The world’s biggest private equity firms haven’t been faring that well in the past few weeks, but latest reports show that the firms are holding on. Although the third quarter has shown some signs of weakness, yet this might also represent an opportunity for investors.
Shares for private equity firms have been slowly going down. According to the Wall Street Journal, year-to-date stock price declines for some of the bigger companies stood at 5.9% for Blackstone, 19.1% for KKR and 35.4% for Apollo at the end trading on Tuesday.
Much of this poor performance is down to bad exit strategies, as companies like Carlyle and Blackstone exited from many of their ventures during the third quarter. For stock prices, the third quarter saw the S&P 500 up by 1.6%.
But for a number of analysts, the situation doesn’t look too worrying. The Street reported that the rather conservative exit strategy that many PE companies have been using is the product of trying to avoid making the same mistakes that led to the financial crisis. Jeff Eaton, from Eaton Partners, told the Street that PE companies were “caught holding the bag” and this together with excessive leverage ended up causing increased liquidity issues.
The problem is that many investors don’t hold enough value for long-term investment opportunities in the current markets. This leads to underperformance by PE companies, even though these companies are holding on very well. Although third quarter wasn’t good for many big PE companies, the second quarter was very good.
Furthermore, Dealogic’s data reveals that PE companies divested $98.3 billion worth of holdings during the July-September period. Although it is a drop from $109.2 billion divested in the second quarter, it is more than during any other data quarter since the early 2011.
In addition, there is more evidence highlighting PE companies’ poor stock performance. Even the recent announcement by Blackstone to spin off its financial advising business wasn’t able to improve its share price. This despite the fact the move brings in nearly $380 million in annual revenue to Blackstone. Analysts believe this typically would have driven up the share price.
Yet, the market’s volatility, especially in the asset classes, provides investors with an opportunity to go after the more stable stocks of PE companies. It is very likely that the next few days show an increasing flow of funds to private equity companies.
The Sterne Agee Industry Report believes PE companies offer interesting entry points. The report says, “current values represent little more than capitalized fee-related earnings and the most recently reported net balance sheet values”.
What further excites analysts is how the current earning expectations are very modest. All the big PE companies are evaluating their earnings much lower than what experts believe will be announced in the coming days.
Knowledge at Wharton also reported that pension funds in the US are very interested in PE company shares. This is because they offer higher yields, as pension funds aren’t performing strongly enough.
To many analysts private equity is a constant performer and thus the weaker performance in the last few weeks isn’t something to get concerned about. Private equity companies and private equity as an investment has been written out many times, yet it continues to perform.