ECONOMIC CRISIS: Listed PE firms feel the heat

Listed private equity firms were walloped in last week’s brutal hammering of public markets across the globe, with some analysts wary about the volatility of the sector.

Public private equity firms took a beating last week as share prices of the industry’s biggest firms plummeted amid turmoil whipped up by dismal economic data and continued uncertainty over sovereign debt issues.

Share prices dropped precipitously for the public firms including The Blackstone Group, Apollo Global Management, KKR & Company, Fortress and Och-Ziff Capital Management Group. In most cases, declines approached 20 percent since the start of trading last Monday to close at year-low levels.

The steep decline in private equity stocks reflected the turmoil in the rest of the market, where stocks have fallen 10 percent over the last two weeks and dropped nearly 5 percent on Thursday in the largest one-day decline since 2008, according to a report released by asset manager BlackRock.

The volatility escalated amid the debate and resolution over the US debt ceiling issue, as well as the release of disappointing economic data over the past two weeks, the report said.

The deal reached last week over the debt ceiling did not spark a rally, as expected, because “it became clear that the long-term debt issues have yet to be resolved,” said Bob Doll, the firm’s chief equity strategist for fundamental equities, in the report. “Investors do not like uncertainty, and being faced with the continued uncertainty surrounding additional rounds of contentious debates over debt issues does not bode well for investor sentiment.”

Blackstone opened the week at $17.01 a share but declined 18.12 percent to $13.39 at Friday’s close, nearer to the bottom of a 52-week period with a high of $19.63 and low of $9.89. Apollo dropped 18.83 percent from its Monday opening of $17.40 per share to $14.01, closer to its 52-week low of $12.95. KKR, which opened on Monday at $15.18 a share, slid 16.79 percent to $12.21 on Friday – its 52-week low was $9.57 -while Fortress’ shares declined 17.15 percent to $3.69 from $4.58 at the start of trading on Monday, about level with its 52-week low of $3.09. Och-Ziff traded at $11.24 at Friday’s close, slightly above its 52-week low of $10.95, and down 9.14 percent from its Monday opening of $12.56.

While this dismal showing was no surprise in the context of the overall market, some analysts said private equity firms were by nature a riskier bet than other types of stocks.
Most of the private equity firms that have gone public “did so more for creating liquidity for partners rather than securities for investors,” said Gregory Warren, a Morningstar analyst who covers Blackstone, Fortress and other asset managers. Because of this, private equity stocks have relatively smaller floats and tend to be much more volatile, he said.

Also, because most listed private equity firms went public after 2007, “investors really don’t know where they should trade relative to other asset managers on a price to earnings basis,” further adding to stock volatility, said Warren. While most assets tend to trade at mid-teens multiples, “you’re not really seeing that with a lot of these guys,” he said.