PE stocks keep tumbling in US(2)

Shares in Blackstone and Fortress hit new lows today following analyst downgrades, while American Capital announced a $500m programme to repurchase shares trading below net asset value.

Public investors continue to shun private equity stocks in the United States as large buyouts and exits, events which would typically cause values to surge, remain relatively elusive in the wake of 2007’s debt market turmoil.

Units in the management companies of Fortress Investment Group and The Blackstone Group hit new lows following analyst downgrades and reports that Blackstone would scale down a previously announced Indian investment as well as pay a $50 million reverse break-up fee for a failed US deal.

Blackstone units were at one point trading at $18.66 today – nearly 40 percent off its June issue price of $31 per unit. Citigroup analyst Prashant Bhatia yesterday downgraded his target for the stock to $33 per unit from $36, noting that investors are worried about potential tax increases and scarce deal financing, the Chicago Tribune reported. Banc of America analyst Michael Hecht also revised his Blackstone target to $30 from $35 per unit, the newspaper said.

Fortress, too, hit a new record low today of $13.51 – a 27 percent drop from its $18.50 initial public offering price. Citigroup’s Bhatia had revised his Fortress target yesterday to $19 from $24, while Banc of America’s Hecht cut his to $28 from $32, the Tribune said.

Investor appetite has also waned recently for American Capital, an alternative asset manager that has been publicly traded since August 1997. The firm, which manages approximately $20 billion, forecast a growth in net asset value last year of 14 percent to 20 percent, equivalent to a share range of $33.50 to $35.42 per share, but in recent days the stock has been trading closer to $31 per share and its yield is near 13 percent.

The middle market-focussed firm yesterday announced a share repurchase programme, under which American Capital may buy up to $500 million of common stock at prices below net asset value, depending on market conditions.

“”With less than 0.8:1 debt to equity, American Capital has one of the best capitalised balance sheets of any public financial institution,” Malon Wilkus, American Capital chairman, chief executive and president, said in a statement. “We received approximately $5.7 billion of repayments and realisations from our portfolio last year, $3.8 billion since the start of the credit crunch, and we are reinvesting this capital at great risk adjusted returns.”

Such numbers put them ahead of competitors in terms of capital for reinvestment, he said, and the repurchase plan will be “accretive to our earnings per share and net asset value per share and will also provide a great risk adjusted return to our shareholders and enhance our ability to grow dividends”.

The firm’s chief operating officer, Ira Wagner, also made a statement geared toward assuaging investor concerns about private equity with relation to the recent liquidity crisis and its ability to produce top returns.

“The unlevered returns on all of American Capital's investments speak for themselves – a 20 percent annual return over the past six years and an 18 percent return over the past 10 years,” Wagner said. He added that the firm’s middle market focus means it has “seen a significantly smaller impact on our business from the turmoil in the credit markets than firms focused on companies valued at $1 billion and higher.  We continue to have a robust set of investment opportunities, and we believe we will generate substantial liquidity in 2008 and that capital gains in 2008 will exceed levels in 2007.”