FORTUNE — One year ago I recommended that you buy stock in publicly-traded private equity firms, like Apollo Global Management (APO) and The Carlyle Group (CG). My theory was that such issuers were being undervalued by analysts who obsessed over assets under management (i.e., fund management fees), while paying too little attention to underlying portfolio performance (i.e., investment profits).
Hope you listened, since such shares have since risen by an average of 65 percent.
That’s a big jump, and I’m not so bold as to issue another editorial buy. But I would suggest you keep ignoring most of the bank analysts.
Last Thursday, Kohlberg Kravis Roberts & Co. (KKR) released first quarter earnings and held the obligatory conference call. Several of the analyst questions dealt with a new dividend policy, while one asked about the outlook for underlying portfolio companies. The majority, however, still related to assets under management.
Among those was the following from Michael Kim, an analyst with Sandler O’Neill:
And this from Matthew Kelly of Morgan Stanley (MS):
In other words, how can you get more dollars from existing investors?
The notion of multi-asset class products is not new. Warburg Pincus, arguably, has been doing it for years with “private equity” funds that include everything from expansion-stage venture capital to large leveraged buyouts. And The Blackstone Group (BX) has raised $1.7 billion for a new platform that takes “a multi-asset class approach to investing in illiquid assets focused on timely opportunities that fall outside other Blackstone alternative fund strategies.”
But, generally speaking, these are exceptions rather than the rule. Not because private equity firms don’t want to raise more money from existing LPs, but because most LPs prefer that each of their fund commitments fit into a dedicated “bucket.”
There’s a “bucket” for early-stage venture capital, one for growth equity, one for mid-market buyouts, one for large-cap buyouts and so forth. This is particularly prevalent in the fund-of-funds world, but also exists at many university endowments and public pension plans.
In fact, many LPs would much prefer to invest in three different funds managed simultaneously by the same firm (each focused on a different asset class), than in a single fund that makes the same deals under a consolidated umbrella. It just works better for their models, and also helps enable secondary sale flexibility. Do KKR’s analysts know any of this?
To be clear, I’m a bit reluctant to knock people for asking questions. Partially because it’s what I do for a living, and also because that’s the purpose of the quarterly earnings call. But when those paid to analyze publicly-traded private equity firms ask questions that reflect a lack of sophistication about the underlying subject matter… Well, I guess that’s why so few of them had proper price targets last May.
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