A distinctly less optimistic tone shaded third-quarter earnings calls by the four largest listed private equity firms as they faced persistently slow dealmaking and a macroeconomic outlook tinged with geopolitical instability.
The average net positivity score for Apollo Global Management Inc., Blackstone Inc., The Carlyle Group Inc. and Kohlberg Kravis Roberts & Co. LP dipped to its lowest level over five quarters at the start of the fourth quarter, when firms were reporting third-quarter results, according to an analysis of the language used by executives and analysts on earnings calls.
The average score for the Big Four — the largest among their peer group by assets under management — has now sunk below the average sentiment score for S&P 500 constituents for three consecutive quarters.
"Multiple wars, along with higher rates and economic uncertainty, have increased volatility and reduced confidence levels," said Carlyle CEO Harvey Schwartz when his firm reported earnings Nov. 7, directly tying "negative sentiment" to muted transaction activity.
Schwartz predicted "lower activity levels and reduced confidence will likely persist for a bit longer," despite what he described as "signs of improvement" in the third quarter for private equity buyout activity. Private equity and venture capital entries globally declined 18.2% year over year in the third quarter, while exits increased for the third consecutive quarter.
Credit fuels AUM growth
While higher interest rates have played a role in muted private equity deal activity, in part by making deal financing more expensive, the upside for alternative asset managers is the boost higher rates give their private credit strategies.
"Our credit businesses are thriving today in the context of a very favorable operating environment, given higher base rates, along with challenges to traditional lenders," said Blackstone CEO Stephen Schwarzman, who predicted the firm's private credit business would reach $1 trillion in AUM in a decade.
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Sounding just as enthusiastic, Apollo CEO Marc Rowan on the firm's third-quarter earnings call described private credit as the future for large asset managers, whom he predicted would develop a slew of new products for investors eager to give their portfolios private credit exposure. Commitments to Apollo's private credit strategies have powered the firm's fundraising in 2023 and accounted for over 80% of the $33 billion the firm raised in the third quarter.
As the second largest of the Big Four by assets under management, Apollo is experiencing the fastest AUM growth of the group, posting an increase of nearly 21% year over year to $631.16 billion in the third quarter. The portion of AUM earning fees was also growing the fastest at Apollo, up nearly 19% year over year to $468.39 billion in the third quarter.
The Big Four collectively managed nearly $2.55 trillion in assets as of the end of the third quarter, up more than 1% quarter over quarter and 9% year over year.
Apollo, Blackstone and KKR stocks all outperformed the S&P 500 on a total return basis from near the end of 2022 to Nov. 8, the day after the close of the third-quarter earnings season for the Big Four. During that period, all three stocks at least doubled the index's 15.7% total return performance, a metric that accounts for both stock price movements and dividends to better approximate the actual returns of an investment.
It has been a different story for Carlyle, whose 2023 total return performance trailed well behind its peers at 4.2% as of Nov. 8.
Blackstone's third-quarter dividend of 80 cents per share for stockholders was the richest of the Big Four. Blackstone is forecast to hike its dividend 75% to $1.40 per share by the close of 2024, a faster growth rate than its peer firms, according to Eclipse, an S&P Global forecasting service.