As Carlyle’s IPO Nears, Founders Eye Rivals’ Earnings

  • Blackstone, KKR report lower ENI
  • Assets at the firms are growing
  • Oaktree makes market debut

The trio of founders sitting atop The Carlyle Group were likely taking a keen interest in the first quarter earnings reports from their already-public peers The Blackstone Group and Kohlberg Kravis Roberts & Co, both of which reported declines in economic net income from the same quarter in 2011. Carlyle, which is set to go public in early May, was also surely eyeing the public debut of Oaktree Capital Group, whose shares have fallen somewhat since they were listed on April 12.  Earnings from Apollo Global Management and Fortress Investment Group, the two other big U.S. listed private equity firms, were not available at press time.

Carlyle, which launched an aggressive IPO road show in late April, is set to go public after a long period of taking the temperature of public markets. The firm’s public debut, in which it is seeking to raise about $700 million for a valuation of roughly $7.5 billion, will place Carlyle among a rarefied handful of alternative asset managers seeking to grow beyond their private equity roots, expanding and diversifying their fee income in ways that allow these firms to be more palatable to public market investors.

Some observers worry about such firms’ dual loyalties, between the proper attribution of profits to shareholders and fund investors, both of which seek to stake their proper claim.

At the same time, listed private equity firms are trying to create ways to attract and reward talent by creating a currency—public stock—through which top employees can be hired and retained.

However, as the tepid first quarter earnings of KKR and the Blackstone Group attest, their evolution into companies with more diverse income streams does not completely insulate them from the vicissitudes of fast shifting asset valuations, or, in the case of fee income and distributions, sharp drops in both buyouts and exits.

As Scott Nuttall, the head of KKR’s Global Capital and Asset Management Group, said during an earnings conference call, the company’s strong asset appreciation was partially offset by “a reduced level of transaction activity and related fee income.”

How slow the deal environment was for KKR was illustrated by the fact that the firm made just one control buyout in the first quarter (Capital Safety), and there were no major exits. That compares to the first quarter of 2011, when the firm took public Nielsen, the television and Internet ratings firm, as well as HCA, the hospital company.

Despite announcing a quarterly dividend of 15 cents a share, KKR reported that ENI was $727 million, down 2 percent from the $742 million reported during the first quarter of 2011. That said, first quarter results were significantly improved from the fourth quarter of 2011, which saw ENI of just $286 million.

Shares of KKR traded around $14.12 a share on April 30, down 25 percent from the peak of 18.96 on April 29, 2011, about one year ago.

The firm did see its assets under management rise compared to a year ago. First quarter assets rose to $62 billion, up $3 billion from the $59 billion the firm managed one year ago. Part of its increase in assets managed was the expansion of the firm’s real estate and hedge fund businesses. The firm is aiming to grow into these areas to broaden its abilities beyond private equity.

Within its private equity group, KKR continued to raise its 11th flagship fund, the KKR North America XI Fund, which has been raising money since early 2011.

Carlyle is also watching its longtime rival Blackstone Group, the world’s largest manager of alternative assets, which reported ENI of $432 million during the first quarter, down 24 percent from the $571 million in ENI that the firm reported in the first quarter one year ago. First quarter income was also down slightly from the $450 million in ENI during the fourth quarter of 2011.

Blackstone’s earnings have been the most consistent among the publicly listed private equity firms, in part because the firm has gone the furthest in diversifying its asset base beyond private equity. Its largest division in terms of assets managed is the credit group, followed by hedge funds. The smallest division is real estate; however, real estate brought in the largest share of ENI for the company. During the first quarter, the real estate group wrapped up fundraising for its latest real estate fund, the $10 billion Blackstone Real Estate Partners VII LP.

Blackstone’s private equity group, in fact, is now ranked third in size among the company’s four divisions. Only about 24 percent, or $37 billion, of Blackstone’s $154 billion in fee-earning assets were invested in private equity. Overall, fee earning assets at the firm are up 26 percent from the $124 billion that the firm managed one year ago.

Stephen Schwarzman, the firm’s chairman and chief executive, said in a statement that “every one of our investing businesses experienced both net capital inflows as well as value appreciation in the quarter,” citing the firm’s strong growth in the assets it manages.

Blackstone Group’s shares closed on April 30 at $13.56, down 24 percent from their price of $18.94 on April 29, 2011, one year ago. The firm’s overall market cap is about half as much as it was when it went public in 2007.

Finally, Carlyle’s founders were probably watching most closely the recent public listing of Oaktree Capital Group. The Los Angeles-based firm, which has a focus on credit-related private equity investments, launched its shares onto the public markets on April 12.

Shares in the firm, which originally priced at $43, have slipped 7 percent in the three weeks since they launched. Shares now stand at $39.90, giving the firm a value of just over $6 billion. The firm has $75 billion of assets under management. The firm’s first quarter results, the company’s first formal earnings report, were scheduled to be released after press time.