by George Putnam, editor The Turnaround Letter
One of the groups that has proven to be most disappointing to IPO
investors in recent years is the private equity sector. These firms
garnered big profits as private companies only to largely fizzle after
going public.
Results have generally been lackluster since
2008. Nevertheless, these companies tend to be run by smart guys and we
expect private equity firms to begin taking steps to boost their stock
prices. Here's 5 potential turnarounds in the sector.
Apollo Global Management (
APO)
began operations in 1990 when several executives of the collapsed
Drexel Burnham firm turned their attention to buying distressed
companies.
While distressed debt remains a core activity,
Apollo today covers many aspects of the private equity landscape. Like
others, Apollo is eyeing distressed opportunities in Europe, but deals
have been slow to develop.
As with many of the companies we
review here, Apollo's dividend will vary; they have a base rate of $0.07
quarterly, but management will disburse all free cash flow not required
for operating expenses.
The shares, trading below their IPO price from March 2011, appear attractive for long-term investors.
Blackstone Group (
BX) has operations that span private equity, real estate, hedge funds and credit products and advisory services.
Though
operating results have struggled due to challenges with existing
investments and tight lending conditions, the company has been able to
grow assets under management to more than $190 billion. Blackstone too
is raising money to take advantage of expected opportunities in Europe.
Some
more patience may be required before the company really begins to
capitalize on its portfolio holdings, but in the meantime the firm is
well financed and pays an attractive core dividend.
Fortress Investment Group (
FIG)
was the first private equity group to tap the public markets in early
2007, just in time to see its stock crushed by the recession. But
operations have steadily improved since then.
Key markets
include senior living, financial services, transportation and
infrastructure. The dividend was reinstated at the end of 2011. One
sign of Fortress' improving outlook is its recent agreement to sell its
RailAmerica unit for $1.39 billion.
Icahn Enterprises L.P. (
IEP)
is run by Carl Icahn, a well-known activist. The company has interests
in automotive, gaming, railcar, food packaging, metals, real estate and
home fashions.
The company is structured as a master limited partnership, so earnings are passed through to shareholders.
The
stock took a hit in 2008, and after a modest rebound it has stagnated
for about three years. As a result, its valuation looks attractive.
Kohlberg Kravis Roberts & Co. (
KKR)
is one of the best known private equity firms, having been immortalized
in the 1990 book (and subsequent HBO movie) Barbarians at the Gate,
which chronicled the firm's battle to take over RJR Nabisco.
The
firm went public in 2010, and the stock has been fairly volatile since
then. Senior management is made up of some of the most experienced
executives in the sector, and they are backed up by plenty of hungry
younger managers.