Private Equity

[moody202]

I am researching the private equity companies and wanted to get opinion from board members if they make good investment. What should I watch out for before investing in these companies. They had great dividend yield in 2013, is that sustainable?

 

Here a list of companies I am contemplating.

 

Fortress Investment Group

KKR

Carlyle Group

Apollo Global Management

 

 

[Packer16]

If you are interested in this type of asset why not invest in BRK, LUK, BAM or OAK where the amount paid to management is less and the incentives of mgmt and investors are aligned?  The other way to play private equity is purchase levered firms like GNCMA and AIQ where the firms are structured as DIY PE investments with no management fee.

 

Packer

[jschembs]

I would never invest in a publicly-traded PE firm. As Packer mentions, the net returns to shareholders suffer from the massive wedge of fees and other compensation lopped off the top. Further, the PE market is incredibly competitive, and only getting more so, meaning that IRRs almost certainly will be lower in future periods.

[obtuse_investor]

This video report from the FT is appropriate for this thread and quite timely.

 

Barbarians back at the gate

http://video.ft.com/3325299108001/Barbarians-back-at-the-gate/Markets

[ap1234]

A couple of potential headwinds to be cognizant of:

 

1. Short-term: Equity markets have been robust and P/E firms have been very active monetizing their existing assets (i.e. P/E firms are net sellers of businesses). As the CEO of Apollo commented a while back, "We're selling everything that is not nailed down." When you monetize a lot of your assets in a short period of time you generate a lot of carried interest which inflates your current profitability and leads to above-average distributions. The question to figure out is what is a normalized level of earnings power for these businesses (i.e. you might need to adjust for the elevated carried interest)?

 

2. Long-term: P/E firms are people businesses (they don't have a lot of hard assets) and rely on recruiting and retaining talent. In the early days when P/E firms were private this was less of an issue and the majority of the economics (i.e. carried interest) went to the employees. As public companies, a significant % of the economics now goes to shareholders. This probably won't be a problem for many years but you should try and figure out whether publicly traded P/E firms can retain talented employees if a large % of the carried interest goes to outside shareholders and not to the young people doing the deals.

 

My guess is this is not as much of an issue for the Blackstones of the world because they have become 'branded' companies or household names in the marketplace. As such, they will likely be able to continue to raise lots of money even if they lost some talented young people and their returns diminish over time.

 

 

[Packer16]

I would not worry about the PE management paying themselves.  They do very well and probably better as a public firm as they can monetize there stakes and still take a lion share of the CI.  If you look at the details of the agreements most of these PE firms is they have 2 classes of shares (public shares and employee shares).  The way most of these are structured is the public shareholders take the risk and share the gains with employees if successful and the losses if not successful.  OAK is the only one I know of that structured more fairly.

 

Packer

[moody202]

Thanks everyone....really appreciate all the responses. The video was great too!

[wachtwoord]

I'm always interested in tickers that show up in the Morningstar 5 star rating and at least a narrow moat screen and APO just made the selection. Any additional viewpoints on this? (price does have a huge influence on the quality of an investment).