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Blackstone, Carlyle seen as refashioning earnings for a lift

Blackstone Group LP and Carlyle Group LP recently adopted it as their key metric after KKR & Co changed last year.

[BOSTON] The titans of private equity, who have long grumbled that shareholders don't show them enough love, are turning to a sweetener: distributable earnings.

Blackstone Group LP and Carlyle Group LP recently adopted it as their key metric after KKR & Co changed last year. The yardstick, which has been in past earnings reports but not spotlighted, strips out mark-to-market valuations and promises to make quarterly results less volatile, particularly in turbulent markets.

The share prices of these giant firms have mostly lagged the broader market since they went public, which for Blackstone was more than a decade ago. The new barometer, which includes cash income from asset sales and management fees, is the latest effort to win over shareholders. It shines a light on the huge stockpile of assets - Blackstone alone raised US$100 billion in 2018 - they have gathered.

"A lot of actions these firms take are to increase shareholder value," said Devin Ryan, an analyst at JMP Securities. "They are looking for things they can do to improve the narrative and improve the investor base."

The volatility inherent in the formula the firms had been using - economic net income - was laid bare once again in the fourth quarter. The measure, which captures both realised and unrealised gains, requires private assets to be marked to market.

Apollo Global Management LLC, which was still relying on economic net income, took a beating on that measure largely because the S&P 500 Index had its worst quarter in seven years. Apollo posted its biggest quarterly loss in eight years as its private equity portfolio plummeted. It and Oaktree plan to join peers with a change to the key profit metric when they report first-quarter earnings.

Apollo's rivals mostly sidestepped the market tsunami last quarter. KKR and Carlyle - which reported results on Wednesday - saw their distributable earnings rise. Blackstone also posted a profit but a smaller one than a year earlier. These firms say the metric better reflects how they run their businesses.

"I am a supporter of this metric," said Stephen Biggar, an analyst at Argus Research Corp. "It's hard for analysts like myself to predict unrealised losses. We can predict fee-related earnings much better. It's a stable component of earnings."

Some private equity firms have also converted to a C-corp - or are considering it - to try to get more recognition in the market. The change from a partnership makes it possible for them to be included in indices and increase their mutual fund ownership.

But the benefits of a C-corp conversion remain a question. Since KKR announced in May that it was making the switch, its shares have gained less than Blackstone's, a partnership. Blackstone, which manages US$472.2 billion, has been weighing whether becoming a C-corp makes sense.

Likewise, firms can't count on shareholders to reward them just because they now tally profit differently, with an emphasis on fees from the steady collection of assets.

"Let's see if this helps," Mr Ryan said.


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