What the wave of private equity deals might mean for your investments
If you’re like me and invest in an S&P index fund, you might be getting a pleasant surprise. As you may know, there has been a wave of private equity deals taking public companies private. If you own the individual stock of those companies, you’re probably pretty excited as those deals usually have a significant premium to them. But if you just index, there’s a nice upside, too.
What’s going on
When a company on an index goes private, what’s happening is it’s shares are being removed from public trading. As a result, that company is replaced by another so you still have 500 companies on the index (in the case of the S&P 500).
So the money that was invested by index funds in the company being replaced must find a new home. Some of it will go to buy shares of the new company. But since the S&P 500 is market-cap weighted, there will likely be some left over. That ‘extra’ money gets distributed among all the companies of the index, raising the price of each.
What this all means for you
Since all the stocks composing the S&P 500 are rising in price because of the redistribution, your fund will rise in price commensurately. You get a nice NAV increase because a stock you didn’t own much of got taken private.
June 7th, 2007 at 8:35 am
[…] cares, you say? Well, besides the direct effects to those of us who invest in an index fund, there is the very real possibility that private equity is the next bubble and when it pops, it […]