Stocks of private-equity firms outperform market

— -- Q: Have private-equity firms, like the ones presidential candidate Mitt Romney worked at, done better than the general stock market in the wake of the crash of 2008?

A: Private-equity firms are one of the largest investment firms many people don't understand.

Even the term private equity is arcane and cryptic. Part of the difficulty in understanding private equity is the fact the term is somewhat of a catch all.

Many firms that call themselves private equity do very different things. Some private-equity firms specialize in buying distressed companies and trying to resuscitate them using new financial and management techniques. Others attempt to buy companies using borrowed money and flip them for a quick profit.

Private-equity firms are deeply entrenched with some of the largest public pension plans, which manage billions of dollars for the retirement accounts of teacher, firemen and other public employees.

Given the influence of these firms, it's not surprising to see leading GOP contender Romney hailing from one of these firms, Bain Capital.

Have these stocks of private-equity firms done better or worse than the Standard & Poor's 500? To find out, we'll build an index out of them and see how they've performed as a group.

A market-cap weighted index of the private-equity firms above indicate that, as a group, these stocks are much more volatile than the broad stock market. The value of the group of private-equity firms fell roughly 90% in value through the end of 2008 and into early 2009, based on a custom index built using S&P Capital IQ. At the depths of the bear market in that time frame, the broader S&P 500 index fell 50%, a brutal loss for sure, but much better than the private-equity firms.

But, with that said, the private equity firms' value has raced back over the past three years. As a group, the private equity firms have risen nearly 120%, while the S&P 500 has risen 50%.

There's no question private-equity firms took their lumps during the recession. The value of many of the investments private-equity firms bought turned south starting in 2008. The ability to borrow money, the key to many private-equity firms' ability to buy companies, dried up. And the ability to tap the initial public offering market soured, making it difficult for many of these firms to sell their companies and raise cash.

But now, with the capital markets working more freely, the times have certainly improved for private-equity firms. And that's very apparent in the performance of the stocks.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz