The conflict between public and private

Should alternative asset managers be taking short-term action to convince shareholders that it’s worth it in the long run? Surely balance sheet cash could find a better home than in an asset manager’s own equity.

What do KKR, Apollo, Fortress and Carlyle have in common? There’s probably a few overlapping circles in that Venn diagram, but PDI is thinking of one particular club – all have authorised share repurchases in a bid to bolster the price and “generate shareholder value”. 

As Carlyle’s David Rubenstein put it, the price at which Carlyle shares have been trading “represent an incredibly attractive value, not only for public investors, but they also represent … a highly accretive investment opportunity and we’ve decided that we should take advantage of this opportunity while it exists”.

So these firms will effectively spend balance sheet cash (in the main) on buying their own equity.

When you look at how dramatically their share prices have fallen, the logic seems sound. Carlyle was trading at $11.70 on 12 February, down more than 60 percent from its peak in the last 12 months.

Business development companies have been in a similar equity spiral and several have also launched buyback progammes

But the fall in these equities has to be seen in context. After years of a QE-fuelled bull market, global stock markets are falling. The main US stock indices have dropped 11-13 percent over the last 12 months. 

The resultant market volatility has hit the short-term returns of these listed alternatives managers as they mark down some of their holdings. A double-whammy for share prices of these managers.

But these listed alternative asset managers make very private, long-term investments, be they in private debt, private equity, distressed assets or real estate. Value is realised at the end of a typically five-year investment period, not every three months. 

In contrast, equity prices ebb and flow, pushed by quarterly reporting and pulled by external shocks. The managers have introduced a layer of liquidity over their core long-term function, trading capital raised from the listing for a fluctuating market cap that responds to investor sentiment. 

And now managers are trying to mitigate the downward trend resulting from the liquidity they say undervalues their business.

“This action should be viewed as a reflection of our firm belief that the current share price does not in any way capture the inherent strength of Apollo’s business model, growth prospects and long-term strategy,” said the firm’s chairman and chief executive, Leon Black. 

It is this that exposes the ridiculous aspect of publicly listing the management company of a firm that makes private illiquid investments. There’s a strong argument that Rubenstein and Black would deliver better shareholder value by concentrating their balance sheet cash on their core business models rather than chasing equity markets. 

Following the buyback fad that hit listed companies after the crisis is a waste of resources. If equity investors can’t take a long-term view of what is a long-term business model, then, at the very least, these firms’ leadership should.


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