Listed Private Equity as Asset Class

Chidem Kurdas

At a time when stocks look expensive, it is intriguing that there may be a cheap new niche in the market. Publicly traded private equity firms constitute such a category, Brinker Capital chief investment officer William Miller suggested at a recent webinar, mentioning Carlyle and KKR as examples.

He said at Brinker this is their favorite asset class because only it is the one they can find that is undervalued. Estimated return – around 11% – for the year is nothing to match the 2013 equity market performance but better than estimates for other classes in 2014.

Some hedge fund managers agree with this assessment, judging from their portfolios. Thus Omega chief Leon Cooperman bought Apollo Investment Corp. – a middle-market lender managed by the private equity firm – and both KKR Financial Holdings and KKR & Co. LP.

One issue with thinking of such investments as an asset class is that pure private equity plays are few. Blackstone Group, the largest of the NYSE listed private equity managers, is in fact a diversified alternatives company in which PE is one of four businesses—the others are real estate, hedge funds and credit. Even KKR does not do only PE; it manages credit funds.

You could define “private equity” broadly to include credit, business development and holding companies. That would cover Philip Falcone’s holding company, Harbinger Group Inc., bought by Mr. Cooperman—an intriguing choice given the problems Mr. Falcone has had.

Oaktree Capital went for Apollo Global Management and Icahn Enterprises LP, Carl Icahn’s holding company. Meanwhile Oaktree Capital is itself listed on the NYSE. Among the buyers is Farallon Capital.

It is a safe bet that the number of listed alternative investment managers, including PE, will continue to grow. But how long it will take for the stocks to realize their full potential is anyone’s guess.

Both Oaktree and Omega, by the way, hold E*Trade, the online brokerage that came back from bankruptcy with the help of an infusion from Citadel. For some time Citadel chief Ken Griffin was not happy with E*Trade’s performance.

Then the stock did exceptionally well in 2013—-but much of the gain happened after Citadel sold its holding, having waited around six years.

That’s just an instance of one of the fundamental laws of stock markets: undervalued companies can stay that way for years. People point out that private equity managers are harvesting their investments successfully, which should boost their listed shares. But valuations remain low.

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2 Responses to “Listed Private Equity as Asset Class”

  1. Citadel on Listed PE Bandwagon | HedgeFundSmarts Says:

    […] Listed private equity and other alternatives may be the best-value asset class around. They’re not a pure play on a particular market, but can be seen as a way to invest in a diversified basket at relatively low cost. […]

  2. Listed Alts: Gains Trump Losses | HedgeFundSmarts Says:

    […] probably the most successful of the alternatives managers, is in all four of these businesses. Since I reported the advantages of listed private equity in January, this topic has received widespread […]

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