Alternatives enjoyed strong 4Q 2014
Aided by portfolio harvesting and strong secular fundraising tailwinds, Morgan Stanley anticipates strong organic growth potential for alts in 2015.
Michael J. Cyprys of Morgan Stanley in a research note titled: “Alternatives 4Q14 Preview: Long BX Into the Print” anticipates that the current positive momentum will continue into 2015-16.
Robust portfolio harvesting
The Morgan Stanley analyst anticipates alternative asset managers to deliver cash earnings growth of 13% q/q and dividend growth of 11% in 4Q 2014, aided by robust portfolio harvesting activity.
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As captured in the following table, Morgan Stanley is 11% above consensus in 2015 on dividends:
Despite recent HY and energy market volatility, the Morgan Stanley analyst doesn’t believe pace of exit activity (portfolio harvesting) will decline substantially in 2015. The analyst anticipates realization momentum would continue in 2015-16 which will drive cash earnings higher and support the stocks. Cryrys considers near-term mark-to-market risk in 4Q’s accrual EPS as a distraction from the long-term value creation by the Alternative Managers. The analyst also considers market dislocations as an attractive deployment opportunity for the Alts.
Alternative asset managers: Blackstone best positioned for harvesting cycle
Cyprys notes alternative asset managers continue to grow robust realization pipelines. The analyst points out that Blackstone leads the pack with exits ramping in their real estate and private equity funds that should lead to strong cash earnings in 4Q14 and 2015. The following table captures recent exits, both announced and rumored/reported in the press, for BX:
Focusing on the recent investments, the Morgan Stanley analyst points out that Alt’s capital deployment was strong in the fourth quarter such as BX targeted non-US real estate investments in GE Cap Japanese Residential Business during the quarter:
The analyst notes ex-energy, Alt’s public portfolios had a strong quarter. As set forth in the following table, BX posted a gain of 11%:
The following table captures notable near-term catalysts:
Overweight on Blackstone
Cyprys anticipates an average 25% total return, including 8% yield for alts, and see the most attractive risk-reward in Blackstone, KKR, Oaktree Capital.
He believes BX is best positioned in terms of harvesting cycle with the recent acceleration of real estate exits, capital raising ($120 billion for 2015-16), and portfolio laddering. The analyst pegged a price target of $45 for BX, a 34% potential upside.
The Morgan Stanley analyst is also overweight on KKR as cash realization from Boots in 1Q15 will support a strong outlook for 2015.