Private equity’s ‘bucket’ list

April 29, 2013, 10:26 PM UTC

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:

“As you continue to build out your investment capabilities across the new strategies and geographies, is there an opportunity to maybe offer LPs sort of a multi-asset class fund that maybe has a broader mandate? Do you feel like there’s demand for that type of strategy that’s more flexible and might offer more of a shorter timeline relative to sort of a traditional PE fund?”

And this from Matthew Kelly of Morgan Stanley (MS):

“I was hoping you could give us an update on LPs and your cross-sell, because there’s been a lot of change in additions, moving parts to the business, as you indicated. So I’m just wondering if you can tell us kind of how many LPs you have now, how many of them own multiple products and if there’s any sort of subset they can’t own multiple products, just based on what they can kind of invest in?”

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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