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Private equity giants hit second-quarter wall as stocks hiccup
[NEW YORK] The three biggest private equity firms posted lower second-quarter profit after US stocks slipped for the first time since 2012.
Blackstone Group LP, Carlyle Group LP and Apollo Global Management LLC each reported a drop in economic net income, an earnings measure that includes unrealized gains and losses that are marked to the market. The Standard & Poor's 500 index of large US stocks fell 0.2 per cent in the second quarter, its first quarterly decline since the fourth quarter of 2012.
The three companies, which together manage $688 billion in assets, have churned out profits as they sold holdings into rising markets, a trend that peaked last year. Private equity firms globally reaped a record US$428 billion in 2014 asset sales, a 30 per cent jump from the previous year, according to Preqin Ltd. The companies struggled in the second quarter to keep pace with last year's earnings, when rising markets lifted gains in their funds.
"Appreciation and new investments have a tough time offsetting" last year's sales, Bill Conway, Carlyle's chief investment officer and co-founder, said on Wednesday on a conference call with analysts and investors. "It's a little concerning" that high prices are preventing Carlyle from making new investments at the same pace that the firm put money to work in the past.
The value of a private equity firm's buyout and real estate holdings affects economic net income, or ENI, because the metric in part depends on quarterly mark-to-market valuations of those investments. Accounting rules require the firms to value their portfolio holdings every quarter.
Unique Drivers The three firms' results were also each affected by unique drivers.
Carlyle on Wednesday said losses in its hedge funds, international real estate and certain energy holdings played a part in its 24 per cent decline in second-quarter profit. The Washington-based firm's funds appreciated 3 per cent, compared with 5 per cent a year earlier.
Apollo, run by Leon Black, also reported results Wednesday. The New York-based firm, which aggressively sold private equity assets from 2011 to 2014, said profit fell 25 per cent in the quarter as its pace of sales continued to slow and its buyout holdings gained 2.7 per cent versus 5 per cent a year ago.
Blackstone, the biggest of the alternative asset managers, earlier this month reported a 62 per cent drop in profit as certain companies it had taken public took a hit during the quarter. Stakes the New York-based firm owns in PBF Energy Inc, Travelport Worldwide Ltd, Hudson Pacific Properties Inc and Brixmor Property Group Inc were down between 13 per cent and 18 per cent.
Shares of Carlyle rose 0.3 per cent to US$26.09 and Apollo advanced 1.6 per cent to US$20.69 at 10:20 am in New York.