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This 'Hidden' Market Is Waiting For Obama -- But You Can Invest Now

David Goodboy

The presidency of the United States is a position of privilege and power. 

Although presidential power is tightly controlled by the Constitution and Congress, the office remains the most influential position on Earth. This political and social influence enables the president to strike up friendships and business relationships with powerful leaders in the banking, finance and private equity arenas.

This fact remains true for nearly every U.S. president. Even our current commander in chief, Barack Obama, is tightly connected to the world of high finance. Despite running his re-election campaign with a populist, anti-Big Business theme, Obama's actions tell a different story.

I'll never forget the series of Obama campaign ads attacking his Republican challenger, Mitt Romney, for his work for the private equity firm Bain Capital. The ads attacked Romney's connection to high finance, alleging a history of draining the life out of companies and the working class. Obama was trying to appeal to the average voter, who might not have a sophisticated understanding of macroeconomic realities. In fact, Obama's actions make him something of a major player in the world of private equity. 

A look at Obama's actual record reveals his support and connection to the financial world. As an Illinois state senator, Obama was a supporter of the venture capital business: He introduced two bills and one resolution intended to benefit his state's private equity businesses. 

Not only did Obama show legislative support for private equity, but his actual deeds have been similar to the private equity leaders he admonished in his presidential campaign. The primary example is his saving of the U.S. auto industry. By retaining Steven Rattner, a powerful private equity kingpin, to lead his task force on the auto industry, Obama was able to revitalize the industry by restructuring General Motors (GM) and Chrysler. 

Obama's private equity connections go beyond the world of business. One example is the nearly $8 million Martha's Vineyard home rented by the Obamas, which is owned by Obama donor David Schulte of the private equity firm Chilmark Partners. 

According to the nonpartisan research group Open Secrets, private equity and hedge fund donors gave more money to Obama's 2008 presidential campaign than to any other candidate.

     
   
  Flickr/Daniel Borman
  Private equity and hedge fund donors gave more money to Obama's 2008 presidential campaign than to any other candidate, according to the nonpartisan research group Open Secrets.

 

It's clear that even a populist president like Obama retains close ties to the world of private equity and high finance. Let's look at how the average investor might be able to profit in similar ways. 

Obama's investments include three different accounts between $50,000 and $250,000 in the Vanguard 500 Index Fund (VFIAX). He also has positions in U.S. Treasurys, four college savings accounts, as well as a steady stream of book royalties in the range of $50,000 to $1 million. 

While it's exciting to discover the president's financial holdings, this is all chump change compared with the private equity deals Obama will likely be privy to after he leaves office. Fortunately, business development companies (BDCs) provide a way for individual investors to play in the same sandbox as the private equity kings and venture capitalists of high finance.

BDCs are firms that lend money to small- and mid-size companies with the goal of participating in the company's growth. Investors can buy shares in the company with the goal of profiting from the BDC's portfolio of company's success. 

My favorite BDC right now is Fifth Street Finance (FSC).

The company calls itself an alternative lender. It provides funds to proven small and mid-size companies alongside top private equity companies. Its business strategy is powerful. A leading private equity company locates a company it wants to purchase. The private equity investors look for untapped potential or other value inherent within the targeted company, with the goal of selling the company at a profit. Once the private equity firm provides the equity to purchase the company, Fifth Street Finance gets involved by providing the needed debt. Fifth Street's profits come from interest and capital gains

Fifth Street is widely diversified and boasts a market cap of slightly more than $1.2 billion. The stock has a five-year average dividend yield of 11.5%. The majority of Fifth Street's debt investments are in floating-rate securities, so the prospect of rising rates could actually help Fifth Street.

Technically, shares of FSC recently spiked downward below the 50- and 200-day simple moving averages. This sets up a great breakout buying opportunity.

Risks to Consider: Fifth Street Finance's business model is risk-averse and well diversified. However, this does not eliminate market and economic risk from the equation. Like all BDCs, the company is dependent on economic growth and a stable market. Always use stops and position size properly when investing.

Action to Take --> Fifth Street Finance provides the average investor a way to participate in the venture capital/private equity arena just like top-tier investors. The stock gapped down recently due to the pricing of a 15.5 million-share offering at $10.31 a share. This creates a buying opportunity for savvy investors. Buying on a breakout close above the 200-day simple moving average at $10.20 makes a great entry level.

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