The market turmoil of 2016 has caused investors and traders to decide that investment management services will no long be needed in the future. This is particularly true of the alternative investment firm. Private equity firms have been hit especially hard as the cashout bonanza of the past few years is coming to an end and earnings have slipped a bit. We are reaching the point where the stocks are incredibly cheap -- and investors with a private equity mindset should start accumulating shares of the private equity firms. The returns over the next five to seven years should be dramatic from current levels. They may go down some more in the short run, and we should consider that an opportunity to keep buying them while they are on sale.
At the recent TIGER 21 conference for high-net-worth investors in Beverly Hills, Thomas Barrack of Colony Capital (CLNY) addressed the idea of buying the alternative investment managers. He told the gathering of the well-heeled that,"Those alternative assets are a buy. The market is mistaken [in thinking that] in this frothy market, perhaps the fund business is going to suffer. In fact, it's the opposite." He is exactly right. Bad markets are the best of times for private equity investors. For the past several years, they have been net sellers, as premium valuations made it difficult to get their capital to work. A lot of that capital has found its way into energy equity and debt investment - and as long as oil doesn't dry up and disappear, the long term payoffs will be enormous for these patient, disciplined investors.
In his recent conference call, Scott Nuttall, head of global capital and asset management at KKR Holdings (KKR), addressed current conditions. He told investors that "In effect, we view markets like this one as giving us a great opportunity to create options that we can monetize in a more optimistic environment. And our model positions us to create more of those options when fear reigns. So we're actually quite bullish on what we are seeing and our ability to monetize this environment. And with a record $29 billion of dry powder across our balance [sheet], we have ample capacity to express our views." KKR is expressing its views on the price of its own stock, as well. The private equity leader repurchased 17.5 million of outstanding common units for $270 million as part of its $500 million buyback. The new fixed distribution policy gives the stock a 10% yield ,which is very attractive in a low-yield world.
Apollo Global Management (APO) is a stock I have been patiently waiting to buy on the cheap for a long time. Leon Black and Josh Harris have created one of the most successful investment firms in the world, and their value-oriented strategy is not all that different than the one I have used for years. Apollo also announced a buyback plan, to take advantage of the current weak pricing of its stock, and will be buying back $250 million if its shares. Apollo pays out a percentage of cash flows, so the payout is not fixed, but if you took the depressed fourth-quarter payout of $0.28 a share and cut in half, the annualized yield is over 4%. I suspect the actual total dividend payout will be higher, so we get strong cash flows while we wait to see if the shares appreciate over time. Black is also excited about current market conditions - telling investors on his recent conference call that, "Broadly speaking, we believe the combination of our distressed and contrarian investing skillset, our long-dated capital and our dry powder is particularly well-suited for today's environment."
Carlyle Group (CG) Co-CEO David Rubenstein thinks market conditions are perfect for his firm - and the firm is taking advantage of the current weak asset prices. Executives also think their shares are way too cheap, and they announced a $200 million buyback. Rubenstein said, when announcing the repurchase plan, that "Anywhere near our current unit price, our units represent an incredibly attractive value - not only for public investors but they also represent for Carlyle a highly accretive investment opportunity, and we have decided that we should take advantage of this opportunity while it exists." When asked about future distributions, CFO Curt Buser said that, "We've [been] returning cash of $6 or $6.04 over the last three years in distributions to our unitholders. So we have consistently performed. As everybody knows each quarter, some can be really high and some can be a little low, but each quarter over the last five years we've performed well in good times and in bad. I don't see any reason why that should really fundamentally change." If the manage to actually distribute half the 4Q payout, the stock will yield around 5%.
Private equity firms are on sale, right now. The smart, patient, and wildly successful investors running the firms are buying back their own shares because they think they are a bargain. So do I. I already own them, and will be buying more as long as the prices are this low.