Alternatives’ Valuations Are Relatively Low amid High Volatility
Blackstone Group (BX) is valued at 9.9x on a one-year forward earnings basis. It’s trading at a premium compared to Carlyle Group’s (CG) 9.0x, KKR & Co.’s (KKR) 7.6x, and Apollo Global Management’s (APO) 9.2x.
Blackstone’s stock has risen 8.7% over the past month. It’s fallen 3.8% over the past year, reflecting a rise in recent months due to its improved operating performance, which has been led by higher valuations of its public holdings, real estate, and rising energy prices. In 4Q16, the company’s performance is expected to improve further on a rise in the broader indexes.
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Diversified asset classes
Alternative asset managers are diversifying their investments toward credit offerings, hedge funds, and real estate investments apart from private equity holdings in order to garner stable returns in volatile times. In addition to alternatives, Blackstone has a high portion of its total portfolio geared toward credit, hedge funds, and investment banking. The company’s credit division is expected to garner annualized returns of 10%–12%.
Carlyle’s valuations are fair due to its weak operating performance in recent quarters, mainly due to lower energy valuations. The company’s carry fund returns stood at 9% in the first nine months of 2016, higher than the market’s appreciation of 3% during the same period. Carlyle has a higher distribution compared to its capital commitments or deployments. This difference results in lower assets under management.
KKR has been trading at a discount, and it’s been deploying capital at a record pace in a bid to garner higher valuations in 2017.
A stable global economy could lead to new fundraising capabilities for alternative asset managers, especially for major players that form part of the iShares US Financials ETF (IYF).
In the next and final part of our series, we’ll study how alternatives will generate premium returns.