Since 2008, activity and fundraising have declined drastically in the private equity sector. For this year, a revival may be in the works.
Harvard Business School professor Josh Lerner said private equity had a very challenging time over the past few years and that he has seen a modest uptick in deal activity this year. Lerner explains that this is because funds raised before the financial crisis are reaching their “use it or lose it” timeline. Usually funds raised need to be invested within 5-6 years. Otherwise, funds need to be returned to the institution that provided them to private equity in the first place. As of April 2013, funds raised pre-crisis are estimated to be about $1trillion.
One of the beneficiaries of the increased deal activity has been KKR & Co. L.P. (NYSE:KKR), which posted economic net income (ENI) of $647.7 million, exceeding analysts’ estimates for the first quarter of 2013. However, ENI dropped 10.9 percent relative to a year earlier. ENI is a measure of profitability that takes into account the mark-to-market valuation of assets. Cash profitability, on the other hand, improved from $190.4 million on March 31, 2012 to $193.4 million on March 31, 2013. Assets under management (AUM) increased to $78.3 billion on March 31, 2013 from $75.5 billion on the prior quarter. Fee related earnings (FRE) rose by $14.6 million in the quarter to $88.0 million.
Both KKR’s private equity and principal investments appreciated at a slower pace in the first quarter relative to a year ago. Citi Research analysts are pleased with KKR’s decision to initiate a 40% quarterly distribution of balance sheet income, as this increases dividends for the sector – a factor that investors have been placing more emphasis on. Also, FRE improvement suggests, according to Citi Research analysts, that KKR is diversifying its sources of revenue beyond private equity.
The Blackstone Group L.P. (NYSE:BX) reported a 28 percent rise in its ENI to $628 million for the first quarter of 2013 last week as its real estate, private equity, credit and hedge fund units successfully sold assets and appreciated in value. Cash profits were $168 million for the quarter and total AUM reached a record $218 billion, up 15 percent year over year with double digit increases across all businesses. Blackstone is also growing through small and strategic acquisitions.
On April 23, 2013, it announced the acquisition of Strategic Partners from CS – deal will close on 3Q13. Strategic Partners has $9 billion in AUM. The deal could provide Blackstone with more exposure to limited partners (LP) and additional $0.02 after tax fee related earnings per share, according to Citi Research estimates. More exposure to LPs will likely help to grow AUM.
BlackRock, Inc. (NYSE:BLK) is also growing its alternative investments segment, which helps diversify its reach across financial markets. Single strategy hedge funds generated higher fees on 1Q13 offsetting weakness in active equity and the Swiss Re Private Equity Partners acquisition done last year increased AUM by $6.6 billion.
Carlyle Group LP (NASDAQ:CG) will announce earnings on May 9, 2013 before market open. Analysts expect earnings per share at $0.94 and revenues to grow to $795.69 million. If EPS estimates are met, EPS growth will be roughly 36 percent relative to last quarter.
Analysts expect private equity firms to continue to benefit from favorable financing conditions including low interest rates and from “dry powder” – funds raised pre-crisis. The major players are selling stakes in winners and making new investments, as well as improving their fee related earnings.