Before moving away from the concept of investing like a private equity firm let's take a look at what the PE giants have been selling in recent months. These firms tend to have much longer timeframes and much less concern about day-to-day or quarter-to-quarter volatility, so when they are selling it makes sense to pay attention.
Many of the sales have been companies these firms bought at much lower prices as part of the private equity process and may have not reached full value. But I don't want to own what they are selling, especially in this extended market. All of the private equity firms were big sellers in the first quarter and have warned of excessive valuations in the public market.
Just yesterday at the Delivering Alpha Conference, Blackstone (BX) CEO Steve Schwarzman said that he finds stocks expensive. He told conference attendees that "If you have interest rates where they are then you will pop up all asset classes. So it's a little expensive for my taste."
In his Henry McVey, Head of Global Macro & Asset Allocation at KKR (KKR) warned that valuations are too high, telling investors, "If we are right, investors could, similar to 1999, end up buying great companies that prove to be less stellar investments because the entry multiple was just too high to provide solid, above average performance."
When I ran some quick and dirty tests of private equity firms' public equity portfolios all of them did well vs. the market but KKR and Apollo Global Management (APO) were clearly the best performers with returns of twice the market's since stocks bottomed in 2009. Last night, I sat down and looked at what these top-two performers have been selling recently.
Although health care has been a popular segment, KKR was lightening up on the sector in the second quarter. The firm sold 60% of its stake in hospital operator HCA Holdings (HCA) and all of its shares of orthopedic care provider Hangar (HNGR) in the quarter. KKR also cut its holdings in musculoskeletal health-care products company Zimmer Biomet (ZBH) by half. KKR owned them all for several years and apparently believed that current valuations offered a good opportunity to cash in on some of these positions.
Beyond health care, KKR sold all of its holdings in fintech company Fidelity National Information Services (FIS) . The firm acquired the stake when it sold long-time LBO holding Sunguard to Fidelity National last year. Apparently KKR thought that with an enterprise value/EBITDA ratio of more than 16x it was time to ring the register. Fintech is hot right now and consistent with the principle of buying the unloved and selling the popular that drives private equity returns, KKR exited this position.
Meanwhile, Apollo Global's largest public equity disposition in the second quarter was iStar (STAR) . The firm completely exited its position in the real estate development and finance REIT. This was a little puzzling as at first glance iStar looks cheap, and the company has a fantastic collection of properties as well as a decent loan portfolio. But Apollo has been very successful in real estate ownership and lending, so I plan to sift through iStar's reports to see what I am missing.
Like a lot of other investors, Apollo threw in the towel on Staples (SPLS) during the second quarter when the FTC blocked the merger with Office Depot (ODP) . Without the scale that would have been gained from the combination of two large office supply chains, Staples will continue to struggle against Amazon (AMZN) and other online retailers and find it difficult to grow.
Apollo exited its entire position in several other stocks during the quarter, including Calpine (CPN) , Lear (LEA) , Chemours (CC) , Cumulous Media (CMLS) , NMI Holdings (NMIH) and Tronox (TROX) . The firm has been very successful with its public equity portfolios, so when it is selling out of a company entirely I don't want to be a buyer.
Private equity firms are the smart patient money in the markets. They have much longer holding periods than most institutional investors and a reputation for buying things that are out of favor and selling when the assets are fully valued.
When PE companies sell a stock it should be a huge red flag and investors should consider following suit.