Investment Bank Bonanza: How to Ride the Return of High Profile Deal Making
Jay is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After 5 years of volatile and uncertain times in mergers and acquisition (M&A), private equity (PE), and leveraged buyout (LBO), it's time to recognize the recent high profile, large scale transactions in the capital markets as a watershed moment, marking what will be a bonanza for investment banks worldwide.
The capital markets are highly regulated from retail securities to private equity to hedge funds, and it's a fair assumption to anticipate regulation increasing. As such, I recommend to play the wave of M&A, LBO, and other deal making not through traditional banks, but instead through the diversified money manager Blackstone Group (NYSE: BX).
The markets are awash in money managers, and they are certainly not equal. It takes some consideration and context before making an investment into this sector.
Blackstone sets itself apart from its competitors with its asset size and earning power, the breadth of it's services and products, and its international exposure. The macro data paints a clear picture of what it takes to differentiate in today's marketplace, and relative to the competition, Blackstone is uniquely positioned to take advantage of the trend.
Blackstone Group is a premier global asset manager. The company has a diversified base, with businesses in M&A advisory, Private Equity, Credit products, Hedge Funds, Real Estate, and others. 2012 year-end GAAP revenue came in at $4 billion with over $1 billion in distributable earnings (a 48% increase over 2011). Fee related earnings were up 28% over 2011 to $700 million, as assets under management increased $44 billion (26%) to $210 billion. This growth was driven by $47 billion in capital inflows of which $19 billion was invested in new fund strategies. Blackstone’s funds returned $18.5 billion of capital to investors in 2012. The scale of this performance is staggering, and is indicative of the diversification and globalization of this company.
The Media Frenzy and the Return of High Profile Deal Making
The news has been awash in announcements of high profile mergers and acquisitions of late. First with the highly covered plan to take Dell private through a leveraged buy-out (LBO), followed soon thereafter with news that the two major office supply retailers in the US, Office Depot and OfficeMax, are in merger talks
Warren Buffett still talks about his “elephant gun” even after putting up $13 billion in cash towards the purchase of Heinz. Bankrupt American Airlines (AMR Corporation) is in late stage negotiations to merge with US Airways in an $11 billion deal. And Liberty Global recently announced plans to acquire Virgin Media in a $23.3 billion cash and stock deal.
And there is no reason not to anticipate more and more high profile, media grabbing headlines in the next 12 months. With the cost of capital at historic lows, anticipate this surge of media coverage to spur a shift in attitude, bringing both buyers and sellers off the sidelines, spurring a boom in M&A, IPO, LBO, and other capital market transactions.
Volatility and Global Exposure
The data shows two key traits for consistent, above peer performance: the ability to weather volatility and global exposure.
This chart, sourced from Ernst & Young, clearly shows the volatility and uncertainty that has pervaded the markets since 2008.
Further, the near term VIX index, a common measure of implied volatility in the markets, again shows how unpredictable the capital markets have been over the past 5 years.
It'd be foolish not to recognize this volatility as a continuing concern in the markets, and to anticipate the trend to continue for the foreseeable future. As such, we should consider it to be absolutely critical to only invest in firms with sufficient diversity in their capital market exposures to weather these short term spikes.
The Carlyle Group (NASDAQ: CG) immediately comes to mind as another large, globally diversified money manager that fits this macro profile. Carlyle Group has over $170 billion in assets under management that yielded $2 billion in GAAP revenue and $688 million in distributable earnings for year end 2012. Carlyle also had a stellar year fundraising, bringing in commitments twice what they raised in 2011. However, Carlyle missed on 4th quarter earnings badly after the stock ran up 43% in the 6 weeks preceding the earnings release. Carlyle will likely benefit from the macro trend, but an investment at this point is premature given the earnings miss and short term run up we observered leading up to the release.
While the high profile deals on the front page of the Wall Street Journal are almost always stocks and companies traded in New York or London, the real growth in the industry is taking place in China and Asia.
From the same Ernst & Young report, it’s clear to see that the IPO market is being driven significantly from the Asian-Pacific.
There are two primary stories in the world economy today. There is high growth in the emerging markets, primarily driven by increasing domestic demand in China and surrounding areas. And there is slow growth and uncertainty in the western economies. The world is not in a recession and most investors do not anticipate it falling into one. However, it is clear that to find opportunities to put money to work on a global, diversified scale, capital must participate in the high growth environment in Asia and other emerging markets.
Free of the regulation of traditional banks, highly diversified products and services to weather and profit during any short term volatility, and with global exposure particularly in Asia, the big money managers are well positioned to seize market share in today's business climate and continue their strong performance in the market. Blackstone should be considered best in class. The stock is currently trading near its 5 year highs; don't be fooled if you see this company breaking through that resistance and continuing the trend higher.
jayhjenkins 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!