Strong Buyout Fund Returns Drive Private Equity Stocks Higher

Over the past decade, as private equity firms like Blackstone, KKR and Carlyle Group have grown into a gargantuan size and raised buyout funds nearing or eclipsing $20 billion, one critique of their cash gusher was that it would inevitably drive fund returns lower. Now, as the U.S. economy emerges from the Coronavirus pandemic and markets soar to new record highs, recent earning results from America’s big buyout firms reveal a trend of rising returns even as funds surged in size.

Fueled by piping-hot financial markets, returns from the flagship private equity funds of Blackstone, KKR and Carlyle are on the rise. Mega funds from these firms that recently ended their investment period are all running ahead of their prior vintages and raise the prospect that PE firms can achieve net investment return rates nearing or exceeding 20%.

Carlyle, which reported first quarter earnings on Thursday morning, is the newest firm to exhibit rising performance. Its $13 billion North American buyout fund, Carlyle Partners VI, which was launched in 2014 and ended its investment period in 2018, is now being marked at a 21% gross investment rate of return and a net return of 16%, or a 2.2-times multiple on invested capital.

The fund has realized $8.8 billion of investments, like insurance brokerage PIB Group and consultancy PA Consulting, and sits on a portfolio marked at nearly $20 billion. The returns are two-to-three percentage points ahead of Carlyle Partners V, the flagship buyout fund it raised just before the financial crisis. That fund is on track to earn a net IRR of of 14%, or a multiple of 2.1-times its invested capital.

Rising fund profitability, even at scale, is helping to fuel Carlyle’s overall profitability. Net accrued performance fees from Carlyle VI ended the quarter at nearly $1.4 billion and Carlyle sits on a record $3.2 billion in such performance fees that will likely be fully realized in 2021. The firm’s once-lagging stock has recently risen to new record highs.

The trend is even more clear at Blackstone and KKR, which have both used spongy IPO markets to realize multi-billion dollar investment windfalls in recent months.

Blackstone’s flagship $18 billion private equity fund, Blackstone Capital Partners VII, was closed in May 2016 and ended its investment period in February 2020, just before the Covid-19 economic meltdown. After taking public or exiting investments like Bumble, Paysafe and Refinitiv, this fund is now marked at a 18% net investment rate of return, five percentage points better than its prior fund, which raised in the aftermath of the 2008 crisis.

In the past two quarters, the fund has been the single biggest driver of Blackstone’s record profitability, generating over $1.6 billion in combined accrued performance fees. In the first quarter, the fund was responsible for 82-cents in quarterly per-share profits, filings show. Overall, Blackstone sits on a record $5.2 billion in net accrued performance fees.

At KKR, it’s a similar story. The firm’s $8.8 billion Americas XI fund, which was raised in 2012 and ended its investment period in 2017, is generating net IRRs of 18.5%, or a 2.2-times multiple on invested capital, according to the its annual 10-k filing from February. That sets up the fund to be KKR’s most profitable buyout fund since the 1990s.

KKR’s first quarter results, set to be released in early May, may show even bigger windfalls and higher returns. Its recent public offering of Applovin looks to be one of the greatest windfalls in the firm’s history, bolstering returns and profits for its even newer $13.5 billion Americas Fund XII. Asia could also be an area of big returns as its $9 billion Asian Fund III monetizes investments.

As returns rise, PE firms have seen their stocks soar to new record highs.

Once a laggard, Carlyle is up 36% year-to-date to a new record high above $42, according to Morningstar data. The firm, now led by chief executive Kewsong Lee, has returned an annual average of 23% over the past five-years.

KKR has done even better, rising 40% this year alone and 125% over the past 12-months. It’s five and ten-year total stock returns are now 33% and 13.5%, respectively.

The top performer in the industry is Blackstone Group, which recently eclipsed a $100 billion market value. Up 39% this year alone, Blackstone’s generated an average annualized total return of nearly 19% over the past decade, which is about five-percentage-points better annually than the S&P 500 Index.

Bottom Line: With public markets hitting new record highs, buyout firms are reporting LBO returns not seen since the 1990s. Their stocks, which once badly lagged the S&P 500, are beginning to beat the market.

Antoine Gara

I’m a staff writer and associate editor at Forbes, where I cover finance and investing. My beat includes hedge funds, private equity, fintech, mutual funds, mergers, and banks. I’m a graduate of Middlebury College and the Columbia University Graduate School of Journalism, and I’ve worked at TheStreet and Businessweek. Before becoming a financial scribe, I was a member of the fateful 2008 analyst class at Lehman Brothers. Email thoughts and tips to agara@forbes.com. Follow me on Twitter at @antoinegara

Source: Strong Buyout Fund Returns Drive Private Equity Stocks Higher

U.S. Economic Growth Is Peaking And That Means Stocks Could Struggle This Year, Goldman Warns

As the economic benefits of massive fiscal stimulus and businesses reopening reach their peak in the coming weeks, Goldman Sachs analysts are warning that U.S. economic growth will slow, leading to “paltry” stock returns over the next year and an end to the market’s massive pandemic rally.

U.S. economic growth will peak within the next two months, Goldman analysts said in a Thursday morning note, forecasting that gross domestic product will grow by an annualized 10.5% rate in the second quarter, the strongest expansion since 1978 aside from the economy’s stark mid-pandemic rebound in the third quarter of last year.

Economic growth will then “slow modestly” in the third quarter and continue to decelerate over the next several quarters, the analysts predicted, adding that such deceleration is typically associated with weaker stock returns and higher market volatility.

In a sign that fiscal stimulus effects and economic activity are peaking, the ISM Manufacturing index, a monthly economic indicator measuring industrial activity, registered at 65 in March—above the threshold of 60 that Goldman says typically represents peak economic growth.

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According to Goldman, the S&P 500 has historically fallen an average of 1% in the month after the ISM Manufacturing index registers more than 60, and in the subsequent 12 months, it’s gained a “paltry” 3%—significantly less than the 14% annualized return over the last 10 years.

Goldman expects the S&P will end the year at 4,300 points—implying just a 4% increase from Thursday’s close, lower than some other market forecasters who expect the index could soar to as high as 5,000 points by year’s end.

Crucial Quote

“Equities often struggle in the short term when a strong rate of economic growth begins to slow,” a group of Goldman strategists led by Ben Snider said Thursday, noting that during the last 40 years. “It is not a coincidence that ISM readings have rarely exceeded 60 during the last few decades; investors buying U.S equities at those times were buying stocks at around the same time as strong economic growth was peaking—and starting to decelerate.”

Surprising Fact

The most recent ISM reading is the highest since a level of 70 in December 1983—after which the S&P inched up just 0.2% in the following 12 months.

Key Background

Trillions of dollars in unprecedented fiscal stimulus during the pandemic have helped lift the stock market to new highs over the past year, and though President Joe Biden’s $2.3 trillion infrastructure plan could add even more fuel to the economy, Anu Gaggar, a senior investment analyst for Commonwealth Financial Network, said Thursday that “investors have been quick to recognize [that] much of the upside has already been priced.”

That’s evidenced by the growing divergence in performance between the broader market and growth stocks this year, Gaggar says, echoing the sentiment from Goldman analysts Thursday. The tech-heavy Nasdaq, which far outperformed the broader market by surging 44% last year, has climbed about 9% this year, underperforming the S&P and Dow Jones Industrial Average, which are up roughly 12% each.

Key quotes

“Economists predict 10.5% GDP growth for the second quarter, the strongest quarterly growth rate since 1978.”

“Growth in the third and fourth quarters of this year will clock in at 7.5% and 6.5%, respectively. Growth is then seen slowing in each quarter of 2022 — by the fourth quarter Goldman is modeling a mere 1.5% GDP increase.”

“Although our economists expect U.S. GDP growth will remain both above trend and above consensus forecasts through the next few quarters, they believe the pace of growth will peak within the next 1-2 months as the tailwinds from fiscal stimulus and economic reopening reach their maximum impact and then begin to fade.”

FX implications

The US dollar index drops 0.10% to trade at 91.25, as of writing. The dollar gauge resumes its downside momentum after facing rejection just below 91.50 in the US last session.

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Investors Can Sleep on These 3 Dividend Stocks

In a time of economic uncertainty, there is something to be said about low-risk dividend stocks. Companies whose fortunes aren’t directly tied to economic health and that pay a reliable dividend can be a comforting investment to those that aren’t keen on taking on a lot of risk.

Here we highlight three stocks that offer a steady dividend and some peace of mind as the economic recovery unfolds. They aren’t likely to make you rich anytime soon, but they will make for some more restful nights ahead

Is Coca-Cola Still a Buy-and-Hold Stock?

If Coca-Cola (NYSE:KO) is a refreshing investment for value legend Warren Buffet, it should be good enough for the rest of us. Regardless of the economic backdrop, there will always be consumer demand for sodas, juices, teas, and other beverages.

With this said, restrictions on large gatherings during the pandemic have impacted Coke’s recent financial performances and brought more volatility than usual to the stock. However, with the worst likely over, the company appears to be on the path back to more normalized sales patterns. As family picnics and outdoor concerts gradually return along with restaurant traffic, Coke should start to see higher volumes based on group size rather than stockpiling.

Despite recording 11% lower revenue in 2020, Coke kept its dividend hike streak going serving up a $1.64 payout to loyal shareholders. The 2.4% dividend increase made it 59 straight years of higher dividends.

In the near-term Coke is a conservative way to play the economic reopening theme. Its beverage portfolio is more in tune with health and wellness trends with brands like Vitaminwater, PowerAde, and Minute Maid. As activities like youth sports and amusement park attendance normalize, Coke’s performance should improve.

Longer-term Coke’s rising dividend and defensive nature make it the classic buy and hold stock. So, investors can simply opt to have what Warren’s drinking.

What is a Good Non-Cyclical Dividend Stock?

Speaking of defensive stocks, Unilever (NYSE:UL) is about as non-cyclical as its gets. The U.K.-based consumer products giant is the company behind many of our favorite personal care and food items. Dove soap, Axe body spray, Q-tips, and Vaseline are all Unilever brands. So too are popular indulgences like Ben & Jerry’s ice cream, Lipton iced teas (and soups), Hellmann’s mayonnaise, and even the beloved Popsicle brand.

Unilever is definitely, a mature, low growth business, but sometimes slow and steady wins the race. After rising 9% and 6% in 2019 and 2020, respectively, the low volatility stock is down approximately 8% this year offering investors a good chance to stock up.

Although the elevated demand for Unilever’s food products has waned in recent quarters, it’s pretty much a sure bet that people will still be scooping up their go-to items as shopping patterns normalize. And as usual, this should lead to some solid profits for Unilever and sizeable dividends for shareholders.

Unilever has one of the strongest balance sheets in its peer group that supports an ability to pursue growth opportunities such as product expansion and establishing a greater presence in developing markets. The ADR currently has a 3.4% trailing dividend yield which about twice the average dividend yield of the consumer staples sector. This is an easy stock to throw in the cart as a core long-term holding.

Is it a Good Time to Buy 3M Stock?

3M (NYSE:MMM) has been one of the least volatile U.S. large cap stocks over the last ten years. Although it’s not a consumer defensive company, it’s highly diversified end markets generate some reliable financial results. With broad exposure to the automotive, aerospace, transportation, electronics, and health care industries as well as the consumer space, a downturn in one segment can be easily offset by strength in another.

The company has had some choppy performances in recent quarters. Some of it has related to the pandemic and some has not. Demand for home improvement, cleaning, food safety, and personal safety products has been strong. On the other hand, COVID-19 restrictions have forced the automotive, industrial, office supplies, and oral care businesses to re-evaluate how to adjust to the post pandemic economy.

Fresh off a corporate restructuring, though, 3M looks to be in a good position to capitalize on improving conditions in its key markets and achieve its earnings growth goal. Management is aiming to reduce annual operating expenses by at least $250 million. Based on the initial progress, this looks feasible and should drive higher margins and steady single digit growth over the long-term.

3M consistently rakes in some $30 billion in revenue each year and even in slow or no growth years it rewards shareholders with a higher dividend. In fact, 3M has gone toe to toe with Coca-Cola in raising its annual dividend in each of the last 59 years. The Dow Jones index mainstay has a 3.1% dividend yield and at 23x earnings is trading at the lower end of its historical valuation range. It deserves to be a mainstay in any long-term investment portfolio.

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Credit Suisse Bullish On Stocks In 2021 Because It’s Bullish On 2022

NEW YORK, NEW YORK – JULY 23: People walk along Broadway as they pass the Wall Street Charging Bull statue on July 23, 2020 in New York City. On Wednesday July 22, the market had its best day in 6 weeks. (Photo by Michael M. Santiago/Getty Images)

Credit Suisse analyst Jonathan Golub introduced his 2021 price target for the S&P 500 (^GSPC) of 4,050, implying 12.2% upside from Tuesday’s closing levels. Underpinning this upbeat call is his assumption that two years from now, the post-virus economic recovery will have already hit a peak.

“Our 2021 forecasts are designed to answer a simple question: what will the future (2022) look like in the future (end of 2021),” Golub said in a new note Wednesday. “From this perspective, we are forced to de-emphasize the near-term, focusing instead on the return to a more normal world.”

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“As we look toward 2022, the virus will be a fading memory, the economy robust, but decelerating, the yield curve steeper and volatility lower, and the rotation into cyclicals largely behind us,” he added.

Based on Golub’s analysis, economic activity as measured by GDP growth will renormalize at levels slightly above trend, or with quarterly annualized growth rates just over 3%, starting in the second half of 2021.

And the labor market — which as of October was still 10 million payrolls short of pre-pandemic levels — will likely reach “full employment” by the second half of 2022, Golub added.

Since the stock market discounts future events, each of these prospects for further improvement down the line should translate into a higher S&P 500 as investors price in these events.

Analysts have already begun to account for an anticipated improvement in corporate profits, as S&P 500 earnings per share (EPS) have on aggregate sharply topped consensus expectations so far for each of second and third quarter results this year.

“We expect 2020 estimates to rise, 2021 to remain stable and 2022 to moderate,” Golub said.

His 2021 S&P 500 price target of 4,050 is based on earnings per share of $168 next year, for an improvement of 20% over the expected aggregate EPS this year. He expects EPS will then rise to $190 in 2022.

Sector leadership

On a sector basis, Golub rates technology stocks as Overweight for 2021, given their “faster sales growth, superior margins, robust FCF [free cash flow], and low leverage. He also rated financials, one of the laggard sectors so far for the year-to-date, as Overweight, given their propensity to lead during recoveries.

“Consistent with a typical recovery, banks should benefit from improving credit conditions, increasing transaction volumes, and a steepening yield curve,” Golub said. “The group is adequately reserved, likely. resulting in a greater return of capital.”

Golub designated cyclicals with a Neutral rating for next year, saying he is “positively inclined toward economically-sensitive groups and believe[s] their momentum should persist over the near-term.” But he added that he thinks the largest quarter-over-quarter improvements in economic activity have already come and gone, leaving more tepid further upside potential for stocks with profits closely tethered to economic growth.

He rated non-cylicals like consumer staples as underweight, while giving health care specifically an Overweight rating.

“Non-cylicals should lag in an improving economy as falling volatility supports higher P/Es (price-earnings multiples) for riskier assets, and rising rates make their high dividend yields less appealing,” he said. “The one exception is health care, which should outperform given a more robust earnings trend.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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When It Comes To Markets, Nobody Knows What Is Happening

Market analysts regularly send commentary to journalists who regularly write about finance and economics. And while there is some divergence of opining, frequently you can find common patterns in many of the emails.

Recently, there has been a deluge of analyst comments bouncing off the walls of the email inbox. Many were saying on Wednesday morning that markets were souring because the election was up in the air. Except that wasn’t the case. Major indexes went up.

As I said, it’s about the election, but it really isn’t. This could have been anything. A tremor in trade relations between two major world powers. Unexpected drops in crude oil pricing. The election is nothing more in this case than an object lesson in the limitations of what the market experts can tell you. Recommended For You

To markets, perceived or even potential uncertainty is unsatisfactory. Those placing investment bets want as much information about the chance of success or failure as possible. As equities are focused on future results, the calculus becomes more complicated than that facing a first-year university engineering student trying to determine the volume of a doughnut.

But the delayed nature of this election is nothing historically, when you consider the 1876 contest that stretched into the Compromise of 1877, otherwise known as the Great Betrayal by millions of Blacks in the South. Or every single election, as the Electoral College members meet in mid-December to cast the actual ballots and even those are subject to count and possible challenge by Congress early in January.

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Despite all the political and financial media, pundit, and expert nail biting, markets have been quite happy over the last few days. According to data from S&P Capital IQ, the S&P 500 index was up 1.8% between Monday and Tuesday and then 2.2% from Tuesday to Wednesday. For the Dow Jones Industrial Average, the changes were 2.1% and 1.3%. Nasdaq NDAQ +3% saw 1.9% and 3.9%. The Russell 2000 small cap index jumped 2.9% by Tuesday and was flat on Wednesday.

This looks like a positive reaction. It shows nothing suggesting that markets are worried. Maybe the analysts saw early suggestions in index futures, which were fluctuating. Who knows, they might have written their commentary the previous night.

Then there were the explanations of what’s been happening since it became obvious that markets were comfortable. Tech stocks were doing well because a divided Congress would make it unlikely that they’d face a breakup or interference, although that isn’t clear. Republican and Democratic elected officials have made their anger at the major tech platform companies clear and have moved back and forth over issues of privacy and censorship. To assume that a Google GOOG +0.8% or Facebook would be safe from any action (which could be newly undertaken or continued by a Department of Justice lawsuit) is unrealistic.

Next came assumptions that the response was all about pandemic stimulus, which at least had some basis in fact. Loose monetary practice and fiscal stimulus have skyrocketed during the pandemic. Mountains of money entered the economy and, with interest rates ensuring low yields on bonds, investors want a return, which has meant stocks. But no one has a clue as to when a stimulus might happen or its size.

Analysts know all this variability, but they can’t account for it on a minute-to-minute basis. There are debates among academics and experts over whether the stock market acts like a random walk—a series of coin flips. Some say that over the long run, there are patterns and the market can be predictable to a degree. Others disagree.

In either case—pure random movement with overall economic forces pushing prices up over time or something with patterns—stocks go somewhere over the long haul. They also do on the short haul although, collectively, with far less precision. Indexes go up and down and large percentages of the stocks represented in them do the opposite.

This is why it’s so hard to beat the markets. You’ll likely never know which ones in particular might do well over a given time frame, and you can’t necessarily predict the macroeconomic forces that will shape the track down which they all race.

But the experts and pundits and reporters and politicians all feel the pressure to explain every bump in that road. Human beings have a natural tendency to look for narratives that offer, in retrospect, the story of why things happened. The expected understanding of all things investing, whether realistic or not, is why they’re paid.

Call a broker and ask what happened today, and that person needs to sound informed. The market reporter speaking with a television anchor wants to sound knowledgeable. The pundit is expected to point a finger in the right direction. But so much of what happens is mass psychology and beyond rational description.

Some people are truly canny and have a better sense of the flow. They still all get caught out often. When they do, there’s a scramble to find a solid ground. Chalk it up to human nature.

So, take all of what you hear with a grain of salt. There are no obvious answers, and the explanations might be right or wrong. Instead, focus on the longer run. That’s where the money’s to be made and the bumps and jags fade into a smoother pattern. Follow me on Twitter or LinkedIn. Check out my website.

Erik Sherman

I’m a freelance journalist and writer with credits in Fortune, the Wall Street Journal, the New York Times Magazine, Newsweek, NBC News, CBS Moneywatch, Technology Review, The Fiscal Times, Inc, and Vice. I also do ghost and corporate writing. You can see my portfolio at http://www.linkedin.com/in/eriksherman and find me on Twitter at @eriksherman.

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Yahoo Finance’s Brian Cheung looks at stock market performance after elections. #election #stockmarket #stocks Subscribe to Yahoo Finance: https://yhoo.it/2fGu5Bb About Yahoo Finance: At Yahoo Finance, you get free stock quotes, up-to-date news, portfolio management resources, international market data, social interaction and mortgage rates that help you manage your financial life. About Yahoo Finance Premium: With a subscription to Yahoo Finance Premium, get the tools you need to invest with confidence. Discover new opportunities with expert research and investment ideas backed by technical and fundamental analysis. Optimize your trades with advanced portfolio insights, fundamental analysis, enhanced charting, and more. To learn more about Yahoo Finance Premium please visit: https://yhoo.it/33jXYBp Connect with Yahoo Finance: Get the latest news: https://yhoo.it/2fGu5Bb Find Yahoo Finance on Facebook: http://bit.ly/2A9u5Zq Follow Yahoo Finance on Twitter: http://bit.ly/2LMgloP Follow Yahoo Finance on Instagram: http://bit.ly/2LOpNYz Follow Cashay.com Follow Yahoo Finance Premium on Twitter: https://bit.ly/3hhcnmV

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