NEW YORK (
) -- The private equity industry's disappointing run in public markets -- highlighted by a 60%-plus fall in the value of
shares since its $4.1 billion 2007 initial public offering -- may be showing signs of a turnaround with a near 20% rise in
The Carlyle Group's
stock since its May IPO.
For financial sector investors who've struggled to understand and benefit from the earnings of America's largest private equity giants since Blackstone's IPO over five years ago, a rush of new money into the industry may be worth watching as a sign that firms are poised to report their highest post-crisis earnings and dividend payouts.
A string of big fund raising announcements signals new money is headed into the industry's coffers. For investors in publicly traded private equity stocks, it's those fund flows and a recovery in the value of billions in existing investments that's key earnings and dividend payouts.
Were positive trends to remain in place, the largest PE firms in the U.S. like Blackstone, Carlyle,
Apollo Global Management
Oaktree Capital Group
could pay out dividends as high as 8% in 2012 and 10% in 2013, according to calculations from KBW, far surpassing the optimism for payouts from large and mid cap banks.
Since an April initial public offering, debt specialist Oaktree Capital Management has announced the highest industry dividend, paying out 79 cents in the second quarter, giving investors an over 8.4% payout this year as of Tuesday's close. Meanwhile, after a big post-IPO rise, Carlyle Group is projected to pay out dividends in excess of 10% in 2013, as its cash earnings for shareholders more than double, according to KBW.
Although KBW and other analysts covering private equity stocks have long been bullish on the industry - for years it's been hard to find a single "sell" recommendation on a PE stock in spite of generally weak performance -- the rush of money into the industry by way of new fund launches may be tangible proof that their optimism is warranted.
That's because new money heading into private equity firms represents a predictable potential payout to public investors, even if earnings and the underlying investment performance of funds remains volatile, as evidenced by recent quarterly reports.
Private-equity 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 management fees -- smallish 1% to 2% fees paid to firms raising new funds -- and on a share of a firm's realized investment gains on within those funds, usually paid out in dividends.
While firms' preferred earnings measure is called "economic net income," which represents management fee earnings and quarterly marks to unrealized investments, industry analysts like Howard Chen at Credit Suisse and Robert Lee of KBW now argue that investors should focus on the cash that firms earn for shareholders via fees and their interest in realized investment gains.
It's these cash earnings that give firms like Apollo, Blackstone, Carlyle and KKR big dividend expectations, potentially driving shares. Now, Carlyle's post-IPO rise and reports that it, KKR, Blackstone and Apollo are raising money for new funds in the size of $10 billion and beyond give investors tangible evidence that rising dividend trends may be taking hold.
data indicates that after private equity inflows were more than halved since the crisis, fund inflows are back on the rise.
The key is that according to KBW, private equity firms like Blackstone, Carlyle, Oaktree and Apollo are likely to pay out roughly 80% of cash based earnings attributable to public shareholders in dividends. As a result, the firm estimates that by the end of 2012, Blackstone and Carlyle's dividend will rise above 4% and will roughly double in 2013 to 8.3% and 10.4%, respectively, in 2013, as fund flows and investment realizations bolster tangible cash earnings.
"Considering the positive capital formation trends at most firms in conjunction with the substantial amount of invested capital already in the ground, we still see substantial latent earnings power at many firms notwithstanding more modest near-term realization expectations," writes Lee of KBW in an Aug. 27 industry outlook. "In many cases we believe investors continue to pay little for this latent earnings power and our top picks include Blackstone, Carlyle Group and KKR," he adds.
According to Lee's calculations, Carlyle Group's 10%-plus dividend yields is expected to be an industry leader by 2013, as the firm's cash earnings grow to $2.72 a share, while Oaktree, Blackstone and Apollo won't be far behind with expected payouts ranging from 8% to 9%.
Publicly traded firms
Fortress Investment Group
Och-Ziff Capital Management
, which have private equity and hedge fund operations, are also expected to pay out similar yields.
Written by Antoine Gara in New York