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Earnings Roundup: Buyout shops find niches amid rosy economic outlook

  • Funds eye niches, international markets amid high prices
  • Apollo “focused on monetizing the portfolio”: Harris
  • Carlyle’s Conway optimistic, despite 0.7 pct headline GDP growth

The leaders of the largest domestic private equity funds continue to face challenges deploying capital amid a buoyant, high-priced economy in the early days of President Donald Trump’s administration.

Despite concern that Trump’s saber-rattling foreign policy and unpredictable approach to fiscal and monetary policy could trigger a downturn, public- and private-market valuations continued to expand through the first quarter, PE leaders told reporters and analysts during their earnings calls.

Blackstone Group’s Hamilton James said his firm avoided pricier segments of the market by pursuing investments in cheaper energy and healthcare companies, along with consolidations of smaller companies.

Apollo Global Management is trying to make its money “on the buy” by acquiring portfolio companies “five multiples south of the private equity averages,” Senior Managing Director Joshua Harris told analysts.

Rosy economy, sharp pricing

Carlyle Group Co-Founder Bill Conway said on the firm’s call that “despite this rosy economic environment, the investment environment remains challenging, characterized by high prices and significant competition. During this period, we’re focused on finding deals where Carlyle has an edge and if we do, we’ll aggressively pursue those transactions.” 

Meanwhile, Kohlberg Kravis Roberts is all but avoiding domestic markets, with just 17 percent of the $5.4 billion it invested in Q1 coming from its North American PE business.

“Most of our deployment as of late is coming out of Asia. Newer market for us, lower multiples, different macroeconomic considerations, opportunities for global growth,” said KKR’s global head of capital and asset management, Scott Nuttall, during the earnings call.

“We are quite cautious about investing in this market in private equity in the U.S. and Europe, in particular, but we are finding some opportunities we like. But there’s been more selling than buying.”

Each of the firms sounded generally optimistic about the U.S. economy, albeit with the now-common caveats that the market is in the later innings of an unusually long bull market.

Carlyle is projecting the U.S. economy to grow around 2.4 percent this year, roughly a full percentage point faster than it did last year, Conway said during the call. Recent reports that the U.S. economy is softening may be overstated, he added.

Business outlays recover

“I would not read too much into the headline GDP figure of 0.7 percent growth reported” in late April, Conway said. “More importantly, government data captured the same recovery in business spending that we have observed in our portfolio and have reported to our LPs over the last several months.”

While auto sales fell in recent months, the firm isn’t seeing much evidence of a slowdown in consumer spending, Conway said. Companies are allocating more to capital expenditures than they have in two years.

With that in mind, each of the firms said it’s a good time to exit portfolio holdings. Blackstone’s PE unit realized a record $6.2 billion during the quarter, while KKR in a news release called its exit activity “robust.”

“We are incredibly focused on monetizing the portfolio because to a large extent we believe that we are heading into the ninth year of an economic recovery, financing markets are ebullient, equity markets are aggressively pricing things in most cases, and so we are doing everything we can,” Apollo’s Harris said.

Readily available debt led Apollo to recapitalize some of its portfolio companies in recent months, he added.

Action Item: For economic outlooks: data.worldbank.org

Image courtesy starfotograf/iStock/Getty Images