Earn 12% to 15% Yields Outside of the Stock Market Income Investors 2017-06-13 16:27:24 These backdoor private equity deals represent some of the top opportunities around for investors looking outside of the stock market. Dividend Stocks,News https://www.incomeinvestors.com/wp-content/uploads/2017/06/Dividend-Paying-Bank-150x150.jpg

Earn 12% to 15% Yields Outside of the Stock Market

The Clintons Made Millions From This “Underground Stock Market”

The Clintons rank as one of the wealthiest couples in American politics. According to Forbes, the couple raked in as much as $240.0 million over the last 15 years.

What most people don’t know is that Bill and Hillary Clinton made a lot of this money through an “underground stock market” that is off-limits to regular people.

And they’re not the only ones. Former presidential candidate Mitt Romney made millions of dollars through these private investments. Other well-connected politicians—including Al Gore, Tim Geithner, and George H.W. Bush—all earn lucrative incomes from this market as well.

I’m talking, of course, about private equity. And while the government barred small investors from participating, I’ve found a backdoor to get in. For those willing to do a little extra legwork, they can pick up yields of 12% to 15% outside of the stock market.

Let me explain…

The media often portrays private equity firms as mystifying, ominous operations. But few people know how they work.

Most folks know one thing, though: they make money hand over fist. During the 1980s, Mitt Romney’s Bain Capital, LP earned 20%+ annual returns for his clients. That’s after factoring in Romney’s two-percent management fee and 20% cut of annual profits.

Why would anyone pay these kinds of fees? Because, even after fund managers take their share, you still double your money in less than four years. You can’t find returns like this in the stock market.

Private equity is a lucrative investment for a couple of reasons. First off, it creates deals that convert raw debt into equity. Private equity shops borrow money to buy businesses, then use the profits from those businesses to pay off the debt. After a few years, they own the operation free and clear.

It’s actually not all that different from how regular people invest in real estate. They buy a property for 20% down, borrow the rest from a bank, and pay off the mortgage with rental profits. They own the home outright after 15 years or less, locking in a steady stream of income.

Private equity shops juice returns further through savvy management. When “Mr. Market” misprices an asset, they scoop up bargains. Alternatively, they’ll seek out poorly-managed businesses with great potential.

Investors generate impressive profits by shaking up tired companies. Managers will slash costs, get rid of underperforming executives, and sell off non-core assets. Private equity shops also provide mentoring and business advice, often from some of the brightest, most capable financial wizards in the country.

As these investments grow, their financial backers get incredibly wealthy. Private equity firms will often sell off their stake in the business once the debt gets paid off. This often results in a multi-billion-dollar payday.

In other cases, these firms will just milk their investments for ongoing dividends. Without any interest to pay, yields can easily reach into the double-digits. Alternatively, they can use these businesses as collateral, borrowing more funds to buy other companies.

Unfortunately, the private equity world only allows high-net worth individuals in on these deals.

However, there’s one backdoor way to invest. I’ve recommended these names to my readers for years, and they rank as some of my favorite income plays: business development corporations (BDCs).

BDCs operate in the same manner as private equity firms. They invest in and advise private businesses, typically mid-sized companies between $100.0 million and $1.0 billion in annual revenue. Only a few dozen names out of all the publicly-traded stocks out there—less than one percent—fit into this category.

Furthermore, because of how these firms legally structure themselves, they pay no taxes on corporate income. In exchange for this benefit, however, they must (by law) pay out most of their profits to owners. For this reason, BDCs often sport some of the biggest yields around.

5 Top Business Development Corporations

Company Market Cap Yield
KCAP Financial Inc (NASDAQ:KCAP)

$129.2M

13.9%

Prospect Capital Corporation (NASDAQ:PSEC)

$2.9B

12.4%

Medley Capital Corp (NYSE:MCC)

$338.8M

10.3%

Apollo Investment Corp. (NASDAQ:AINV)

$1.4B

9.4%

Main Street Capital Corporation (NYSE:MAIN)

$2.2B

5.7%

(Source: Google Finance)

In addition, BDCs often pay tidy special dividends when they sell a company. It’s not unusual to see double-digit yields from these operations after factoring in the extra payouts.

Bottom line: The world’s wealthiest, best-connected people have made fortunes in private equity. By leveraging other people’s money and some of the smartest business minds around, these investors can earn returns that far outpace ordinary stocks.

As readers know, I love stocks that you can buy today and compound over decades. But, if you’re looking for lucrative, double-digit income right now, you can find it with the best BDCs. These backdoor private equity deals represent some of the top opportunities around for investors looking outside of the stock market.

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