One of the best opportunities in the public equity market right now is in, as strange as it may sound, investing in private equity.
About a decade ago, a slew of the largest and best-run private equity firms starting going public. This was due in good part to let the founders — including investing legends such as Leon Black, Henry Kravis and Henry Schwarzman — create personal liquidity but also benefit by raising capital when stock market performance was strong.
Lately though, the market has been struggling royally, and the PE space has been no exception. Anything related to finance has become a four-letter word, and the stocks of the largest private equity firms have suffered disproportionately. While the market is down around 10% in 2016, the best and brightest PE firms are down much worse — percentages range from the mid-teens to the low 20s.
In fact, it has gotten so bad recently that a number of high-profile private equity firms have resorted to buying back their own stock instead of other firms.
This spells opportunity. With the shares public, investors have a unique opportunity to invest along with the PE founders, and many, including Schwarzman and Black, have publicly lamented that the market doesn’t understand their business models (buying out other companies takes time and the accounting results are uneven at best) or stellar growth prospects.
We’ll cover more of the juicy PE basics and investment appeal as we look at five battered private equity stocks to buy, as they should perform well as the market overall recovers.
Battered Private Equity Stocks to Buy: Blackstone Group LP (BX)
Schwarzman is heavily invested in Blackstone Group LP (BX) and has essentially been publicly pounding the table on Blackstone’s stock. This could be considered self-serving, but these guys have skin in the game to say the least and recently suggested that the company could generate more than $100 in per-share value for investors within roughly 10 years.
Unlike some of the other firms in this list, instead of buying back its own stock, Blackstone plans to use its excess cash (roughly $4 billion) buying into other firms, which is the raison d’etre for PE firms.
At a current share price of $25 per share, the stock is down significantly from its 52-week high of $44. Given the above, a current stated dividend yield of over 9% (though PE payouts are lumpy and depend on when liquidity events, such as an IPO, occur) and faith by management in its long-term prospects, BX stock could do quite nicely over the next few years.
Battered Private Equity Stocks to Buy: KKR & Co L.P. (KKR)
KKR & Co L.P. (KKR) was founded by private equity legends Henry Kravis, Jerome Kohlberg (who left back in 1987) and George Roberts. KKR is synonymous with the leveraged buyout craze of the 1980s that helped pioneer the PE business model.
The RJR Nabisco buyout back then is stuff of legend and essentially put private equity dealmaking on the map.
The shares of KKR recently dipped below $13 and put them down nearly 50% over the past year. The stated yield (again, it depends on yearly payouts) is more than generous at over 10% and analysts project $2.35 in reported net income for all of next year. That puts the reported forward P/E below 6 and the stock at arguably very appealing buy levels.
KKR has been putting its money where its mouth is, too, since it announced a $500 million stock buyback of its own shares last October.
Battered Private Equity Stocks to Buy: The Carlyle Group LP (CG)
The Carlyle Group LP (CG) went public back in 2012 and is yet another prestigious private equity group trading at a depressed multiple of earnings. The stock can be had at a forward P/E below 7 and a share price ($12) well below the IPO price of $22.
Carlyle’s stated dividend yield of nearly 28% is definitely impressive, but will likely drop to a more pedestrian (but still ample) 7% in the coming year. This helps demonstrate how uneven payouts can be, but they are still at levels well above the market average closer to 2%.
In a presentation to investors last fall, Carlyle boasted $48 billion in “dry powder” to deploy. The capital it (and all private equity firms raise) are used to acquire companies, with the intent to take them public, or sell them off, at a healthy profit. Shareholders benefit from the fees paid to the PE firm (for managing the funds), and realize profits when a successful investment is sold.
Battered Private Equity Stocks to Buy: Apollo Global Management LLC (APO)
At less than 7 times forward earnings estimates, Apollo Global Management LLC (APO) isn’t as much as a steal as its peers, but it is run by the eponymous Leon Black who recently called the recent drop in stock price value “kind of an absurdity”. The shares trade around $13 per share, or 50% below highs for the last year.
Like KKR, Apollo is proving it thinks its stock is cheap. It recently announced a $250 million buyback of its own shares, or a healthy 10% of its current market capitalization of $2.4 billion.
Apollo lists $162 billion in assets under management through its publicly listed stock but also has a business development company, closed-end partnership and funds, and real estate investment trusts to earn fees for shareholders and returns for both shareholders and investors.
Battered Private Equity Stocks to Buy: Oaktree Capital Group LLC (OAK)
Oaktree Capital Group LLC (OAK) is perhaps the most different, yet interesting of the battered private equity firms.
For starters, it is only trading about 16% off its high of $57 per share over the last year. It stated dividend yield is also far more modest at less than 4%. At a forward P/E of 17, the stock is not that cheap based on its earnings multiple, either.
But Oaktree was founded by billionaire investor Howard Marks, who is among the most respected investors out there. Mr. Marks’ market memos are widely read and offer some of the best insight into investing, such as distressed debt securities.
Indeed, OAK has a stellar reputation for serving its shareholders and investors fairly, and well.
As of this writing, Ryan Fuhrmann did not hold a position in any of the aforementioned securities.