. And so, we’re going to come in and we’re going to provide capital to help really change and grow the business even further.” So, you can go all the way from just an idea to someone investing in a publicly-traded company and bringing it back to the private sector or someone buying very large companies and effectively helping them become better in what they do.

[00:06:27] Dean Barber: Alright. So, I’m just going to bring this home now because the people that are listening here to The Guided Retirement Show primarily are the average American, maybe they’re the millionaire next door across the country trying to comprehend what you’re talking about. And I could make several different assumptions from what you’ve said so far. One is, “Man, this sounds like a risky deal.” Another is, “Wow. I’ve never been going to be smart enough in order to be able to understand how these companies operate and how I can help them get better.”

And number three, “Man, I don’t have the money to go out there and do what you’re talking about and definitely don’t have the knowledge or the talent to do it.” And so, how is it that you are thinking that the average guy or the average couple out there can have some exposure in their portfolio to private equity? And is it risky like I’m talking about? Does it take a mountain of money to get into it? Do you have to have all that expertise? Like those are things that are on people’s minds as they’re listening to us begin this conversation, Greg.

[00:07:32] Greg Anderson: Right. Well, Dean, what a great question and you kind of teed it up when you said, “Hey, if people are watching Shark Tank and seeing these very sophisticated investors who are then helping to put money to grow somebody’s idea.” But if you take a different approach, there are a lot of firms and these are firms that have been doing this for maybe many, many years, who basically say, “We will do all of the work. We’ll find the companies, develop the team to help them grow, and bring all this together,” and basically, they want funds and effectively as an investor, you then make an investment in the fund and then they do everything else. So, you’re kind of a passive investor and they have that expertise to come in and do all of those things that you were kind of mentioning it earlier.

[00:08:17] Dean Barber: So, then you’re relying on the expertise of that individual as opposed to your own expertise, and you’re able to get into this private equity space with less money.

[00:08:26] Greg Anderson: Yes, exactly. And you find that traditionally, private equity has been a real investment focus for some of the biggest investors in the world, the institutional investors, Harvard, Yale, CalPERS, Princeton, all these large endowments. What people are trying to do now is find a way to bring that to more people, to give more people access to the same investments to these big institutions that have been making for many, many, many years.

The reason why they’ve been making is they find that it gives them a tremendous opportunity to, one, diversify their investment portfolio and hopefully, two, earn a very fair return. You mentioned risk as well as a question and there are different degrees of risk. So, if I am investing in a brand new idea, you’re exactly right, there’s more risk to that idea. Some ideas work, many don’t work in that scenario. So, one of the goals you have in that side is to kind of, again, work with someone where you can diversify amongst many opportunities sets.

And then you have the level where you’re buying existing companies that have been around for a long time, and you’re just trying to make them better. And the risk metrics change based on what kind of a company you’re trying to help invest with, from the brand new startup or you’re hoping you have the next Google to the one where I’m buying an existing company and I’m finding ways or the private equity firms are finding ways to make them better, and kind of grow their business and get a better return.

[00:09:58] Dean Barber: All right, so let’s address this issue of not just accessibility, but it’s still the risk thing. You haven’t answered that for me and so I know that many of the people are listening here to The Guided Retirement Show are saying, “Okay. So, what’s the risk here?” Because I know if I go buy shares of Procter and Gamble as an example, right, it’s easy for me to understand what Procter and Gamble manufacturers, what they sell, it’s household goods, the dividend they pay, the historical price per share, how are they doing on an earnings per share basis and all that stuff? And I know that if I want to sell that stock at any given point in time, I can do it. How do you compare ownership and private equity to just buying those individual companies like that, Greg?

[00:10:40] Greg Anderson: Yep. Well, again, it depends upon the type you’re investing with and let’s focus a little bit on maybe the larger ones that kind of buy developed companies.

[00:10:49] Dean Barber: Yeah. Can we do it from a level of kind of maybe the most conservative way to buy that private equity first?

[00:10:59] Greg Anderson: Yes. So, effectively, the most conservative way is you invest in a fund and I’ll name a couple of firms. One’s a firm called Blackstone, one’s a firm called KKR. They’ve been doing this for 30 or 40 years. They develop funds and their investors will commit an investment amount to them and they have the expertise. They develop teams to then look at and say this is a company that we would like to help acquire and make an investment in and some of these companies could be publicly traded companies. For example, Blackstone a number of years ago, bought the Hilton Hotel chain.

It’s a very developed company but they said, “We can make the Hilton Hotel chain a better company. We can grow its earnings. We can help it improve and we can create a lot of added value from that scenario.” So, now they’re literally buying an existing company that was publicly traded, but now it’s owned privately by the firm. So, they can do that. They can buy companies that do something with their clients…

[00:12:03] Dean Barber: Hold on a second, Greg. Do you have a story behind that Hilton deal? It’d be kind of interesting there. Why would they buy a public company and then now it’s privately owned? So, from the time it was public when they bought it and they take it private then?

[00:12:16] Greg Anderson: They did and the story behind it was that Hilton Hotel chain had bought a lot of other hotel chains like Doubletree and others. And when after they acquired all these different hotel chains, and we probably all stayed at one of the hotels that Hilton owns or runs, they kind of let every one of those hotel chains run independent of each other. They never said, “Wow. We’ve got all these companies kind of under one roof.”

And the firm at Blackstone looked at it and said, “We think we could really improve the value of Hilton Hotel chain because, one, we could centralize some of the costs that are being duplicated. So, we could have one insurance vendor. We could have one marketing group. And we could eliminate a lot of duplicate costs and really improve it. We could help Hilton market better, not just in the US, but internationally. We could really figure out a plan to help them both eliminate costs and expenses, and really grow their revenue in that scenario.”

And with our help, we’re going to take them, we’re going to take them private so now they’re not going to be publicly traded but we’re going to own them. Because the beauty is since we own the company, we have control to make the decisions that we think would work really well from that standpoint. So, that’s what Blackstone did. They acquired Hilton, they took it private, and they really worked on improving their cost structure by eliminating a lot of redundant or duplicate costs.

They really tried to improve their footprint and expand them in the global market. In terms of Asia and Europe, they really try to help franchise their brand better, and just improve everything about their financial structure. And so, that allowed them to really grow that opportunity set or grow that investment and the earnings that Hilton enjoyed by going private.

[00:14:08] Dean Barber: So, were they successful with that?

[00:14:11] Greg Anderson: So, they were very successful in that scenario. I think that they, and normally, when private equity companies acquire a company whether it’s a publicly-traded company that they take private or private company that they want to grow and help expand and maybe they’ll take that company public in the future, they typically are trying to do this. And one thing about private equity is their plan is not to do this overnight. Usually, it’s over maybe a three, four, five, six-year timeframe. So, one of the things with private equity is you’re investing for a little bit longer-term time window.

And so, one of the things that you look at is, and this is the kind of beauty and I always ask this sometimes, if you look at someone that’s invested in a publicly-traded company and we could maybe ask all the people listening in the call, what’s the one thing that would keep you awake if you are now the Chief Executive Officer of this company, you’re now running Tesla or you’re running GE Capital?

And I’ll get a lot of different answers when I ask that question to individuals and ultimately, everyone will kind of get to the right answers, “Well, I think we’re worried about the share price of the company.” And I say, “Exactly.” And at the same time, let’s be a little non-altruistic. You’re also worried about as a new CEO of GE Capital, how do I make my compensation package worth a lot of money? Because when the new CEO of GE Capital came on board a little over a year ago, they said his stock option could be worth up to $300 million.

[00:15:44] Dean Barber: Wow.

[00:45:45] Greg Anderson: So, what does he focus on? He’s focused on share price. So, if he came into GE Capital and said, “I could really make this company a lot better over the next two years, but to do that, I’m going to have to make a lot of changes.” And one of the negatives is, “I’m going to miss the earnings estimate that Wall Street’s projecting for my company maybe four or five over the next six quarters.” And the question also comes, will that executive be willing to do that for the long-term success? And the answer is maybe not. And the reason for that is, what happens if they miss earnings estimates of a publicly-traded company?

[00:16:24] Dean Barber: You get very visible and you’re in trouble, right?

[00:16:28] Greg Anderson: Well, share prices drop significantly. And if you ask the last CEO of GE Capital, who only lasted about a year before he was replaced, what happened to him? Share prices dropped significantly. And so, when you look at publicly traded companies, they’re so focused on this quarter’s earnings estimates, next quarter’s earnings estimates, what am I projecting for revenue growth in the next year? And so, we would say in a way, they’re kind of driven by Wall Street expectations and investor expectations. It will look more short-term focused.

[00:17:07] Dean Barber: So, would it be fair to say, Greg, then that those people are kind of like puppets to Wall Street?

[00:17:13] Greg Anderson: Sometimes I think that’s a very fair answer, Dean.

[00:17:15] Dean Barber: Okay.

[00:17:17] Greg Anderson: And where there’s a difference for private equity, when I’m private equity, I’m not worried about share price because I’m not listening on exchange. I’m typically focused on a long-term view because what private equity wants to do is after they’ve kind of made this company better if it’s an existing company or if it’s a new company, you’re trying to grow it, your goal is to sell it and sell it for a lot more than what you paid for it. You have a longer-term view, probably very similar to some of the people listening to this podcast, who have effectively built their own business.

If you own your own business right now, are you focused on necessarily just next quarter? Are you saying how can I make my business worth a lot more money three, four, five, six years from now? And so, private equity aligns very similar that same thought process that many people probably listen and call today would think about or if you’re a key employee of one of those firms. And so, they have that tremendous advantage of they’re not focused on short-term stock price. They’re focused on more long-term value creation.

[00:18:21] Dean Barber: So, what happened? What happened in that story of Hilton, did they take it? How long ago did that happen? And were they successful in building it back up? And then turn around and make it more valuable?

[00:18:34] Greg Anderson: It’s actually a really great story from the standpoint of after they first bought Hilton Hotel and even the private equity managers in their funds will still try to mark their companies to some comparable company just to kind of give a valuation idea of where it is at the moment. And so, they bought the Hilton Hotel chain in the fall of 2007 and by March of 2009, so they bought it right before The Great Recession.

[00:19:01] Dean Barber: Yeah. I think he had worse timing. It’s like wow.

[00:19:06] Greg Anderson: So, they have perfect timing to come into maybe the worst market we’ve seen since the Great Depression. And if you’re just kind of marketing that business in Hilton to comparable publicly traded hotel chains, they actually had to mark their company down from 100 cents on the dollar. Their investment on Hilton was 100 cents on the dollar to 30 cents on the dollar.

But here’s the beauty, because it’s private and no one’s saying, “Oh, you have to sell or I’m nervous or I panic. I want to get out,” they had the time to implement their plan. Now normally, they would like to kind of improve this company in three, four, five, six years, they’d like to sell it. The Hilton Hotel chain took them longer to kind of implement their plan. But when they sold it, they finished fully exiting that investment, actually, in the first quarter of this year. It was the most profitable private equity transaction ever done. They made about 14.52 billion in profits and for their investors, they annualized it all between 15% and 16% over an 11-year time period.

[00:20:12] Dean Barber: Okay. So, I want to get this to our listenership because this is critical stuff, right? I mean, if this had still been publicly traded and it was selling at $0.30 on the dollar in the Great Recession, many people if that was publicly traded, but look at that and go, “Man, I’m getting out of this thing. It’s going in the tank,” not understanding what’s going on behind the scenes but because it was private equity, the people knew what the plan was, they knew what they were doing, and they had a longer-term objective and come out with a 15% to 16% annualized yield over a 12-year period. That’s incredible.

[00:20:46] Greg Anderson: Yep. And that’s because it’s really interesting, Dean. I actually work with a professor who’s an extra behavioral portfolio management. And we’ve talked at times and said, “Isn’t it interesting? You can find this wonderful investment but it’s very hard for individuals to stay on path with it.” They said there’s research that’s been done, and he said it’s called the fear of being wrong.

And what he meant by that is that as an individual investor, when you make a decision to make an investment in something, if you don’t see immediate kind of it’s really working well right away, your fear kind of starts to grow and you’re afraid maybe I made the wrong choice. I made the wrong decision. And so, what typically happens is if, after six months, it’s maybe that investment’s lagging the benchmark or some index that you’re comparing it to, you’re kind of getting nervous, did I make the wrong choice? And maybe after 12 months, you’re kind of saying, “Wow, I really made the wrong choice. We need to get out.”

And so, oftentimes, that’s the worst possible thing to do because you got out maybe at the exact wrong time. There’s also another unique scenario called the fear of missing out and I think we’ve all seen that a lot when you see markets really run up and all of sudden money kind of flows into that marketplace or as you were alluding to earlier, markets go down and maybe you say, “Well, this is a great time to buy into that market,” but you have too much fear to do it. So, it’s very hard to come in. So, oftentimes, investors are either afraid of being wrong or afraid of missing out.

The nice thing about private equity is that because they have that control in the investment, they kind of eliminate those fears for you. Because they have a game plan, they look to implement that game plan, and then based upon that, they kind of said no, we’re on track, we’re okay. We’re not really worried because we have control of when we’re going to make that decision to sell and it really, I think, helps make very, very strong educated investment decisions.

[00:22:50] Dean Barber: All right. So, let me ask you a question. This kind of we did the Hilton Hotel chains, which I think is a fabulous, fabulous story and I think it can bring home to a lot of the people listening to the podcast here. But you always hear that you have to have diversification. And so, you start getting into this private equity space and you look and say, “Well, if I only do one deal, I’m relying on that deal to be good,” otherwise, it could turn out bad for me. So, is diversification still a key theme in private equity as well?

[00:23:25] Greg Anderson: Yes, it’s a great question. So, for many of the firms that we know that do private equity, when they build their funds, they typically want to own 25 to 30 different companies. And so, these companies are going to be, you know, so they got kind of a diversified number of companies that they’re acquiring from that. They could be in a number of different areas in the marketplace, so they could be focused on all different types of things from the Hilton Hotel chain to I’ll give you another quick example. Another private equity firm is called KKR. They, in one of their funds, bought a little company called Dollar General.

At the time, Dollar General was also publicly traded in that scenario and they took Dollar General from public to private. And so, we have that same thing. You can see them investing in hotel chains. You can see them investing in a firm like Dollar General.

They’ll really look to find just great opportunities where they think they can bring value in that scenario. And if you don’t mind, Dean, I’ll just kind of – when KKR bought Dollar General, and I think most of all have been in a Dollar General store, one of the first things they did after they bought Dollar General is they brought in a company called the Nielsen company. We probably all heard of the Nielsen company.

They do all the ratings and they do all kinds of polling and surveys and things of that nature. And they asked the Nielsen copy, look at Dollar General and say, “What do you think of their product mix? What do you think of store locations?” And it was interesting. Dollar General have done an arrangement with Pepsi. Because they got a better price point with Pepsi, their arrangement was, “We’ll only offer Pepsi products, but we’ll get a better price point.” And that will give them a little bit better margin when they sell the Pepsi products. The Nielsen company came back to KKR and said, “You know what, Dollar General’s clients actually prefer Coca-Cola products 2:1 over Pepsi.”

[00:25:24] Greg Anderson: And so, when they’re not coming into the Dollar General store to buy that 12-pack of Diet Coke or Coke because they don’t offer it, they’re also not buying the milk, the butter, the eggs, the paper towel, all the things they forgot that they didn’t want to go back to the grocery store for. And so, one of the things then that KKR did, they immediately changed the product mix to bring Coca-Cola products back into Dollar General so they could effectively offer a much bigger supply and attract all those clients that weren’t coming in. So, just little ways that they have to seek value.

You know, what was interesting that… “Oh, by the way, that Nielsen company we used, we actually invested in them too. So, they’re actually one of our companies or one of our portfolio of companies as well but we brought them in to help this new investment.” So, they have a lot of synergies that they bring to the table.

[00:26:17] Dean Barber: That’s fascinating. So, you say that most of the time when these companies like a KKR, Blackstone, they want to do this thing, they want a three to five-year kind of turnaround from the time they purchased to the time they sell did was KKR successful in a quicker turnaround on Dollar General or was this another long term deal like the Hilton Hotels?

[00:26:37] Greg Anderson: No. No, they really were. They were much successful in that particular investment. And so, they held it kind of their normal timeframe. And so, normally their timeframe is kind of the three, four, five, six years. Sometimes though, they’ll have the opportunity to sell much quicker because they make enough changes and maybe somebody else is,

“Wow. You’ve really improved this company. It would be great if I could add it somewhere in my other companies so they might sell in one, two, three years.” And then sometimes you get that unique scenario like when Blackstone and Hilton Hotel chains, but the beauty is they have – it’s their decision when to buy a company and their decision when to sell a company. So, they don’t have to worry about panicking if all of a sudden you get a little bit of a challenging market environment. And so, one of the things when you look at private equity and this maybe goes back a little bit, Dean, to your question, are they more risky?

Typically, private equity and I’m looking over the last 29 years and kind of looking at all private equity together in individual types of projects will have different risk profiles, but if I kind of pull them all together in the last 29 years, private equity actually has a lower standard deviation, so kind of a tighter pattern of return than the S&P 500. They actually have a lower drawdown than the S&P 500 and they actually have had a higher long-term historic return.

So, in effect, they’ve actually been able to almost I call them a little bit of – not only are they diversifying the portfolio and the risk of the portfolio, but they’ve also been able to add value in addition to normal traditional equity markets because they have a number of advantages that publicly traded companies don’t have.

[00:28:20] Dean Barber: This is really fascinating. So, one of the things that come to my mind is, okay, so if I buy, I’m going to go back to Procter and Gamble for a minute. If I buy Procter and Gamble, I know I’m going to get a dividend each year. So, I’m getting the benefit of ownership over time and then I’m hoping for some share price appreciation over time. As you own those private companies in that private equity, is there any return that’s coming back to the investor between the time that the company has purchased versus the time the company is sold?

[00:28:51] Greg Anderson: It’s a great question again, and the answer is yes. Sometimes you’ll see that they will generate dividend distributions from those companies and they may pay out cash loan to the investors. Sometimes they say, “No, we’re going to keep all the money and we’re going to kind of reinvest it.” And so, it’s not quite like looking at Procter and Gamble, necessarily, when I’m looking for a much higher distribution.

I would say most of the return comes from the growth. The nice thing about that, though, is that oftentimes, that means a lot of their return is very tax-sensitive, it’s very tax-friendly, from that standpoint because typically a lot of the return is long-term capital gain in that standpoint. But they may, in fact, at times, distribute some income from dividends, some income from interest income, and that the majority of their gain is typically long-term capital gain because usually they’re going to hold this investment for more than a year from that and they’re really trying to grow it. So, it’s attractive from a tax perspective in terms of the type and nature of the game that they typically generate.

[00:29:54] Dean Barber: Alright. So, we’ve already talked about the fact that there are companies out there that have funds that you could invest into that would have the type of diversification that we’re talking about. So, you don’t have to have that expertise yourself. You don’t necessarily have to have the huge capital, like the people on Shark Tank and all that expertise in order to be able to turn the company around or grow that company from where it stands today. But, Greg, there’s some limitations on who can invest in these. You can’t throw $50 into this or $100 into this.

You have to be what’s called an accredited investor and in order to even get information on these things, which means you have to have a certain net worth and a certain income. So, while it does make this private equity available to more of the masses, it doesn’t make it available to everybody. And I want to let everybody know that if you check in the show notes here, you’re going to find a link for a contact information here so that we can get in touch with you.

If you’re interested in finding out more about private equity and how it might fit into your portfolio, we can actually ask you a few questions and find out if you meet that accredited investor qualification. And if so, we’d be happy to get you some information directly on how to invest in the private equity that Greg Anderson and I are talking about right now. So, let’s take a quick break. This is The Guided Retirement Show. I’m Dean Barber. We’ll be right back.


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[00:32:35] Greg Anderson: As you’re alluding to earlier, markets go down and maybe you say, “Well, this is a great time to buy into that market,” but you have too much fear to do it. So, it’s very hard to come in. So, oftentimes, investors are either afraid of being wrong or afraid of missing out.


[00:33:09] Dean Barber: Welcome back. I’m Dean Barber, Managing Director at Modern Wealth Management and this is The Guided Retirement Show. We’ve been going for about a half an hour here, Greg, talking about private equity. And I think you’ve laid a good foundation of the difference between private equity and then just buying a company out on the open markets. I know there’s more you want to add so let’s continue.

[00:33:32] Greg Anderson: Well, one thing I add too that’s a little bit unique about private equity is that they have a unique advantage of opportunity set. And what I mean by that a little bit is that when you look at the publicly traded market in the United States, there’s only about a little over 5,000 companies that are publicly traded. So, most of the time when you think about investing in public traded companies, it’s actually a very, very small universe. And then when you look at the fact that if you look at, if you want to invest internationally in public-traded companies, now you add another about 46,000 companies, but still, you put them together and you’re really looking at maybe over like 53,000 companies.

[00:34:14] Dean Barber: Sounds like a big number though. Sounds like a big number.

[00:34:17] Greg Anderson: What’s that?

[00:34:17] Dean Barber: I said that sounds like a big number still.

[00:34:21] Greg Anderson: It sounds like a big number but then when you look at private equity and say, “Well, some of these private equities can invest in those public traded companies, but they can also invest in privately-held companies. If you just look in the United States, there’s probably just under 6 million private companies in the United States. And then if you add European private companies and Asian private companies, you might now have in the 10 million plus private companies. So, in effect, they actually have a tremendously bigger opportunity set of finding that kind of special unique company that they want to really look at investing in.

[00:35:00] Dean Barber: So, are they going out and pitching to these companies? Hey, we want to buy your company or are these companies actually putting themselves up for sale? Are they seeking private equity investors? How do these deals go down?

[00:35:15] Greg Anderson: It could be all the buzz from somebody wants to sell their company, they want to retire, somebody wants to expand and they need help expanding their business. Somebody wants to maybe get out of the business and move it to the next generation or it could be simply that the private equity firms said this is a really great area to be in. We’d like to focus in the healthcare.

And they actually will look for companies that focus on maybe specific areas of healthcare or the food industry and they actually can search them out and look for them. It could be from a combination of the people that own the company, want to make a change or expand or could be the private equities say, “Well, we really like this area.” For instance, there’s one firm that watched a private equity fund and one of their biggest focuses for that fund is health care in the United States.

They’re focused on making investments in health care businesses in the United States because they see that as a continuing growth opportunity in the US, especially with all the changes in healthcare, the changing demographics of the population. We really want to focus on health care investments. And so, they may have very unique focuses.

[00:36:39] Dean Barber: Interesting. So, you’re not and I think this is fascinating stuff because there are not a lot of people talking about private equity. Generally, the people that are talking about private equity are the multimillionaires and the people that are out there trying to buy this company or that company but in the format you made a comment earlier about how some of the big endowment funds and some of the big pension funds out there, they’re buying these, they’re doing this private equity stuff.

And there are companies out there today that are creating funds that are available so that the individual investor who is an accredited investor can actually gain access to this private equity. Does that individual investor have any kind of line of sight as to what it is that that private equity fund, if you will, owns before they invest? Are they kind of at the mercy I’m just going to put my money in here and I’m going to trust that these guys are going to do a good job? How does that work?

[00:37:37] Greg Anderson: Usually, if it’s a brand new and what happens with one’s private equity is they have a very defined – each fund has a defined time period. And typically, what they’re doing is the first number of years, they’re actually investing in the companies and then in the later years, they’re actually then selling those companies and trying to realize hopefully their gains. They might have losses too but they’re trying to realize on the sale of those companies, they’re selling them and then they’re kind of distributing their money back out in that scenario.

When you invest in private equity and it’s a brand new fund, they’ll probably kind of give you ideas of the areas they want to invest so maybe they want to focus in North America. Maybe they want to focus in Asia. Maybe they want to focus in Europe. They might say, “We want to focus in North America and we want to focus on the health industry.” Or one fund in particular, I’m thinking if they want to focus in Asia and they want to focus on health care and the food industry in Asia.

So, they may give you guidance but individual company, my company, you won’t know because they haven’t decided what companies are we going to buy. They first kind of raised the money, and then they’ll go out and look to buy individual companies but over time, you’ll get more transparency into kind of what they bought from that standpoint. But for many of these managers, for instance, Blackstone just launched their eighth flagship fund so they have seven funds that they had done before so you can kind of see, well, how their funds done in the past.

And so, you get a sense of have they done a good job? Have they not done a good job? And oftentimes too, one of the things about private equity is that for some private equity you may not know all the things they hold it for others. They may announce the transactions they bought. They may say, “Hey, we just bought the Hilton Hotel chain.” And it’s announced that that they owned it.

[00:39:37] Greg Anderson: And a lot of times, they may own companies that they took private, and then they went back and brought them into the market and now they’re publicly traded again. And so, they still own a part of that company and you’ll see those. So, the visibility maybe isn’t quite as good as if you’re looking at just a traditional manager invest in the S&P 500 additionally, but over time, you’ll get more of sense of kind of their focus.

[00:40:02] Dean Barber: So, if I’m right now listening to The Guided Retirement Show, I’m fascinated by this idea of adding private equity to my portfolio, is there something, Greg, in your opinion as a fixed income and private equity specialist, that is how much of a person’s portfolio is it appropriate to consider for private equity?

[00:40:25] Greg Anderson: Another good question because it really varies by individual. But what we tell people is this is one investment that because it takes them a period of years to kind of realize these opportunity sets, it’s basically an investment that kind of goes into the illiquid bucket of someone’s portfolio. So, if someone says, “You know what, I have X amount of money, I can have X amount where I really don’t have to touch it for a number of years,” that size might be 5% for one individual, it might be 10% for another, but there’s kind of a range of where you’re kind of comfortable.

Because even if someone says, “I think I could have 20% that I wouldn’t have to worry about,” my experience has been that in life, things change. So, I always err a little bit on the conservative side from that standpoint and say, “Okay. Let’s make sure we size it right from that standpoint.”

And it’s interesting. If you look at some of the institutions and if I were to look at like Harvard or Yale, they have a much bigger allocation to private equity than say, CalPERS, which is a California kind of retirement association. And the Texas Teachers Association is a big investor in private equity as well.

[00:41:45] Dean Barber: Well, that makes sense. That makes sense because CalPERS and the Texas Teachers Retirement, they’ve got distributions. They’ve got to be making every single year, every single month for their retired teachers, right?

[00:41:56] Greg Anderson: Yep. And that’s exactly it. So, as an individual, you kind of have to put yourself in that same scenario. How much do I need for my portfolio to live? Is this something where I’m not going to need it for 20 years. And this is kind of really trying to grow. So, it really does kind of vary a little bit but you hit it right on the nose dealing with the examples. For some people like Harvard, they know exactly how much every year they’re going to fund to the university.

So, they can kind of build in that plan and say, “Greg, we know we need this so, ah, we have a little more room to have something that is kind of in our illiquid bucket.” But as you mentioned, for the retirement firms, they’re making payments every month so they know we need more cash flow, we have to have a much smaller amount in private equity. We still want it for all the reasons of improving hopefully our portfolio and portfolio return but size really varies but I always kind of tell people to err on a particular, you know, a little bit on the conservative side.

[00:42:58] Dean Barber: So, you’ve been listening to The Guided Retirement Show here. I’m Dean Barber and we’ve been speaking with Greg Anderson, fixed income and private equity specialist. We’ve discussed private equity today and how the individual who is an accredited investor can gain access to private equity in a diversified format. And because of the accredited investor status and how all the dissemination of information comes out to you, if you want information on how private equity works, we have to first make sure that you are an accredited investor.

You go to the show notes at That’s Click on the link that asks us to get in touch with you. We’ll give you a call. We’ll visit with you by email or however you want to do it and find out if you meet the accredited investor status and if so, then we can get you some information on how you can do more research and get involved in seeing if private equity should be a part of your portfolio.

And, Greg, we mentioned early in this podcast that you also have a great amount of expertise in fixed income and you bring a very different view of fixed income investing than what most people think about. I do want to have you back on here at The Guided Retirement Show to talk about the aspect of fixed income investing and where that fits in and all the things that people think they know that just ain’t so. And so, if you don’t mind, I’d love to get you back on The Guided Retirement Show to talk about fixed income.

[00:44:33] Greg Anderson: You know, it is my pleasure. Thank you so much. I would really love to do that.

[00:44:37] Dean Barber: All right. Great. Great to have you here, Greg. Thanks for taking time to share your knowledge and expertise on private equity with listeners to The Guided Retirement Show.


[00:44:45] Dean Barber: Well, I hope you enjoyed the conversation with Greg Anderson. All of you out there that are listening that are wondering, “Okay, what is an accredited investor? Do I qualify? Can I participate in what you all were talking about today?” in the show notes, you’re going to find a link. That link is going to get you a contact to Modern Wealth Management. You can just go to the show notes and say, “Hey, I want to find out if I’m an accredited investor. Let me know about what that’s about, and whether or not I qualify to receive information on this private equity investing.”

Go to those show notes, click on the link, let us know that you’re looking to understand if you’re an accredited investor or not, and we’ll make sure that we get you some information so that you can do your due diligence and we’re here to answer any questions you have. Also, make sure that you share this episode with your friends and family. Check us out on YouTube, subscribe to the YouTube channel, and you can actually watch us do the show as opposed to just listening, whatever is convenient for you. I appreciate you being here and can’t wait to do the next episode with you.


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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.