Alternative managers’ private equity divisions are expected to see improved performances in 2017 on higher liquidity and growth in sectors such as renewables, engineering, defense, and services. Alternative asset managers garner most of their base and performance fees from private equity businesses.
Private equities aim to generate higher returns compared to the broader index (SPY) in order to command higher performance fees. Major triggers for private equities include deployments at low valuations, a stable global economic outlook, and improved public holdings valuations.
In 3Q16, Blackstone’s (BX) private equity division reported economic income of $132.1 million on the back of a 3% rise in its portfolio value. Its total revenue stood at $337 million, compared to -$522 million in 3Q15, reflecting improved valuations.
The Carlyle Group’s (CG) private equity holdings’ valuations also rose 3% in 3Q16, mainly due to the rebound in the energy sector (USO). In 4Q16, these valuations could see growth of over 2.5% as broader sectors rise.
KKR & Co.’s (KKR) private equity division contributes nearly 75% to the company’s total revenue. In 3Q16, KKR reported revenue of $549 million in its private equity division, a rise on the back of a 5.8% YoY (year-over-year) rise in its portfolio valuations. The company benefited from higher performance fees and economic net income as its valuations rose.
Apollo Global Management (APO) also saw a rise in its private equity holdings, in part due to its broad market appreciation. Alternatives target diversified portfolios in bids to deal with rising uncertainty and fast changes in sector outlooks.
In the next part of our series, we’ll study private equity fund deployments and how they might look in 2017.