Three of the big four private equity firms have reported earnings for the second quarter. The fourth, Apollo Global (APO) , reports today, but I have not had time to read the report or listen to the call yet. Blackstone (BX) , Carlyle Group (CG) and KKR (KKR) all had strong quarters as the stock and real estate markets were relatively strong. They also benefited from the recovery in oil prices and energy-related debt pricing in the quarter. All three had lots of cash at both the fund and corporate levels, and all three were selling more than they were buying during the second quarter of the year. Equity valuations are stretched, and the long-term patient money has been looking for the door.
Scott Nuttall of KKR summed up his view of the current market on his conference call. He told investors, "We've been taking advantage of investment opportunities where we find them. More idiosyncratic, and at the same time, as you heard, we are exiting given the strength of the equity and debt markets." It sounds a lot like something I have been saying in that if they can find something to do that fits their parameters, they will do it, but it is a lot easier to find stuff to sell than it is to uncover bargains.
Bill Conway, co-CEO at Carlisle, had similar thoughts. On his call, he told investors, "In terms of purchase multiples that we're seeing, I would describe them as high. We are regularly beaten out by our competitors and strategic and the public market. I suspect whenever we win one, some of our competitors are saying: 'Wow, Carlyle really overpaid for that.' And frankly, sometimes when we lose, we're wondering what our competitors saw that we didn't see in a particular asset." All three of the firms are willing to buy, but none of them is willing to overpay in the current market.
All three of the companies were also active in and increased their participation in the credit business, with direct lending being a favored area of concentration. Banks have pulled back from the riskier forms of lending, and it has created a vacuum that the private equity firms are anxious to exploit. I have said for some time now that individual investors should also be taking advantage of the opportunity by owning shares of business development companies (BDC) that have a relationship with the private equity and alternative asset management firms.
My favorite private-equity-connected BDC is still Apollo Investment (AINV) . Its relationship with Apollo Global gives it access to deals its competitors just will not see. It also has access to world-class credit analysts with decades of experience in higher-risk lending. The BDC has been repositioning the fund to reduce risk and stabilize returns in the future, and it has also been refinancing debt to lower total interest costs. CEO Jim Seltzer described the new approach on his last conference call: "Going forward, we intend to reposition our portfolio in such a way that we believe is designed to have a lower risk profile, less volatility and should provide more stable returns for shareholders. We intend to achieve this by repositioning a portion of the portfolio into traditional corporate loans, primarily floating rate, directly sourced from the Apollo platform."
The board appears to have a high degree of confidence in the new approach as they recently announced they had expanded the company's stock repurchase program by $50 million to $150 million. So far this year, they have repurchased $86 million of stock. The shares currently trade at 90% of book value and yield 9.85%.
All three are finding it fairly easy to raise money right now. Institutions and high-net-worth investors are tired of low returns in the equity markets, and many of the traditional money managers and even hedge funds are just delivering the desired result. Increasingly, they are looking to the long-term, patient approach of private equity to achieve the desired and, in many cases, needed returns. I have long been an advocate of the private equity mindset, and in a low-rate world, it appears some larger investors are starting to come around to that point of view.
If you need any additional encouragement to start thinking and investing less like a trader and more like a private equity investor who buys undervalued companies and holds them until they can be sold at a premium, consider this comment from Bill Janetschek, CFO of KKR. On the conference call, he discussed the results of the latest dispositions: "On a blended basis, the PE exits were down at 2.6 times our cost and an IRR (internal rate of return) of 26%." That's the advantage of the private equity mindset.