Analysts at Morgan Stanley projected that alternative asset managers will generate strong returns in 2014 given the robustness of the equity markets, an open exit window, and fund raising tailwinds. The analysts revised their price target yield to an average of 22% total return including a 7% distribution yield next year.
Alternative asset manager stock prices
Morgan Stanley analysts Matthew Kelley and Toni Kaplan noted that the stock prices of alternative asset managers climbed an average of 47% year-to-date, and they believe that it is time to “get more constructive” on the sector because of three reasons:
- Strong equity markets yield higher implied value of future carry
- Distribution is poised to remain elevated
- Strong secular fund aising tailwinds
According to Kelly and Kaplan, the multiples increased at an average of ~42% 2013, but it is still cheap. They explained that multiples remained at 9.9x (average 2014 Price/ENI) compared with ~16x of traditional asset managers. The analysts also noted that relative multiples declined slightly this year, and believed there is an opportunity for the multiples of alternative asset managers to increase next year.
Increase in distributions
The analysts noted that distributions went up by 167% year-to-date. According to them, the increase was partly via changes to payout policies, and they expect realizations and unit holder distributions to continue to be at higher levels in 2014 to 2015 with the assumption that the equity markets cooperate particularly given the “significant amount of fair market value remaining from pre-2008 funds.”
“We see the most upside to realization estimates potentially for BX given the vast amount of real estate AuM in carry position and pick-up in recent public market exit activity,” write Kelly and Kaplan.
In terms of fundraising growth, the analysts estimated that alternative managers will achieve an average of $84 billion in annual gross fundraising from 2013 to 2017.
The analysts upgraded their rating for the shares of KKR & Co. LP (NYSE:KKR) from equal weight to overweight with $27 per share price target. Its total return is expected to be around 25%.
Kelly and Kaplan said the near-term catalysts for KKR are not evident, and may depend more on exits and quarterly distributions. However, the analyst perceived medium to long-term tailwinds to support the shares of the company including sizable balance sheet funding future growth, $971M accrued carry driving 2014-16 distributions , potential to increase investment income payout ratio, and earnings shifting more towards higher multiple management fees.
The analysts maintained their Overweight ratings for the shares of The Blackstone Group L.P. (NYSE:BX) with a $32 per share price target and Oaktree Capital Group LLC (NYSE:OAK) with a $65 per share price target.
They also maintained their equal weight ratings for the shares of Apollo Global Management LLC (NYSE:APO) and Carlyle Group LP (NASDAQ:CG) with price targets of $34 a share and $33 a share, respectively.
