Alternative asset managers including giants like Blackstone Group (BX), KKR (KKR), and the Carlyle Group (CG) saw improved operating performances in 2H16 on rising broader markets (SPY) (SPX) and a better global economic outlook. Managers have seen their stock prices rise between 10%–40% over the past one year. In 2017, alternative asset managers are expected to see further improvement as declining unemployment, improving wages, and higher corporate profits support higher valuations of holdings. The major concerns that could halt market advances include higher inflation, higher-than-expected rate hikes, or a major global slowdown.
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Apollo Global Management (APO) has risen 39% over the past one year mainly due to rises in the valuations of its portfolio holdings. Blackstone, the largest alternative manager, rose 12% mainly due to a strong rebound in 2H16 helped by the performance of private markets and hedge funds. KKR fell 3% and Carlyle Group rose 2% during the same period, reflecting a relatively weaker performance.
Alternative fund managers could see stable valuations in 1H17 as valuations of broad markets have soared and holdings continue to see a stable uptick on a quarter-over-quarter basis.
Fund managers deployed a record amount of dry powder across asset classes in 2016. A major chunk of this was deployed in equities. These deployments could help alternative fund managers to garner higher base and performance fees in 2017.
In 4Q16, Blackstone beat estimates by $0.04 with reported economic net income (or ENI) per share of $0.68 on improved holdings valuations. KKR missed estimates and posted ENI per share of $0.40, mainly due to a lower-than-expected rise in private holdings. Apollo Global posted earnings per share (or EPS) of $0.98, beating estimates of $0.77 on improved holdings valuations.
The Carlyle Group missed estimates by $0.39 and posted EPS of $0.02. The company’s operating performance was weak as a result of its global market strategies and lower managed assets.
Alternatives are expected to see continued competition from the exchange traded or index funds of traditional asset managers such as Vanguard, BlackRock (BLK), and State Street (STT). ETFs are cost-effective and customized to broader indexes, sectors, and regions.
In this series, we’ll look into alternative asset managers’ expected performances, deployments, strategic initiatives, managed assets, strategies, locations, dividends, and valuations in 2017.
Let’s start by exploring alternatives’ private equity performances.