Memo to shareholders: Be careful if a private equity firm holds a ton of your stock.
Private equity firms have been challenged this year as first-quarter profits are down significantly from the year-ago quarter. This puts pressure on the distributions that funds can pay to investors and it may be a reason why some of the larger private equity funds, such as Carlyle Group (CG), Kohlberg Kravis Roberts (KKR) and Blackstone (BX), have recently pared some of their larger positions. These three names are often listed among the top five private equity firms in terms of assets under management (AUM): Carlyle has $178 billion, KKR has $126 billion, and Blackstone has $95 billion in private equity AUM,
Broadly speaking, sales are sometimes part of so-called systematic selling. Sometimes, however, sales are a sign that private equity firms have a need to unload positions for reasons that have more to do with the firm doing the selling than the assets being sold. Either way, sales can be a sign for investors to pay attention if they own -- or plan to own -- stock in companies held in private equity firms' portfolios. To be sure, given the nature of private equity, examining a firm's public portfolio represents just a portion of the firm's total holdings.
Blackstone, for instance, saw its first-quarter dividend fall to $0.28 a share from $0.89 a year ago. Days after announcing first-quarter results, Blackstone shed 20 million shares of Brixmor Property Group (BRX). Blackstone took Brixmor public in 2013 and shares are up 19% to $24 a share since its IPO date but the company was mired in an accounting scandal earlier this year. In April the company announced a new CEO, which makes the timing of Blackstone's sale curious. Sources close to the matter said that the sale was part of "systematic selling."
Meanwhile, Carlyle Group (CG) recently launched block sales of three companies that the private equity firm called "big winners" in a recent earnings call.
On Tuesday, Axalta Coating Systems (AXTA) announced that Carlyle would be unloading 25 million shares in a transaction that is expected to close at the end of the month. As a result of Carlyle's decreasing stake in the company, it may have to forfeit one of its five seats on Axalta's board. The announcement of the Axalta sale came a day after Carlyle priced a secondary offering for 13 million shares of Booz Allen Hamilton (BAH) and three weeks after Carlyle priced a secondary offering of 20 million shares of CommScope (COMM). The combined sales totaled approximately $1.6 billion. Representatives for Carlyle Group declined to comment.
The sales alone should not be a huge surprise to investors. In its first-quarter earnings call, Carlyle Group's co-CEO Bill Conway said he expects to see more block trades in Carlyle's public portfolio and called Axalta, Booz Allen and Commscope the "ABCs of private equity." Indeed, those companies represent some of Carlyle's largest holdings in its public portfolio as well as some of its best-performing holdings.
But when taken alongside Carlyle's falling stock price -- down 45% over the last year -- and the decrease in its first-quarter dividend to $0.26 a share from $0.33 a share a year ago, there may be more to Carlyle's recent sales.
If investors were looking for clues as to what Carlyle might sell next, they may want to look at NXP Semiconductors (NXP) and Masonite International (DOOR). Carlyle already shed approximately $350 million of its position in NXP last month. Shares of the company trade around $91 and are up nearly 9% this year. (NXP Semiconductors is an Action Alerts PLUS holding.) As for Masonite, a Florida-based company that makes doors, shares currently trade around $71 and have gained 16% this year.
Similarly, investors may want to look at the holdings in KKR's public portfolio for clues as to sales that could be coming.
Earlier this month, KKR sold 15 million shares of Walgreens Boots Alliance (WBA). The announcement of the sale came days after KKR reported first-quarter losses of $0.73 a share. (Walgreens is an Action Alerts PLUS holding.) In its first-quarter earnings call with analysts, KKR said declines in First Data (FDC), Walgreens and WMI Holdings (WMIH) -- its three-largest balance-sheet positions -- created a $270 million unrealized loss for the company. Representatives for KKR declined to comment.
For further signs of stress in its portfolio, KKR announced in October that it was changing its dividend payment plan in which it will pay a fixed quarterly dividend of $0.16 a share compared to a 75% to 80% payout of cash generated. For the first quarter, this means KKR's dividend fell $0.30 from a year ago.
Should KKR look to do more sales, investors may want to pay attention to the following holdings in KKR's public portfolio. Home health care company Amedisys (AMED) has spiked threefold to $52 since KKR announced an 8.5% stake in August 2013. Also in the health care space, investors may want to watch HCA Holdings (HCA) and Concordia Healthcare (CXRX) as possible sale candidates in KKR's portfolio. Other KKR holdings to watch are GoDaddy (GDDY), Marvell Technology (MRVL) and Zimmer Biomet (ZBH).
While the private equity sales could be part of planned selling, investors may want to pay extra close attention to them in light of recent poor performance among private equity firms.