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Alternative asset managers slowed asset sales, boosted fundraising in Q4'17

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Alternative asset managers slowed asset sales, boosted fundraising in Q4'17

Publicly traded alternative asset managers are likely to report a slower pace of exits, but continued strong fundraising trends when they announce fourth-quarter 2017 financial results.

S&P Global Capital IQ estimates forecast that a majority of large, public alternative managers will see adjusted EPS for the fourth quarter of 2017 decline on a sequential basis, but be up year over year. Exemplifying the trend among alternatives, behemoth Blackstone Group LP's consensus normalized EPS estimate of 66 cents is forecast below that of the linked and year-ago quarters. But while earnings may be down, the company has been on a fundraising tear.

Keefe Bruyette & Woods analyst Robert Lee anticipates most alternative managers will continue to experience progress in capital formation, and expects that Carlyle Group LP in particular will have a strong showing in the quarter.

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Recently enacted federal tax reform, which included a dramatic reduction in the corporate income tax rate, will not immediately benefit alternative managers but should improve their investment holdings, Credit Suisse analyst Craig Siegenthaler said in a Jan. 10 note to clients.

"Their underlying portfolios should see a near-term valuation lift from the decrease in the corporate tax rate," Siegenthaler wrote. He anticipates strong fourth-quarter 2017 metrics across the board for Blackstone, expects Carlyle Group and Ares Management LP to surpass economic net income expectations by wide margins and believes KKR & Co. LP will post a narrower beat on that metric.

Siegenthaler said his long-term view of the group remains positive in part due to tax reform, attractive share valuations and a strong secular fundraising backdrop for alternative investments continuing to take market share from traditional managers.

Realizations from sales of invested assets declined during the quarter overall, which will result in lower distributions and slower earnings results, KBW's Lee said in a Jan. 10 note. The performance of private holdings was better than publicly traded equities, he added.

Lee pegged the tax cut benefit in the sector to be about 10% to 15% of fee-related earnings. That benefit was part of his rationale for moving price targets up for Apollo Global Management LLC, Ares Management, Blackstone, Carlyle and KKR.

Some companies may, down the line, take advantage of the lower tax rate by converting from limited partnerships into corporations, though such decisions would probably come after this earnings season, the analysts said. Industry observers see Ares and KKR as strong candidates for the change, which could lead to companies trading lower distributable earnings for an expanded investor base and higher stock values.

Both Lee and Siegenthaler anticipate a robust fundraising environment to persist, assuming no changes to the macroeconomic environment.

Tim Mundy, a partner and private equity adviser for Deloitte, noted that the sector's mountain of dry powder is at an all-time high, which has made deal-making more competitive. Higher valuations driven by the huge amounts of uncalled capital is pushing investment returns lower, Mundy said in an interview.

"What used to be a normal 6x return is now 4x if it's a good deal," he said.

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