Public PE Firms See Earnings Gains

The three largest publicly traded private equity firms—Kohlberg Kravis Roberts & Co., The Blackstone Group and Fortress Investment Group—finished 2010 by trouncing earnings predictions for the fourth quarter, surging ahead of analysts’ estimates by an average of 60 percent.

The accelerating earnings, even from Fortress, the group’s laggard, signaled to industry watchers that despite some challenges, the industry is recovering briskly from the financial crisis.

“The outlook continues to get better,” says Dan Fannon, an analyst at Jeffries & Co. who covers Blackstone and Fortress, as well as conventional money managers. “The business is generally exhibiting good trends, and we should see these trends gathering momentum through 2011.”

Michael Kim, an analyst at Sandler O’Neill who covers KKR and other money managers, agrees. “This is the start of a growth cycle for the industry,” he said. “There are long term tailwinds here. Private equity firms have just turned the corner. And now that they’ve turned the corner, all their metrics are screaming more favorably.”

Among the metrics Kim refers to is fundraising. While the industry has plenty of “dry powder,” and many private equity firms are not yet in fundraising mode, those that are trying to raise new funds, such as KKR, are seeing a modestly improving fundraising environment, albeit from a much smaller base than the free-spending years before the crisis.

“KKR wouldn’t be out there raising a new fund if they didn’t think they were going to work through the existing capacity they already have,” said Kim. “I think they’ll hit their target,” referring to the $8 billion to $10 billion that KKR is believed to be raising for its latest fund.

The asset levels at these private equity firms are increasing, said Fannon at Jeffries. “Generally, the industry will continue to see more fundraising,” he said. “And that bodes well for fees.”

KKR reported that its economic net income, which private equity firms and analysts say is the preferred way to report earnings available to shareholders, rose 39 percent to $715 million in the fourth quarter, up from $515 million a year ago. That amount, more than 60 percent above analyst estimates, translated to earnings of $1.02 per share, compared to 61 cents in the fourth quarter a year ago.

At the close of 2010, KKR managed $61 billion in assets, up 17 percent from the previous year. The company raised its quarterly dividend to 29 cents a share from 15 cents.

The improving story is much the same at Blackstone. Fourth quarter economic net income rose 56 percent to $513 million from $329 million in the fourth quarter of 2009. That was more than 50 percent above consensus estimates. That translated into earnings of 46 cents a share versus 29 cents a share in the fourth quarter of 2009. The company raised its quarterly dividend to 32 cents a share.

In January, Blackstone said it would begin raising its next fund, which will focus on real estate opportunities. The fund will likely have a $10 billion target, according to sister news service Reuters.

Chief Executive Officer Steve Schwarzman said in January at the World Economic Forum in Davos, Switzerland, that his firm continued to be upbeat about real estate, particularly hotels. “We’re putting money continually in the hotel business where we’re seeing a big pickup, not just in the United States but literally everywhere in the world.” Blackstone’s real estate holdings currently stand at $27 billion, more than a quarter of the company’s $110 billion under management at the end of 2010.

Total assets managed by Blackstone were up 14 percent from $96 billion at yearend 2009. The growth came mainly from credit and marketable alternatives, which rose 22 percent for the year, and not from private equity, which actually fell by 1 percent.

Blackstone and KKR both owned stakes in some of the New Year’s big IPOs, helping raise the likelihood of further offerings and exits as the year develops. Both companies owned stakes in Nielsen, the ratings company, and Blackstone owned a share of BankUnited. KKR is expected to float retailer Toys ‘R’ Us and hospital operator HCA by the end of the year.

Fortress rounds out the clutch of publicly listed private equity firms. The firm said its distributable income in the fourth quarter more than doubled to $122 million, or 24 cents a share, against $60 million in 2009. Analysts had expected earnings of 15 cents a share.

Earnings from Fortress marked a substantial improvement over results in 2009. Mudd said in a press release that the company has been able to draw “a significant number of new investors.”

Fortress derives a bit more than half of its management fees and incentive revenues from private equity investments, the rest coming from its hedge fund and credit operations.

The company’s total assets under management rose 42 percent to $44.6 billion in 2010, from $31.5 million a year ago. Most of the new assets came from its April 2010 acquisition of Logan Circle Partners, a fixed-income asset manager that had $11.7 under management.