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Summary This far into a bull market, U.S. investors traditionally have to make do with paltry yields in the 1-2% range. Unless they’re looking at a REIT or the commodities & energy sector, where an enormous question mark hangs over the medium-term outlook for oil and metals. However, there is another sector that is offering some eye-popping yields: the private equity industry. By Steven Carroll The private equity industry, where stalwarts such as The Blackstone Group LP (NYSE: BX ) offer an F12M dividend yield of 8.6% and KKR & Co. LP (NYSE: KKR ) an equally appealing 8.8%. So what’s going on? Source: Thomson Reuters Eikon The story unfolds Clearly the market’s growth expectations look undemanding (KKR -7.9% 5-year EPS CAGR, BX -8.3%), yet the StarMine Smart Estimate is forecast to rise gradually over the next three years in both cases. Why the disconnect? One suggestion is that markets see a large rise in volatility and assume exits from previous investments will be delayed. Another is that funding terms may be less favorable to the companies and/or that achieved prices on exit will be lower as investor appetites wane in line with falling stock market values. Certainly, it seems unlikely there’ll be a large amount of activity this quarter, but the share price is implying years of such volatility, or that the high of the cycle has come and gone (certainly possible, but a somewhat pessimistic base case). Source: Thomson Reuters Eikon Blackstone’s chapter When Blackstone first listed, there were many commentators that called the top of the market, and sure enough the $35 share price plummeted in line with the rest of the market, bottoming in mid-2008 at a stomach-churning $5. Since then, the share price has reached new highs, with the company’s all-time (and 52-week) high being $44.43. The stock has since fallen back just over 25% in the last 3 months, so it’s fair to say this isn’t a low beta stock. Quant indicators certainly appear in your favour – with a smorgasbord of high scores from StarMine’s various factor models. Source: Thomson Reuters Eikon Testing the wind The “alts,” or alternative asset managers, are often viewed as a levered play on capital markets. BX, KKR and their peers require stable markets in order to fund their acquisitions and ultimately be able to unload them back into the marketplace. The performance of BX seems to validate that, with eye popping outperformance (210% over five years) and, as mentioned, massive declines during the crisis period. So really this is a binary choice – for those who believe the markets are going through a normal period of bull market angst (three months ago it was Greece, today, China) this seems like an interesting stock with a huge carry. For those who believe this is the start of the great unwind, with the Chinese economy creating an inverted version of the super cycle – obviously BX and KKR still could have a lot of air to be removed from the tires. If you think commodities, oil and emerging markets are all going to plummet (from here) in the face of falling growth expectations in the world’s second largest economy – the sidelines might be a safe place. For the bull – with an 8.6% yield and a deeply pessimistic valuation – even just a stablilization of markets at current levels would probably be enough to earn some reasonable capital gains. The perma bears will no doubt have an alternative view but it seems an interesting opportunity. For the nervous retail investor – perhaps just sit on that fence for a while and add BX and KKR to the watch list. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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