Investors looking for income and growth in the financial sector should consider the securities of top-tier private-equity firms. An elite group of publicly-traded private equity (PE) companies have demonstrated a talent for consistently executing lucrative deals, raising large amounts of capital, and aggressively returning profits back to shareholders.

The timing seems ripe for these businesses as ultra low interest rates and overregulation of the banking industry neatly play into the hands of the most nimble PE firms.

Financial services companies as a group have been relative stock market laggards in recent months as investors have become disappointed by lacklustre earnings progress. Record low interest rates have translated into lower profits on loans, a major driver of bank earnings. At the same time, a raft of new regulations have burdened the industry with increased costs. Sweeping financial sector reform laws such as the Dodd Frank Act limit the ability of banks to return capital back to investors just as most bank loan committees, still reeling from the past credit crisis are generally unwilling to be more creative.

The end result is that most of the world’s largest banks, many of which paid handsome dividends prior to the financial crisis, have since slashed their payouts with many cutting back to almost nothing. Even locally, the Bank of Butterfield’s once intriguing dividend yield of over eight per cent is now down to about a mere penny each quarter. Banks across the globe are still actively repairing their damaged balance sheets and paying out hefty fines to various government authorities who blamed them for historical systematic blunders.

And yet the world of finance continues to move forward with more nimble players picking up the pieces.

Overall loan demand has increased with in an improving economy and companies still need capital. Furthermore, the desire for investors to earn a higher return on their investment in this low interest rate environment has resulted in some less regulated entities emerging as winners.

PE firms are one group taking advantage of the dislocations. As an asset class, private equity remains quite robust and the strongest players are thriving. PE firms now manage a remarkable $3.5 trillion in assets and the total has been growing. In 2014, these funds invested nearly $1 trillion in over 5,000 deals, the highest total since 2007, according to data tracker PitchBook. The funds are also making hay on these investments with a record $445.7 billion earned on their 1,671 “exits” of companies through a sale or initial public offering, up 46 per cent from 2013. Meanwhile, these funds still have about $750 billion in so-called dry powder cash on hold to spend as of January 2015.

PE firms make profits by borrowing money or raising it from investors to purchase troubled or inefficient companies at prices deemed to be lower than their intrinsic values. The buyout firms then attempt to turn the companies around and sell them at a profit, all the while earning large fees charged against the investor’s principal. The firms also invest directly in private companies and provide high yield loans.

KKR & Co, a renowned PE firm recently bought into Preferred Sands LLC which was on the brink of a potential bankruptcy. KKR offered a $700 million loan to keep the outfit afloat in return for a 40 per cent stake in the oil services company. The company received a 15 per cent yield on one of the loans.

Also in on the energy game, Apollo Global Management is attempting to raise a $4 billion to $5 billion fund focused on energy debt and close it by April. Meanwhile, Blackstone Group is very close on a similar-sized fund focused on the energy space and the firm is also increasing its position in struggling European real estate markets.

As an asset class, private equity often falls under the umbrella classification known as hedge funds. But while hedge funds as an asset class have lately fallen from grace, the best performing PE managers have avoided much of the fallout.

Late last year America’s largest pension fund made a surprising decision to divest its investments in hedge funds after concluding they were too expensive and complex but decided to maintain its allocation to PE. The California Public Employees’ Retirement System (Calipers), with assets over $300 billion, stated they would maintain their PE allocation, although the board plans to trim the number of firms managing its capital. As of last October, Calpers had $31.2 billion invested in private equity, or about 10.5 per cent of its overall portfolio.

Investments in publicly-traded companies such as Blackstone and KKR offer liquidity, high dividend yields and attractive growth prospects. The traded securities are structured as limited partnership units, which amounts to investing alongside the general partners and participating in their high fees rather than paying them out to the firm as an owner of their products. This strategy offers much better liquidity than investing directly in the individual partnership units which often have lockups exceeding five years.

In terms of dividends, Blackstone Group paid a twelve month trailing dividend yield of 5.8%, KKR paid 8.5% and Apollo yields 13.1%. Payouts have been on the upswing. Blackstone, one of our favourite plays increased its annual dividend by an average of 18.7% annually over the past five years. Several other companies in this sector also score well on our proprietary system metrics. One caveat is that most common stock dividends are clipped for income tax withholding at source.

At some point in the future, we may see higher interest rates; and eventually, the heavy-handed regulators could dial back their regulations. At that point banks could again become the high yielding, stalwart companies they once were. In the meantime, niche financial sector players with seasoned management teams are worth a look.

Bryan Dooley, CFA is a senior portfolio manager at LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.