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Oaktree Deal Raises Distress About Private Fund IPOs

NEW YORK ( TheStreet) -- Can the average stock market investor make money investing in Wall Street's exclusive private equity and debt trading clubs?

As investors are tempted once again to tap rarified trading profits that were once available to only the smartest Wall Street minds and the world's richest investors, the tepid response to the initial public offering from the industry's largest distressed debt manager, Oaktree Capital, suggests more investors answered this question in the negative than bankers expected.

Investors are right to be skeptical of this IPO crop -- Carlyle Group is hoping to follow Oaktree and begin a road show next week.

Oaktree -- with $75 billion in assets under management -- placed 8.8 million shares -- lower than its original goal of 11 million shares -- at the bottom end of its price range, or $43. Thursday's deal raised $380 million for Oaktree, as it lists shares on the New York Stock Exchange under ticker "OAK". Shares fell lower than the IPO price in Oaktree's debut morning of trading. In an ironic footnote to the Oaktree deal, one of its restructuring investments, Aleris International, a once bankrupt steel manufacturer, scrapped a planned IPO on the same day that Oaktree priced its lackluster deal. 

Will debt specialist Oaktree Capital pan out for stock investors?

The Oaktree deal comes amid a poor performance run for several of the private equity players that have already gone public, including Blackstone Group (BX - Get Report), KKR (KKR - Get Report), Apollo Global Management (APO - Get Report), Fortress Investment Group (FIG) and Och-Ziff Capital Management (OZM).

Blackstone Group shares are off roughly 50% since its 2007 IPO, while Fortress and Och-Ziff have fared even worse since hitting stock markets. Among recent listings, Apollo's shares are off roughly 20%, while KKR is a rare alternative asset manager in the green, posting a 30%-plus stock gain.

It would be a mistake, though, to view the weak Oaktree deal as a sign that the alternative asset manager can't be an attractive investment. The issue may be that investors view these companies in the wrong light as Wall Street tries to take them public. Analysts that cover alternative asset managers argue that the sector needs new stock valuation methodologies altogether.

If the alternative asset manager sector is to live up to expectations as publicly traded stocks, understanding the return profile of these companies is the starting point for a re-evaluation. As opposed to being the latest Wall Street snake oil, focusing on management fees and the expectation of increasing investment gains indicates alternative managers may be poised for strong, stable earnings and dividends.

Private equity and debt-focused funds may offer above average returns for their limited partner investors, but those returns don't go directly to public shareholders. Shareholders get a taste of the potential manager investment savvy by way of secondary management fees -- smallish 1% to 2% fees paid to firms opening funds with billions in investor assets -- and on a share of the manager's realized investment gains on those funds, usually paid out in dividends.
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