Private Equity Cashes In on Stock Market’s Rise

On April 10th, the Standard & Poor’s 500, a widely-watched measure of the stock market, hit an all-time high at 1,589.07.  In March 2009, it had dipped to 676.53.  This staggering increase of over 130 percent in just over four years has benefitted millions.  One group that has profited especially handsomely from the stock market’s rebound is private equity insiders.  Private equity specializes in acquiring companies that are private (i.e., are not publicly-traded), restructuring them to make them more competitive, and often, making a subsequent public offering of the companies’ stock.  The hope is that the business insight of the private equity managers will make a company more profitable than it was before, thereby allowing the managers to command a price for it that is much higher than the acquisition price was.

If a private equity group takes a company public, the insiders of the private equity group (such as its managers) often receive shares in the company through the initial public offering as well as cash.  The question becomes when to sell these shares.

That time is apparently now.  According to Dealogic, a consultant firm for investment banking, over half of secondary offerings in the first quarter of 2013 were from private equity groups.  Secondary offerings in a company consist of a shareholder, rather than the company itself, selling shares to a third party.  The huge amount of stock being sold by private equity insiders indicates that they may think the current run-up in the stock market may plateau or reverse in the near future.  But the party may last at least a bit longer; so far in 2013, 72 percent of companies whose stock was sold by private equity (not counting the companies’ IPOs) had higher stock prices a month later.

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