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Should stock market investors follow private equity’s lead?

February 25, 2015, 3:45 PM UTC

Private equity firms are paying out more cash than ever before. Perhaps stock market investors should follow their lead.

By the end of June 2014, buyout kings like Leon Black and Henry Kravis handed back $444 billion to their investors, far ahead of the $304 billion distributed to investors in the first six months of 2013, according to research firm Preqin. If that pace kept up for the rest of the year, then investors saw an increase of nearly two-thirds in cash distributions compared to the previous year. It likely did. Blackstone, the largest alternative asset manager, with over $300 billion in assets, recently said it handed back $45 billion in 2014, a record for the firm.

Payouts typically come after private equity firms sell assets, either through outright takeovers, IPOs, or debt dividends. The tsunami gives private equity investors, who often have cash tied up for five years or longer, a chunk of liquidity to reinvest in buyout funds or redirect to other assets.

Historically, broader stock market prices tend to fall following a wave of private equity asset sales. It’s not that buyout firms are the cause of the dip. Rather, the buyout model enables private equity firms to hang onto their assets until it’s the right time to sell. If all is working well, PE firms sell the most investments when equity prices are topping out.

So, the recent wave of sales should send a message to stock investors. It can take months for a private equity firms to complete an asset sale. When markets start to rise, they get to work. There has been a gradual buildup over the past three years leading to last year’s selling spree. 2011 marked a record $392 billion in sales, and in 2013, it was $561 billion.

In 2007, private equity exits hit a high point and the S&P 500 was peaking as well. A year later, general equity investors and private equity cash distributions both experienced a low point. Stock market investors might view private equity as a leading indicator. When their selling tops out, yours should too.

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