Listed private equity firms target discounted investments as share prices fall

Listed private equity firms target discounted investments as share prices fall

The four largest publicly traded alternative asset managers aim to take advantage of the same market turbulence that curbed investment performance and sent their stocks tumbling in the first half of 2022.

Each of the four — Apollo Global Management Inc., Blackstone Inc., The Carlyle Group Inc. and KKR & Co. Inc. — turned in a worse total return performance than the S&P 500 for the six months ended June 30. The index shed 20% of its value during that time, heading into bear market territory.

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Executives at the firms focused on the silver lining of the market’s storm clouds in recent earnings calls: falling valuations for potential acquisition targets. The quartet held roughly $416 billion in dry powder at the end of the second quarter, giving them the opportunity to “deploy large-scale capital at lower prices,” as Blackstone CEO Stephen Schwarzman put it.

Falling prices

The big four’s first-half performance was in line with a broader trend of falling stock prices across the financial sector, analyst Brian McKenna of JMP Securities said.

“Financials at the end of the day are economically sensitive stocks. They’re tied to the macro, they’re tied to the economy, and they’re cyclical in the near term,” McKenna said, adding that concerns about inflation and a possible recession powered the sell-off.

SNL Image * Click here to download a spreadsheet of data featured in this story.
* Click here to read more about private equity fundraising in H1.
* Click here to read about TPG Inc.’s Q2 earnings.

A significant slowdown in private equity exit activity in the first half of the year also pulled down the firms’ stocks. Income from realizations is a “pretty big input into bottom line earnings,” McKenna said.

“The end result is a lot of these stocks were down 20%, 30%, 40%, in some cases, from the highs,” he said.

Apollo, Blackstone and KKR all reported negative net income figures for the quarter while writing down the value of their private equity portfolios. Carlyle’s second-quarter net income figure was in positive territory but down 73% year over year, and while its private equity portfolio did not lose value in the quarter ended June 30, it did not gain any, either.

AUM growth

At the same time, all four continued to grow assets under management to record levels in the second quarter, despite an industrywide slowdown in fundraising. Each of the four alternative asset managers also reported an uptick in management fee-generating AUM for the second quarter.

“Even with all this volatility, the largest and most diversified managers, they’re still able to raise capital, which I think speaks to their business model, their ability to outperform and their ability to create value across their portfolios,” McKenna said.

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Analyst Chris Kotowski, a managing director at Oppenheimer & Co. Inc., drew attention to the huge amount of available dry powder in his mid-July industry update, noting that “the opportunity to deploy such large amounts of capital in challenged markets should have benefits for many years.”

The largest alternative asset managers employ a business model “built to thrive and profit” from market dislocations, Kotowski wrote. They “don’t need to sell anything into a weak market but are able to deploy ample capital into it,” he added.

McKenna suggested the likes of Apollo, Blackstone, Carlyle and KKR actually “welcome these big draw downs.”

“They can step in and make some really highly attractive investments with great economics,” he said.

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