Carlyle Group LP (CG), The Blackstone Group L.P. (BX): Three Private Equity Stocks for an Improving Economy

Page 1 of 2

As the US economy slowly rebounds from the financial crisis, private equity companies are capitalizing on new opportunities. These companies are uniquely positioned to capture profits through their highly-leveraged business models.

Investing in the funds that these companies manage will likely yield attractive returns over the next several years. But investing in the stocks of the private equity firms themselves provides potential for a much larger investment gain.

Today, we’ll take a look at three private equity stocks that should offer tremendous returns over the next several quarters.

The Blackstone Group L.P. (NYSE:BX)

The business model

Private equity companies are different from many other asset management firms because of the multiple streams of income these companies have access to. The typical private equity company makes money from three primary revenue sources:

  • Management Fees: When investors place capital in the funds managed by private equity groups, the companies typically charge a management fee. This fee might represent 1% to 2% of assets on an annual basis. When you consider the billions of dollars invested by these groups, the management fees can be quite lucrative.
  • Incentive Allocations: Private equity groups typically charge their customers a percentage of profits known as an incentive allocation. If the group manages a $10 billion dollar fund and posts returns of 15% ($1.5 billion dollars), the group might charge investors 20% of those profits. In this example, the incentive allocation would be $300 million.
  • Return on Capital: When private equity companies launch new investment funds, they typically put their own capital to work alongside their investors. So if the investment fund turns out to be profitable, the company realizes a return on their on investment (on top of the fees that they charge their investors).

All three of these income streams work together to make private equity companies very lucrative businesses. As an investor, I would much rather use my capital to buy shares of a private equity company (giving me access to all three of the revenue streams) than invest my capital into one of the funds managed by these groups.

The business structure basically allows the private equity companies to generate tremendous profits when their investments perform well, while at the same time, the companies aren’t forced to accept a significant amount of risk if the investments lose value.

As investors in these stocks, we can have the same asymmetric risk profile (maximum gains when profitable, minimal loss when unprofitable). Here are three private equity groups you should consider  buying.

Diversified for maximum exposure

Investors in Carlyle Group LP (NASDAQ:CG) benefit from the company’s broad exposure to many different markets and asset classes. The group manages 114 different investment funds, with exposure to nearly every corner of the global economy.

On the corporate side, Carlyle Group LP (NASDAQ:CG) has been responsible for bringing some great companies to market. One great example isDunkin Brands Group Inc (NASDAQ:DNKN).  Dunkin’ was a company struggling to grow until Carlyle purchased the restaurant chain.

Carlyle Group LP (NASDAQ:CG) revamped the company’s growth strategy and got the restaurant back on track. Then Carlyle issued an IPO, selling shares of Dunkin’ Brands to public investors. The stock has continued to do well since the IPO, and Carlyle has profited handsomely.

Analysts expect Carlyle to earn $3.10 per share this year. Currently, the stock is trading around $27, or less than 9 times earnings expectations. Given the company’s broad exposure to the global economy, I expect Carlyle Group LP (NASDAQ:CG) to generate impressive profits over the next several years.

A real estate powerhouse

The Blackstone Group L.P. (NYSE:BX) has recently been focusing on the residential real estate market. Over the past year, Blackstone has spent billions of dollars on residential real estate, buying foreclosed homes and renting them out.

The investment approach makes a lot of sense, given the recent rebound in home prices across the country. Rental rates have also increased which helps the company generate strong cash flow from its portfolio of assets.

Over time, The Blackstone Group L.P. (NYSE:BX) will eventually sell many of these houses for a significant profit. When it does, the company will be able to assess incentive allocations from investors in the funds that purchased the homes. Of course if you are an investor in Blackstone, these incentive allocations benefit you as a shareholder.

The Blackstone Group L.P. (NYSE:BX) is currently trading at just under 10 times expected earnings for this year. The company also pays a 5.8% dividend yield, making it a very attractive investment.

Deep value

Shares of KKR & Co. L.P. (NYSE:KKR) are trading at a very attractive multiple, currently less than 8 times this year’s expected earnings. The discount may be due to the longer-term portfolio the company is building (which may take longer for incentive allocations to kick in).

KKR & Co. L.P. (NYSE:KKR) (as the company is often referred to) is currently active on the acquisition front. Just this month, the company announced it’s first European property purchase – a 430,000 square foot portfolio of retail locations.

The company is also active in acquiring entire companies as well as specific divisions of conglomerates to build out its portfolio of investments.

Even though investors may have to wait some time before KKR & Co. L.P. (NYSE:KKR) realizes incentive allocations, the company still pays a 5.8% dividend. So investors are being paid very well to wait for profits to accumulate through the company’s various private equity investments.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!