These Three Private Equity Firms have Great Potential in 2013

Abir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If we compare the economy to a car, then we can say that private equity is like oil for this car. It is necessary to keep the economy running well, but many dislike it. If you do not have oil in your car or private equity in the economy, your car engine (as well the economy) are likely to incur significant damage.

In 2013, shares of publicly traded private equity firms should continue to perform well due to a number of factors, including low interest rates, strong fundamentals, and a favorable economic environment. The Blackstone Group (NYSE: BX), Kohlberg Kravis Roberts & Co. (NYSE: KKR), and Fortress Investment Group (NYSE: FIG) are the three leading investment companies that are going to outperform the general market. BX, KKR and FIG’s stock prices have appreciated by about 26%, 15% and 25%, respectively, since Aug. 13, 2012. This performance is favorable compared with the return of about 5% for the S&P 500.

Recent Performances by the Trio

The stock prices of Blackstone, KKR, and Fortress have risen significantly, and the values of other ratios are given below.

Ratios

The ratios above are still lower than the S&P 500 price-to-earnings ratio of 15.2 based on 2012 estimated earnings, and comparable with its price-to-book value ratio (tangible) of 4.6. Thus, the strong stock price performance in the past five months of private equity firms has been driven by multiple expansions.

Performances as of September 30, 2012, compared with September 30, 2011

The above figures are from the 3Q 2012 Earnings Report of Blackstone, KKR, and Fortress.

In the fourth quarter there were no significant negative events and the market was nearly flat, so a strong finish to 2012 should be expected as all three companies are well positioned to make the best out of challenging times.

All of the three firms are constantly expanding their wings by gathering assets, entering into new deals, and/or delivering strong performance results. Blackstone successfully closed on several new funds, including a $2.5 billion energy focused fund, a $1.5 billion tactical opportunities fund (a hybrid between a hedge and a private equity funds), and a $13.3 billion private real estate fund. From an investment point of view, Blackstone acquired Vivint, the largest home automation company and the second-largest home security service company in North America. The firm also closed the purchase of Motel 6 in North America from Accor SA, and entered a strategic partnership with LLOG Exploration for developing oil and gas assets in the Gulf of Mexico.

KKR focussed itself mostly on investing by entering into a partnership to develop a 971-acre business park in Houston, TX. The company also announced that it would acquire a British oil and gas company (Acteon) and the U.S. insurance broker Alliant (from Blackstone). It has also made some strategic investments in Sunrise Senior Living, Accellos, Westbrick Energy (Canadian oil and gas company), and United Envirotech (a Chinese industrial firm).

Finally, Fortress won an award for best investment manager in Asia, and closed on a $1.65 billion Japanese investment fund, while also paying in full its outstanding debt.

Promising 2013 ahead

2013 has a positive outlook for the leading private equity and hedge funds companies. There are several reasons, including a low interest environment, where government or "safe" securities will provide a very low return, for why there will be more demand for higher return credit investments. One such area is non-performing mortgages and loans, and asset backed investments in general.

Secondly, there will be more opportunities for global investment firms, as equity correlations are starting to break down. Third, there are a lot of uncertainties with more traditional sources of financing, such as banks and investment firms, so Blackstone, KK,R and Fortress are able to fill this void. Fourth, traditional hedge fund strategies such as long-short, emerging markets debt, and commodities will likely become more attractive in 2013.

Real estate and energy projects are the core investment areas for Blackstone, KKR, and Fortress (to a lesser extent). When interest rates are low, real estate is a good hedge against inflation. The oil and gas industry is growing while also being capital intensive, but is providing stable returns. Finally, private equity firms should benefit from record levels of new issuance of U.S. high-yield and leveraged loans.

On a concluding note

While the stock prices of Blackstone, KKR, and Fortress have outperformed the returns in the S&P 500 since August of last year, their shares still have a good future.

Dividend Yields

The case for investing in the shares of these large private equity and alternative investment firms is further helped by the dividend yields mentioned in the table above. As with any investment there are risks, but these three companies have proven that they can invest wisely under evolving market conditions. Due to technological innovations cars may not need oil in the future, but private equity's role in the economy should only grow from current levels.


abirk has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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