Banks Show Us Where the Profits Are

Amanda Heckman|January 22, 2022

The banking sector released earnings this week… and it was a mixed bag of good and bad news.

But the best news was that banks are the latest things to show us exactly where investors should be putting their money.

It’s a moneymaking trend that is getting bigger and more profitable than ever.

A Tell-Tale Sign

Goldman Sachs may have missed on earnings last quarter… but it made nearly $2 billion on its private-equity investments.

Wells Fargo’s fourth quarter revenue of $20 billion exceeded expectations by $2 billion. Management credited strong equity gains in the bank’s venture capital and private-equity businesses for the boost.

This is a big deal… and it shows where banks’ money is being treated best.

Despite stocks having a record year, private equity had an even better year.

In 2021, companies raised more than $300 billion in new capital for just the second time ever.

And $1.2 trillion in private-equity transactions took place in the U.S. alone.

Private-equity activity shattered the previous records for both number of exits (the equivalent of closing a position and locking in profits) and the total value of those exits. In 2021, private-equity firms exited 1,731 U.S. companies, gaining a total value of $854.3 billion.

And it’s not just banks that see the dollar signs in private equity.

CalPERS (the California Public Employees’ Retirement System, the largest public pension fund in the U.S.) raised its U.S. private-market allocation target from 8% to 13%. The fund manages nearly half a trillion dollars’ worth of assets.

The $75 billion Los Angeles County Employees Retirement Association lifted its private-equity target from 10% to 17% of its portfolio in May while dialing back its target for stocks to 32% from 35%.

Overall, pension funds raised their private-equity holdings to an average of 9%… or roughly $480 billion worth of funds.

University endowment funds – long regarded for their investment prowess – also know where their money will be treated well…

Harvard’s private-equity investments, worth a third of its total portfolio, returned 77% last year. Venture capital funds are also recording huge returns: The University of North Carolina saw a 142% return from that portion of its $10 billion endowment.

Go Where the Money Is

The growth in the private-equity sector is largely the result of two factors… First, the long-term low-interest-rate environment has had investors looking for higher returns wherever they can find them (see also: crypto).

Second, higher and higher stock valuations have led to predictions for significantly lower returns… leading investors to take a look at other, more profitable assets.

Christopher Ailman, who has spent more than two decades as the investment chief of California’s teacher pension fund, the nation’s second-largest, has predicted that 2022 returns on the S&P 500 will be in the low single digits.

Wilshire Associates, which advises pensions, is expecting 10-year returns of 5% for U.S. stocks and 1.85% for core bonds. Private equity, the firm believes, will yield 8.4%.

So while we face some headwinds in the markets… especially with Andy’s prediction for a recession later this year…

Investors should look to the private-equity sector for the biggest moneymaking opportunities.

And we’ll be telling you more about it in the weeks ahead. Stay tuned.