William R Katz, Neil Stratton and Steven J Fullerton of Citigroup Inc. (NYSE:C) continue to see further evidence that Alternatives are diversifying their businesses, deploying dry powder despite upward moves in rates & markets and perhaps most importantly, actively monetizing investments, helping to drive distributions. In turn, investor uneasiness that higher rates will truncate the ability of managers to either make new investments or exit existing ones seems unfounded, in their view, and Blackstone Group is among the most likely to benefit.
Citigroup: 2Q turning out to be a catalyst for alternatives
2Q ENI (Economic Net Income) results could be a catalyst for the Alternatives to recover from oversold levels, particularly with the group screening cheap on a SOTP basis at approximately 5x (’14-’15-E) performance fees (ex B/S and FRE impacts). Citigroup Inc. (NYSE:C) believe the probability for ENI beats is rising following better than expected results from Blackstone Group and solid portfolio marks from The Blackstone Group L.P. (NYSE:BX) and Carlyle Group LP (NASDAQ:CG). Among Alternatives yet to report, Citigroup think Apollo Global Management LLC (NYSE:APO) looks particularly strong given distribution dynamics.
Citigroup: Blackstone Group remains top Alternatives selection
The Blackstone Group L.P. (NYSE:BX) remains their top Alternatives selection reflecting platform diversification; among best in class capital raising; and strong ETR potential. Following Blackstone , they prefer Och-Ziff Capital Management Group LLC (NYSE:OZM). For Och-Ziff Capital Management, they see the recently launched standalone equity L/S strategy stabilizing volumes while performance fee visibility is improving as we get closer to YE. For KKR & Co, they see one of the stronger diversification efforts underway as well as attractive upside. Apollo Global Management LLC (NYSE:APO) and Carlyle Group LP (NASDAQ:CG) also round out their Buy recommendations.
Blackstone Group Valuation
Citigroup Inc. (NYSE:C) value The Blackstone Group L.P. (NYSE:BX) at $30 using a blended methodology based on: 1) 75% distributable earnings discount model (DEDM); and, 2) 25% sum-of-the-parts (SOTP) approach that combines target P/E, book value, and NPV of performance fees. Citigroup $25 SOTP factors: 1) 18x target multiple applied to their 2013 FRE estimate of $0.57, or ~$10 in value; 2) ~$10 for the net present value of performances across Private Equity, Real Estate, Credit, and Hedge Fund Solutions segments; and, ~$5 in net cash and investments and unrealized carry. Citigroup base-case DEDM factors a 10% cost of capital; 70% distributable ratio; and 95% payout ratio; and specific growth assumptions (for a $30.75 target).