NEW YORK (TheStreet) -- Private-equity firms Apollo Global Management ( APO), Blackstone Group ( BX), and KKR ( KKR) are the best pure-play growth stocks in the financial services sector, Bernstein Research analysts said in a Thursday report that initiated each firm with the equivalent of a "buy" rating.
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Private-equity firms have significant growth opportunities ahead, particularly in real estate and debt investing, which stock investors are giving little credence to, according to Bernstein's analysis.
"We believe the market is undervaluing the going concern value of these firms and the significant growth opportunities ahead, both of which we view as practically free options at current market prices," the analysts said, noting an average price-to-earnings ratio of below 11 for alternative investment firms.
Undervalued growth opportunities, in concert with a strong market for selling existing investments, means that alternative managers may see earnings and revenue rise in coming years, as the traditional financial services sector muddles through a tepid macroeconomic environment and increasing regulatory burdens.
"The alternative managers' private market businesses are in the midst of a nirvana for portfolio company exits and performance fees," Bernstein said. In 2013, firms like Apollo Global Management accounted for more than 10% of the buyout industry's realization and fundraising activity.
Publicly traded alternative asset managers derive their earnings from annual management fees on the assets they manage. The PE firms also generate earnings from the value of residual interests they hold in their funds, which now span private equity, distressed debt and a host of other alternative assets.