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Oaktree Deal Raises Distress About Private Fund IPOs

"Despite the potential for accelerating cash flows in 2012 and 2013, in our view, valuations of many alternative manager stocks remain inexpensive and not reflective of their potential earnings power," notes KBW analyst Robert Lee in a December assessment of the sector. Lee also notes that long-term commitments to funds and the pullback of investment banks from private equity and proprietary funds provides these managers with a consistent set of cash-based earnings.

While firms' net income may swing wildly depending on market activity, similar to investment banks, cash earnings may be more stable and reflective of financial sector above average dividend yields. The Blackstone Group and KKR are Lee's top picks within the sector.

Investors still unclear on how to pick winning alternative asset manager stock may also look at whether insiders are selling stakes in IPOs.

In Blackstone's blockbuster 2007 IPO that has since underperformed significantly, the company's co-founders Peter Peterson and Stephen Schwarzman both sold significant stakes. Meanwhile, KKR's co-founders Henry Kravis and George Roberts haven't sold their shares, as the company's stock has performed strongly since a July 2010 listing.

Oaktree Capital Management was co-founded in 1995 by Howard Marks and six executives from the money manager TCW Group. Marks, who holds about one-sixth of the company's shares, and his partners, earn money on investments in distressed debt, real estate, convertible bonds and direct company ownership, mirroring the strategies used by some of the world's largest hedge funds.

In Oaktree's share offering, management were large share sellers as the company's chairman Marks and president Bruce Karsh cashed out roughly 40% of the IPO proceeds, according to a March regulatory filing. Other existing shareholders such as hedge funds Farallon Capital Management, Maverick Capital, JMG Capital Partners and Scroggin Capital Management were expected to sell an additional 1 million shares, according Bloomberg data gleaned from Securities and Exchange Commission filings.

The Carlyle Group is soon to be world's second largest publicly traded private equity firm when it sells a 10% stake in a May IPO, according to Bloomberg. In that filing, which is expected to fetch a valuation of $7.5 billion to $8 billion, Carlyle's co-founders won't sell their shares.

For more on financial IPOs, see BATS Global Markets share crash. See five stocks that could be trampled by a share overhang, for more on private equity backed IPOs.

-- Written by Antoine Gara in New York

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