The stock market may have continued its upward march in the third quarter, but a group of eight publicly traded alternative asset managers that collectively manage more than $1.230 trillion in client assets appears to be on course to report lackluster earnings.
Public holdings of several alternative asset managers did not appreciate much, according to several analysts, even as the S&P 500 index climbed nearly 4% during the quarter. A slowdown in realization activity could hurt distributable earnings, a measure of cash earnings available for distribution to unitholders, at several companies. Economic net income, another profit measure that captures both unrealized gains and cash earnings, is also projected to be "soft" for several alternative asset managers, Credit Suisse analyst Craig Siegenthaler wrote in an Oct. 4 report.
Data compiled by S&P Global Market Intelligence shows that six of eight alternative asset management companies are expected to report lower quarter-over-quarter earnings in the third quarter. On a year-over-year basis, five companies are projected to see their earnings fall and two companies could report flat earnings.
Third-quarter distributable earnings at Blackstone Group LP, which kicks off the earnings season for alternative asset managers on Oct. 19, may not be able to match the levels seen in recent quarters, Jefferies analyst Gerald O'Hara said in an Oct. 6 note. The company grew its distributable earnings by more than 126% in the first half of 2017 on a year-over-year basis on the back of strong asset sales. Realizations in the 12 months ending June 30 were $51 billion, the company's highest for any 12-month period, CFO Michael Chae said during a July 20 conference call.
Similarly, Apollo Global Management LLC and Oaktree Capital Group LLC undertook fewer exits on a sequential basis, Keefe Bruyette and Woods analyst Robert Lee wrote in an Oct. 9 note.
KKR & Co. LP, on the other hand, saw strong realizations during the quarter, due in part to its sale of drug capsule maker Capsugel and a reduction of its stake in First Data Corp. Credit Suisse's Siegenthaler expects the company to grow its distributable earnings quarter over quarter.
Private equity firms' inventories of public holdings that are ripe for sale have shrunk in recent years, KBW's Lee said, adding that strategic sales and dividend recapitalization transactions could be the way forward for asset managers to see returns on their investments. Lee also believes that public securities in the buyout funds raised between 2012 and 2014 could present exit opportunities in the coming years.
Some companies, such as Blackstone, could finish the year on a high note on the realizations front. The company announced in June that it would sell its European logistics business Logicor in what CFO Chae described as the largest private real estate transaction in Europe. The €12.25 billion deal, which is expected to close later in 2017, is expected to contribute up to 40 cents per unit of distributable earnings, Chae said during the second-quarter earnings call. That is about 63% of the company's distributable earnings of 63 cents per unit for the second quarter.
Jefferies' analyst O'Hara expects Apollo's economic net income to get a boost from an 8.5% rise in Athene Holding Ltd.'s share price during the quarter. KKR, whose second-quarter earnings got a lift from a 17.4% jump in First Data's market value, will not be able to count on the financial technology's stock performance when it reports its earnings for the third quarter as First Data's stock fell about 1% in the period.
On the fundraising front, alternative asset managers continued to attract large inflows of new capital from pensions, sovereign-wealth funds and other large investors. The quarter witnessed the closing of the largest fund in the private equity history, according to data provider Preqin, as Apollo Investment Fund IX raised $24.7 billion. As of September, private equity firms were sitting on a record amount of "dry powder" at $942 billion. As public markets continued to grind higher, institutional investors expressed concern in a Preqin survey that private equity firms might find it difficult to invest at attractive prices.
Stock prices of most alternative asset managers outperformed broader markets this year, but at least three stocks are trading below their initial public offering prices. Blackstone, the largest company in the space, has seen its assets under management more than quadruple since making its public debut in June 2007. But the company's Oct. 17 closing price of $33.22 represents just a 7.16% increase over its IPO price.
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