KKR & Co. LP (KKR)

A lot of private equity players sold off last week. They are high beta plays on higher equity markets. If you are sitting on a pile of cash, this sector has been receiving more investment recently. Their exit strategy for any investment gets foiled with this sell off. He prefers Blackstone because they are more diversified.

Private equity firm. The yield is ~12% and nothing yields that high. He does not follow the company.

This should be able to grow its investment portfolio by 18% over the next couple of years on an annualized basis. Raised money in 2006 in its Asian fund and is starting to harvest that. Very geared towards the overall market and the markets have done really well, particularly in the US. They are launching money now with a European fund. One of the things in Europe is buying distressed debt.

Private equity companies are enormously profitable and really cheap because the difficulty is that it is really “deal flow” (?) for them. They cash in on some of their private equities. When you have a strong market like we have had over the last couple of years, you can float stuff off. There have been a raft of IPOs at very good valuations, and the private equity guys have been raking in even more, which is why they are at low valuations. This is probably not the right time to be in any of them.

This is a long-term Hold. There are 3 revenue generating lines, which seem to be trading at a pretty good discount to where they should be. The whole financial sector has not been doing very well. Feels they are in a very good position. There will be a lot of cash coming back to shareholders in the next little while. There is a 3% yield on their recurring revenue base.

The presumption is that it is a safe dividend. But they are building upon multiple fund raises and often the house is paid first. The ability to maintain the dividend is based on their ability to raise funds. He would pass on it based on the structure.

He owns Blackstone (BX-N), a similar type of company, but he feels management is a little bit better and there is a little bit more upside, especially as they start to realize the value of some of the investments in their funds. Broadly speaking, the reason he likes the private equity sector is that you are starting to see more institutions allocate capital to alternative investments as a source of diversifying their returns. Thinks that there is going to be a significant increase in alternative asset allocation during the next 3 to 5 years. As a result of that all of these companies are going to have more money to play with. The nice thing about being in a frothy equity market is that you can realize higher prices when you go to sell some of your investments. We are now in that timeframe where these companies are going to get pretty high prices for the assets they bought when equities were a lot lower and the prices were a lot lower. The challenge is to reinvest and get pretty good returns. If you have this, realize this is a cyclical stock and there is a good secular trend that will support it, but if you start to see the market pullback, there is going to be a lot of volatility with some pretty significant downside. Both of these are trading at a 10%-15% discount to his NAV estimates.

Alaris Royalty (AD-T) or KKR (KKR-N)? Two very, very different operations. Like brokerage firms and private equity firms, most of the profits walk out the door to the general partners. Shareholders are often an afterthought. Right now, with asset prices being pushed very high, it is a real dilemma for these private equity firms, because they are paid to invest money and they get paid big, big fees and big bonuses to invest money. They can borrow money really, really cheap, but it is increasingly difficult to find things to acquire at cheap prices. They are making money right now on things that they had bought 5 years ago, when the end of the world was coming.

The issue he has is that the public has been lured into a sense that these are steady growth stories. The 2% income that comes from managing money will be steady and will cause these businesses to appreciate over time. The 2% money is locked up for only 12 years and thereafter they have to continue to raise capital. If the funds have not performed, the capital will fall off the docks and the 2% income stream will be impaired. On the 20% profit sharing, first the house has to be paid. High-quality company and best in breed in terms of the buyout funds but he wouldn’t own it. Be careful.

Owned for a couple of years and it has done very well for their investors. They have done a really good job. Invest their own money, which she likes. They have done this for clients and earned a fee for that. They set the stage for a performance bonus, which they get when they sell their assets. The healthy yield goes up and down.

This has been a real boom for this kind of a company. They are harvesting a lot of the stuff that they had invested in. Great yield. A perfect environment where they have low interest rates. Using leverage on the companies they buy, they can easily finance them. Also, the equity market is strong so they can bring a lot of things public. This is an ideal environment for private equity.

One of the top leading private equity firms that is publicly listed. Have been very good at growing their pools over time, but not something he is a big fan of because they tended to destroy long-term value by creating short-term value for themselves. Like many of the private equity guys, they are buying up everything they can get their hands on. This is causing problems for the rest of corporate America because there are a lot of CEOs complaining that they are pushing the prices up that are no longer viable. He owns their preferred shares which are yielding 7%-8% roughly.

Their business is firing on all cylinders. There was a pullback with the market. They sell assets into the strong market, which allows them to collect their performance bonus. The challenge will be investing in it, but with conservative return assumptions she gets pretty decent upside on it. It also invests some of its own money in its investments and that contributes to the net asset value of the company.

(A Top Pick Jan 11/13. Up 76.78%.) The whole private equity space has been firing on all cylinders as it has been such a great environment for them. With low interest rates and getting a bigger chunk of capital from pensions as their investors consolidated, the performance has certainly been there. She has been trimming a little at these levels. If you own, consider taking a bit of money off the table.

(Top Pick Jan 11/13, Up 53.85%) Last few quarters they were driving home the distributable earnings. She still sees 15% upside in the shares.