Summary
- Many of the top alternative asset managers including Blackstone Inc., The Carlyle Group Inc., and Kohlberg Kravis Roberts & Co. L.P. have underperformed the S&P 500 Index.
- Underappreciated assets, however, are precisely what value investors look to for alpha.
- For long-term investors looking to buy quality companies at attractive discounts, adding these alternative asset managers should be a no-brainer.
- In terms of value, Carlyle is the most attractive at just 9.7x forward P/E.
- We believe that Carlyle is undervalued, and we see the potential for P/E multiples to improve from its current 9.7x to a more reasonable 12x within the next 12-24 months, translating to a potential 23.7% gain on its share price over this period.
Alternative asset managers are lagging behind the equity bull market due to ongoing concerns that high-interest rates would cap investor appetite for risk, limit deal flow, and raise the cost of leverage. Meanwhile, private equity (PE) portfolio companies are under increasing pressure to temporarily shelve expansion plans, conserve cash, and cut costs in order to assuage investor concerns over financial prudence.
With the immediate prospects of alternative asset managers still looking vulnerable and fee-related earnings not likely to rebound anytime soon, it is no surprise that share prices for these asset managers have underperformed lately. Especially with risk-free cash, money market funds, and short-term Treasuries yielding around 5% at the time of writing, it is also understandable that investors are not too keen to take on risk.
As the accompanying chart shows, many of the top alternative asset managers including Blackstone Inc. (BX), The Carlyle Group Inc. (NASDAQ:CG), and Kohlberg Kravis Roberts & Co. L.P. (KKR) have underperformed the S&P 500 Index (SPX) since the beginning of 2022. The only exception is Apollo Global Management Inc. (APO), which has benefited from its concentrated bet on private credit compared to its more diversified rivals.
