Listen to Private Equity and Focus on These 2 Sectors

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I make a point every quarter to read the transcripts of the earnings calls from all of the big private equity firms.

KKR-stockAlthough I have a small position in shares of KKR & Co. L.P. (NYSE:KKR) and several of the public entities sponsored by Apollo Global Management LLC (NYSE:APO), ago I don’t really care what the revenues and profits were over the last three months.

Given that private equity managers think in terms of five to seven years, evaluating a three-month snapshot of the firm is mostly a waste of time.

However the earnings calls are highly informative for long-term investors, as the executives generally spend a little time talking about where they see opportunities to deploy capital for high long-term returns right now.

Private Equity Market Outlook

I have been a fan of Leon Black since he left Drexel Burnham. He learned the LBO and buyout business at the elbow of Michael Milken and all the dealmakers that did business with the high-yield bond leader back in the 1980s.Under his leadership, Apollo has put up some impressive returns for investors in his private equity and credit funds over the years.

When Black refers to the markets as “generally overvalued” as he did in the most recent earnings call, it is probably worth paying attention to. When he talks about opportunities in middle market credit and direct lending sectors, it should be a trigger for investors to consider snapping up shares of Apollo Investment Corp (NASDAQ:AINV), a business development company advised by Apollo Management.

Co-founder Josh Harris also has a Drexel pedigree and has proven himself to be a very astute investor over the years. When he makes a statement like,

“You should expect our contrarian style of investing to drive us to lean into situations from which others may be running. In certain cases where the market values are falling, our conviction remains…In the energy sector specifically, based on our deep industry and technical expertise, we continue to believe this is the very attractive area to be raising and investing capital.”

I think its time to break out our calculators and start digging through the battered energy sector for bargains that are safe and cheap enough to have high returns over the next five years or so.

William Conway and David Rubenstein have built Carlisle Group into an industry leader in private equity and other forms of alternative investing. While short-term traders were focusing on the year-over-year earnings decline, I was more interested in Mr. Conway’s comments in the earnings release.

He told investors, “With our major funds reloaded, we are well positioned to take advantage of market volatility, particularly in the energy sector.” On the subsequent conference call, he added, “I love the way we’re positioned in energy. We have 70 investment professionals for energy.”

I do not really care what the private equity firms did in the last there months. I care that, looking five to 10 years down the road, they think that energy is going to provide the type of long-term returns they desire of 20% or more annualized. I care very much when they talk about the demand  for credit as banks step away from riskier lending and what this means for well-run Business Development Companies over the next several years.

If you can adopt the longer-term private equity mindset and buy undervalued assets to hold for a long time as these high-return investment vehicles have done for the past few decades, your invesment performance should skyrocket.

As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/listen-private-equity-focus-2-sectors/.

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