For private equity firms, 2013 has been a year of exits. With the stock markets roaring, they've been peddling their portfolio companies to retail investors almost daily. Some 170 companies have gone public this year after a period of private equity (PE) ownership, including big names such as Hilton and SeaWorld. The $30 billion in post-PE IPOs in the U.S. established a new record. (Non-U.S. markets have seen another $21 billion.)
The stocks look shiny and new, but you should hesitate before you drive one of them off the lot. Private equity managers have a simple method: They buy companies, overhaul them, then resell them for a profit. The firms replace management teams and ratchet down costs, and that can accelerate profits. That's great -- but the firms also borrow heavily to buy these companies and typically load them with a speed-inhibiting 20% more debt than their peers, according to S&P Capital IQ LCD. In addition, private equity managers make oodles -- Blackstone, for example, has an unrealized $8.5 billion gain on its Hilton stake based on the IPO price -- making one wonder whether the stock has maxed out before it lists shares.