AS ARES READIES IPO, BLACKSTONE & KKR BEAT EARNINGS ESTIMATES,
sending their share prices higher and creating enthusiasm for the sector that should help Ares. These are the takeaways from a trio of Bloomberg stories. Driven by a strong market for private equity-backed asset sales, KKR & Co. beat the average analyst’s first quarter estimate by 61 percent, with economic net income after taxes of $593.7 million. Reporting $813.9 million in after-tax economic net income, Blackstone Group outdid the average Q1 estimate by 27 percent. Tony Ressler, a former Drexel Burnham Lambert banker who co-founded Ares in 1997, after helping launch Apollo Group, has “contemplated a public offering for years,” but “decided to wait” until PE firms “showed success in public markets.” Apparently, that moment has come. Ressler is planning to raise up to $419 million through an initial public offering, valuing Ares at as much as $4.86 billion. Ares has $74 billion in assets, operates more than 140 investment funds and had $329 million in after-tax economic net income in 2013. If conditions remain positive, watch for other large PE managers to list.
ARE BIG, LISTED PE FIRMS LEAVING ROOM FOR THE NIMBLE, BOLD & UNLISTED?
That’s the implication of a piece in The Economist titled “Barbarians at Middle Age.” “Having shareholders is not the only thing that has changed for firms that pioneered private equity.” In addition to “accumulating assets under management at a furious clip,” listed PE firms are “becoming duller.” “Once at the forefront of finance’s most exciting deals, borrowing vast amounts to seize control of underperforming companies in hard-fought takeover battles, they often now merely extend loans to such businesses.” Such moves mean their revenues are “relatively skewed” toward annual management fees of 1 percent to 2 percent, rather than to carried interest – the 20 percent of investors’ profits where they once “earned most of their income.” When stock market analysts value PE firms, “they typically attach three times more value” to steady, predictable management fees than to lumpy carried interest. “Bosses, fretting about their share prices, will therefore chase humdrum volume over dramatic but risky deals.” A time may come when bolder, more nimble firms will “shake” the big listed firms “from their torpor,” concludes The Economist.
IF PE FIRMS DON’T BECOME STOCK MARKET ACTIVISTS, THEY MAY LOSE OUT,
claims Steven M. Davidoff in a New York Times DealBook column on the repercussions of the novel $45.6 billion unsolicited offer for drug company Allergan by Valeant Pharmaceuticals and William Ackman’s activist hedge fund, Pershing Square Capital Management. “Valeant has now disclosed to the world that activist hedge funds are a ready arsenal of capital that can be used to aid hostile takeovers by corporations.” Hedge fund “expertise will be invaluable to companies on the hunt for takeovers, perhaps supplanting investment banks that advise on such situations.” More pertinently for PE, the partnership between Pershing Square and Valeant “will also increase pressure on private equity firms to become more like activist hedge funds. The bid for Allergan is larger by multiples than any private equity deal since the financial crisis. It shows the potential for these private equity firms and their hundreds of billions of dollars in unspent capital. If PE is to stay in the game, it will have to find a way to compete,” taking inspiration from this new model, predicts Davidoff.
EMERGING MARKETS WILL GET THE MOST PE INVESTMENT IN THE YEARS AHEAD,
“as Brazil and China become the leading global recipients of capital from the sector,” writes Reuters, summing up the key point from David Rubenstein’s ‘Private Equity 4.0,’ speech, delivered at a recent Associacao Brasileira de Private Equity & Venture Capital conference. “Yes, emerging markets have problems from time to time, but they don’t have the same problems that developed economies do,” says Rubenstein. “Five years from now the amount of money invested in emerging markets will be way bigger than today.”
KKR AND NASDAQ WORK TO ALLOW RETAIL TRADING OF PE FUNDS,
according to The Wall Street Journal. Nasdaq OMX Group and KKR & Co. are filing regulatory papers for the creation of “a private market” run by Nasdaq, where “giant pension funds and wealthy individuals will be able to sell to smaller investors” slices of existing PE funds “valued at as little as tens of thousands of dollars.” It’s the latest iteration in a push by PE managers to reach retail investors. A year ago, “Carlyle began allowing investors to put as little as $50,000 into a collection of its buyout funds through an intermediary.” In 2012, KKR created “two relatively-high-fee mutual funds for individual investors, but it decided to close them earlier this year amid tepid interest.” Meanwhile, funds-of-funds group Pantheon, launched a PE investment product for U.S. retail-controlled retirement accounts last fall. So far, all the efforts are disappointing. But an exchange that makes trading small positions in funds easy would overcome one of the biggest challenges for retail PE investment: the long-term, illiquid nature of the asset class.
“RECORD” VOLUME IS EXPECTED FOR SECONDARIES,
writes The Wall Street Journal. “The market for secondhand PE investments has grown swiftly,” with annual deal volume likely to hit a new high of over $30 billion in 2014. “For years, the annual volume of secondary deals hovered around a few billion dollars. Assets that changed hands were usually poorly performing, or their owners were in distress and needed cash quick. But as the PE business has boomed, so has the secondary market, just as rising new car sales can boost the number of used cars.” Mature secondary stakes return cash typically within three years, offering faster distribution than primary funds which can take five years or more to start paying out. Though rarely offering the investment home-runs that primary PE fund investments can provide, secondaries can deliver double-digit returns at lower risk, notes the WSJ story. Secondary specialist Ardian just raised $9 billion to acquire interests in existing funds. That’s “the largest such fund ever raised and comes only two years after the firm raised the previous record of $7.1 billion.”