The Public/Private Equity industry consists of companies that take an interest in other entities, or asset classes such as real estate, through a direct equity stake or debt position, with the hopes of earning above-average returns on their investments once sold or taken public. Additionally, alternative asset managers generate a good portion of their profits through management and advisory fees based off their total assets under management (AUM). Indeed, these companies are rather cyclical and perform best when the general economy and market indices are healthy. However, the downside may not be as harsh as other cyclical companies. In less-than-favorable economic times, their ability to invest in more diverse asset classes can act as a partial hedge.
Moreover, Public/Private equity companies have been known to pay out a large portion of their profits to shareholders, sometimes as much as 100%. Contrary to the conventional quarterly dividend, which delivers a fixed payout until stated otherwise, private equity companies, such as KKR & Co. L.P. (KKR) and Fortress Investment (FIG), our highlighted stocks in this article, tie their quarterly distributions close to profitability. As a result, we have seen dividend yields expand into double-digit territory (Note: The figures may have been helped somewhat by the most recent selloff in the broader market). True, yields can be lumpy depending on financial performance, quarter to quarter, but investors willing to sit tight could be rewarded with prolonged periods of elevated returns.
KKR & Co. L.P.
KKR & Co. is a global asset manager with total assets under management approaching the $100 billion mark ($98 billion as of June 30th). It runs offices in fourteen countries spanning North America, Europe, Asia, and Australia, and operates in three different segments, private, public, and capital markets. The Private market segment comprises more than half of total AUM, mainly through private equity funds and some investments in energy and real estate. Of late, realization activity (more commonly referred to as profit taking) has been increased, as funds across the globe have appreciated in value, thus spurring KKR to record profits. Earnings growth has been solid since 2011 and should maintain momentum over the coming years.
While KKR is aggressively trimming its positions in certain areas, as past investments begin to reach desirable maturity levels, its noteworthy efforts on the capital raising front, continued performance in currently invested funds, and newer investments in promising sectors of growth, should refuel the tank for gains further down the road. Specifically, KKR is set to allocate more than half a billion dollars to an investment in Preferred Sands, a producer of sand for oil and gas manufacturers. The special situations fund, where the above capital will flow through, looks to take advantage of companies in distress. What’s more, in the short term, recently raised capital could make its way towards South American and African funds, as KKR looks to continually diversify its geographic footprint.
Given the company’s impressive bottom-line performance last year, distributions nearly doubled from $0.84 in 2012 to $1.62 in 2013. KKR is poised to register a year-over-year increase in distributions in 2014, especially considering the aforementioned rate of realizations and strong profit outlook for the remainder of the year. Although the yield may jump around a bit (12.5% at present) and is contingent on the timing of asset sales, we expect investors to receive a hefty high single-digit to low double-digit return for quite some time.
Fortress Investment, a global alternative asset manager focused on public equity, fixed income, and alternative markets, is amongst the highest yielding stocks in the Private/Public Equity industry. At the moment, Fortress returns an eye-opening 12.5%, based on our forward-looking 12-month dividend estimate (Note: The payout is linked directly to after-tax distributable earnings).
Meanwhile, Fortress’ history of dividends is rather limited. The company only began to pay a quarterly distribution in 2012, delivering $0.05 a share. After that, FIG increased its payout marginally in 2013 and again in 2014. However, starting in the third quarter of this year, Fortress’ board of directors saw it fitting to better align the company’s dividend policy with its profitability by paying out nearly all of its after-tax distributable earnings. As a consequence, the dividend more than tripled from $0.08 to $0.26 a share. Going forward, there will be a consistent base distribution of $0.08 a share, further bolstered by additional payouts associated with excess earnings. All things considered, the payout will likely jump around frequently due to fluctuations in FIG’s bottom-line performances. However, the yield is poised to easily outpace the broader market averages in the foreseeable future.
What’s more, our fundamental stance on the company over the long haul is rather rosy at this juncture, therefore supporting an elevated yield in the years to come. Indeed, a surging total AUM figure is quite encouraging, as fortress generates a substantial amount of revenues from management fees. In the meantime, FIG’s traditional asset management arm, Logan Circle, continues to attract capital from investors, specifically into fixed income strategies. Additionally, investment income, which has been strong of late due to rising asset valuations, also plays a meaningful role in the top-line figure. Looking further out, we think appreciation in the company’s private equity portfolio is apt to persist, along with periodic profit withdrawals that ought to underpin earnings. Therefore, given the newly initiated distribution policy, and the company’s positive financial outlook, investors looking for extra income may find this high-yielding equity of interest.
|KKR & Co. L.P.
|Blackstone Group LP
|Harris & Harris Group
|Amer. Capital Ltd.