It's an idea that the richest and most powerful people in the business world almost never say out loud.
But takeover king Wilbur Ross knows it. So does Herb Allen, the most exclusive banker in the world. And you can bet your boots that billionaire Warren Buffett knows what I'm about to tell you. In fact, he's often said these are the types of deals he wants to pursue...
They're privately held...
"As of September 2010, [the] private [market] outperformed the S&P 500 by 11.4 percentage points, 7.3 percentage points and 19.4 percentage points for one-, three- and five-year periods," according to an investing trade group.
And a study by professors at Duke and Ohio State covering a period from 1984 through 2010 found that private market investors earned 18% more than the S&P 500.
It's proof that when it comes to investing, the rich really are different -- they invest in better companies.
But exactly how do they do this?
Well, rather than buying shares on the stock exchange, savvy big hitters write a very large check to a very special kind of firm. To be eligible to invest like this, federal law stipulates that an investor needs to have at least $200,000 a year in annual income ($300,000 for a couple) and more than $1 million in net worth, excluding a primary residence.
That is a very high bar. These rules block 94% of investors.
The official name for these highly exclusive firms is "private equity."
A private-equity firm has more than a pile of investor cash to offer. It also provides executive mentoring and business advice -- often from some of the biggest names in corporate America.
I like private equity because a lot of private-equity firms do the exact same thing I try to do with Game-Changing Stocks...
They try to find "the next big thing," and they seek to invest in it before anyone else realizes that they've found the golden ticket. (For example, Amazon (Nasdaq: AMZN) founder Jeff Bezos invested $250,000 in Google (Nasdaq: GOOG) in 1998... years before it even went public.)
Here's the good news. Private equity doesn't have to be our competitor. It can be our partner. In fact, you and I can put private-equity and its consultants to work for us the same way the billionaires do.
That's because there is a way around the rules that bar ordinary investors like you and me from investing in private-equity deals.
And as these businesses grow, their private equity backers can get phenomenally rich...
For example, between 1973 and 2006, Yale's endowment fund generated average annual returns of 30.6% in private equity. That includes a monster return of 168.5% in the year 2000, when Yale made $2.1 billion on its private equity investments.
Compare that 30.6% figure to the average gain of just 7.5% per year for the S&P 500 during the same time period, and you start to see the type of effect private equity could have on your portfolio.
Here's what Yale has to say about private equity...
"Private equity offers extremely attractive long-term risk-adjusted return characteristics." (Source: Yale Endowment Fund -- annual report)
Given the returns they've generated, it should come as no surprise that private equity now ranks as Yale's single largest holding. In fact, Yale invests twice as much money in private equity as it does in regular common stocks.
And Yale's performance isn't unique.
The bottom line is that private equity firms have made countless fortunes over the years.
But until 2007, you couldn't invest directly in private equity unless you were either an elite institution like Yale, or you ranked among the richest 6% of all Americans.
All of that changed in June 2007 when one of the largest players in this notoriously secretive industry made a surprising decision. It decided to list its shares on the New York Stock Exchange.
Thanks to these recent developments, you can now invest directly in a handful of the world's biggest and most lucrative private-equity firms. And with each and every deal they make, you can reap the same rewards that the ultra wealthy have already been enjoying for decades.
And over the past few years, several other private equity firms have followed suit. The most recent filing took place in May 2012, when The Carlyle Group (Nasdaq: CG) began trading on the Nasdaq.
Action to Take --> You won't become a multi-millionaire overnight, like the partners at Carlyle, but you'll have a chance to bank a tidy profit from some of America's fastest-growing private companies. And most important, you'll tap directly into the private market -- a market that's cheaper and more lucrative than regular, ho-hum common stocks.
[Note: The Carlyle Group isn't my favorite private equity investment (I've reserved that for my Game-Changing Stocks readers). But I think it shows one of the little-known facts about investing today -- the private market is finally being unlocked for public investors. And it's not just private equity... there are other ways to access this market.
I've put together an entire presentation on this topic that has more details -- including the backdoor way you can access the underground stock market where Mitt Romney made millions. Click here to watch the video now.]