A Recession-Proof Play… That Doesn’t Suck

You may not hear about it in the financial press, but private equity deals are starting to heat up.

After a slow start to the year, the big boys are getting out their checkbooks again.

We got news of a big deal on Tuesday: A duo of private investors is looking to buy West Fraser Timber (WFG). Shares of the Vancouver, Canada-based forester surged by as much as 20% on the news.

Timber assets are a no-brainer for the world’s biggest funds.

Timberland tends to appreciate nicely… plus, it grows a renewable product that’s increasing in demand. And since timber is a recession-proof play, many of the world’s largest pension and institutional funds own billions of dollars’ worth of timber assets. So does our old fishing pal, John Malone – America’s largest landowner.

But it’s not just timber. We’re seeing private equity deals erupt across all sectors and industries.

It makes sense. The data shows that the years following a recession provide some of the very best returns for the asset class.

The fine folks at consulting firm Bain & Company just released some intriguing numbers… especially for folks looking to dig themselves out of this year’s mess.

The numbers show that stellar returns are likely on the way.

Just look at what happened the last few times tech stocks took a big fall.

Funds scored a median return of 25% in 2001… 40% in 2022… and 47% in 2003.

In 2009… same thing. Investors who bought during the panic were rewarded with a quick 24% return.

A Different Way In

There are a few ways into these sorts of gains. Private equity funds, of course, are the most natural path. But like hedge funds… they’ll cost you (if you can even get in). Most charge a 2% annual fee and take 20% of the profits for themselves.

That’s why it’s worth exploring another option.

Business development companies (BDCs) offer much the same exposure as private equity funds – yet a stake can be purchased in them just like an ordinary stock on a public exchange.

With a BDC, you can get an equity stake in private, off-market companies. You can get preferred stakes in public companies. You can buy debt. And you can get a shot at some very lucrative derivative opportunities… like warrants.

It’s no secret that Main Street Capital (MAIN) is one of the most popular BDCs on the market.

It invests in some very small companies. Most have annual sales between $10 million and $150 million.

For example, Main Street recently bought a big stake in Robbins Brothers, a wedding-focused jeweler. The company has been around for more than 100 years. But it’s been privately owned. Thanks to this deal, regular investors have a rare shot at claiming an equity stake.

Main Street also just got a slice of Verified Credentials – a 38-year-old company that focuses on preemployment background checks and public record verification. It’s a booming business. And, again, a BDC is what allows folks into it.

What’s really appealing about BDCs – especially right now – is the income they throw off. They are well-known to be dividend-paying machines.

Main Street, for example, currently boasts an annual yield of 6%. Better yet, it pays that yield to shareholders with checks cut monthly.

Thanks to that yield and a steady share price, shares of Main Street are net positive for the year.

But history tells us the best is yet to come for BDCs and the private deals they work in.

Double-digit returns are on the way.

Most recession-proof plays are boring. They may protect us from the downside… but at the cost of the upside.

That’s not the case with this asset class.

History proves the best is yet to come.

It’s another reason to love private deals. They pay off.

Be well,

Andy

P.S. Look for big changes in these essays next week. With all that’s going on in the world and in the markets, we had a good idea. And now we’re bringing it to life. You’re going to love it. It’s another great (and free!) perk of your subscription. Stay tuned.