How Are Hedge Funds Feeling About the Private Equity Stocks?

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Facebook Inc. (FB) has caused many a headache in the investing world. After the so-called debacle that was the Facebook IPO, with the company now down 40% since its opening price, we found it interesting that many funds were increasing their stakes in publicly-traded private equity firms that invest in private companies. Many top fund managers stayed invested, or were upping their stakes in the top publicly-traded private equity firms during the second quarter. We have identified five private equity companies that saw interest from the funds we track.

Leading off the list of publicly-traded private equity firms is Fortress Investment Group LLC (NYSE: FIG), a New York-based investment firm with invested capital of $21 billion. Fortress recently announced EPS of $0.08 for 2Q, $0.01 below consensus. Driving the miss was lower revenues, with both performance fee and management fee revenue down. AUM grew by 3%. Earnings are expected to grow by 33% next year, putting the PEG ratio at 0.3. The company trades at a forward P/E of 8.5 and has a dividend yield of 4.4%. Its 2.4 beta has allowed the company to go on a tear following the Facebook IPO, being up 33% year to date.

Bill Miller of Legg Mason Capital is the top name in Fortress of the funds we track. Legg Mason owns over 11% of Fortress’ shares at 5.9 million. After Bill Miller, the list of the top five funds owning the most shares of Fortress is robust:

Jim Simons upped his position by 29%, D.E. Shaw increased by 20%, Chuck Royce of Royce & Associates stayed level and Ken Griffin of Citadel Investment Group increased his by 11%.

American Capital Ltd. (NASDAQ: ACAS) manages $68 billion in assets. The company beat 2Q EPS estimates by 38%, and is expected to grow next quarter earnings by 21% from the same quarter last year. The company, like Fortress, trades at a PEG below 1, at 0.80. American Capital trades relatively cheaply compared to peers, with a trailing P/E of 4, even with a 75% run up in its stock price year to date. The company is also another high beta stock in the sector, at 2.2.

The company calls its largest fund shareholder the previous private equity firm we discussed, Fortress. Fortress owns the most shares of American Capital of any of the funds we track. As well, American Capital makes up 6.2% of Fortress’ 13F portfolio.

MCG Capital Corporation (NASDAQ: MCGC), a smaller private equity firm, targets investments in domestic small to mid-sized companies. MCG Capital’s forward P/E of 10 and expected declines in earnings for full year 2011 – expected to be almost 50% below that of 2011 – has caused investors to remain cautious. Stifel Nicolaus only days ago cut its rating from ‘hold’ to ‘sell’ citing valuation. The company has a beta of 2.2 and is up 18% year to date. MCG Capital does pay an 11.79% dividend yield, even after trimming the dividend in 2Q. The low market cap on this company has not stopped the likes of Bill Miller and AQR Capital from owning it.

Apollo Investment Corp. (NASDAQ: AINV) invests in middle market companies providing direct equity capital and targets a time horizon of five to ten years. Apollo’s beta is a bit milder than the other four stocks at 1.7, but the stock has been up over 20% year to date, even as the company missed 2Q earnings estimates of $0.20 by posting $0.18.

D.E. Shaw and Bill Miller actually took new positions in the company, as Israel Englander upped his position by 37%. Chuck Royce and AQR Capital chose to keep their holdings steady. Insider sentiment was also positive for the company during 2Q.

Of our five private equity companies, The Blackstone Group LP (NYSE: BX) is by far the biggest, with the other four companies touting market caps below the $5 billion mark; Blackstone comes in at over $18 billion. For 2Q, the company posted net income of $0.19 per unit, down 74% from the same quarter last year and 57% from 1Q. Additionally, Blackstone continues to gather assets, increasing AUM by 22% in 2Q.

The most notable top shareholder at the end of the second quarter was Ariel Investments owning 3.1 million shares, up 14% from 1Q. Jim Simons and Chuck Royce also upped their stakes in Blackstone, and Bill Miller, who owns three of the other private equity stocks mentioned, also owned Blackstone at the end of 2Q.

Overall, the private equity industry’s organic growth has declined to -0.08% quarter over quarter, from 0.9% last quarter, anchored by equity flows. The 2Q equity flow showed a net flow of negative $29 billion versus negative $6 billion in 1Q. Although the investment fund flows were negative for the industry during the same quarter Facebook launched its IPO, there were no drastic downsizing or outflows by the funds we track.


This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Apollo Investment. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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