Last week’s news that the private buyout firm KKR & Co. plans to sell shares to the public has some readers, like Judy in Portland, Ore., wondering if the stock is a good way to tap into the huge profits these firms are making. Robert in Boston, meanwhile, is trying to figure out the best way to move a big chunk of cash with him when he moves to Canada.
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How do I take advantage of private equity IPOs?
— Judy, Portland, Ore.
Judging by the performance of the recent initial public offering of anther big private equity player, Blackstone Group, the best thing the average investor can do is to stay as far away from these stocks as possible.
There's no question these buyout firms are hugely profitable for the principals — some of whom have become billionaires. These firms buy up all the stock of a public company, borrow big money on its behalf and then beef up profits, hoping to sell the company back on the public market for more than they bought it.
The business plan is not a lot different than buying a “fixer-upper” house and making improvements that raise the value of the house by more than those improvements costs. (Except that there are a few more zeros involved in the sales price.)
People who like support these firms do say they’re making stronger companies; opponents say they’re just like real estate flippers and simply cash out by loading up companies with debt. (We’ll leave that debate for another day.)
But consider this. The principals who are now selling public shares in these private equity buyout firms made all their money in the first place by knowing when it’s time to buy and when it’s time to sell. So if they’re offering shares in their company now, you might be wondering why they believe it’s time to sell. Here are a few reasons to think about:
In any case, getting in on an initial public offering is all but impossible for individual investors; these shares are usually divvied up by the underwriter for their regular (read: big) customers.
Even if you did get in on the first day of trading, you won’t necessarily make money. Blackstone, the 900-pound gorilla of private equity, was priced at $31 a share when it first traded on June 22 but it opened at $36.45 and was still selling for $35 by the close. Individual investors who bought at that price then watched the stock drop for the next five trading sessions — to below $30. At this writing, it’s back up to a little over $31.
I need to move a large amount of cash from the U.S. to Canada (around $50K). What is the best way to do this? Presently, I am planning on wiring the money from my U.S. bank account to the Canadian bank account but am worried about not getting a good rate for the exchange.
— Robert, Boston Mass.
No matter what daily exchange rate you find published in the paper, you'll get a little less than the market rate when you convert your dollars to loonies. For travelers looking to convert for small amounts, banks usually offer the best rates. But like anything else involved in travel, it pays to shop around if you can.
With larger amounts, a little shopping can make a big difference: Every penny you lose on your $50,000 transfer will cost you $500. You may also want to expand your shopping list to include major currency brokers. Unfortunately, currency markets move minute by minute, so it’s tough to get an exact price on the cost of the transfer ahead of time.
And at the moment, no matter where you go, the conversion rate is not going to be pretty. The dollar recently hit a 30-year low against the Canadian loonie and could be headed even lower .
Also, keep in mind that transactions of $10,000 or more have to be reported to the U.S. Treasury Dept. — which is looking for tax dodgers, money launderers, terrorists, and other law breakers. According to the IRS.gov Web site, these reports can include:
- Currency Transaction Report (CTR): Filed by financial institutions handling a currency transaction of more than $10,000.
- Report of Foreign Bank and Financial Accounts (FBAR): Individuals have to report a financial interest in accounts in foreign countries, if the total value of these accounts is more than $10,000 at any time during the calendar year.
- IRS Form 8300, Report of Cash Payments Over $10,000: This one is filed by anyone engaged in a trade or business who, in the course of that trade or business, receives more than $10,000 in cash in one transaction — or two or more related transactions — within a 12-month period.
- Suspicious Activity Report (SAR) These are filed on transactions or attempted transactions involving at least $5,000 that the financial institution "knows, suspects, or has reason to suspect" the money came from illegal activities.
Under certain circumstances, you may be considered an "exempt person" — but the bank has to file a form designating you as such, based on the reporting rules.
One obvious way to try to avoid this reporting would be to move the money in several transactions that fly below the $10,000 radar. Alas, if this is done solely to avoid the reporting requirements, you could be charged with trying to "structure" the transaction to evade the law. (That's illegal.)
So better check with your banker to see which rules apply to you before you send your hard-earned dollars on their way.
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