Strong Buyout Fund Returns Drive Private Equity Stocks Higher

Private equity

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.

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

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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.

Coming off the worst quarter in history, the U.S. economy grew at its fastest pace ever in the third quarter as a nation battered by an unprecedented pandemic put itself back together. Michelle Girard, chief U.S. economist at NatWest Markets, Stephanie Kelton, professor of economics and public policy at Stony Brook University, and Michael Strain, director of economic policy studies at the American Enterprise Institute, join “Squawk Box” to discuss. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGeIvi » Subscribe to CNBC TV: https://cnb.cx/SubscribeCNBCtelevision » Subscribe to CNBC: https://cnb.cx/SubscribeCNBC » Subscribe to CNBC Classic: https://cnb.cx/SubscribeCNBCclassic
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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.

Further Reading

S&P 500 Passes 4,000—And These Market Experts Think It Can Keep Climbing Higher. Here’s Why. (Forbes)

Dow Jumps 200 Points: Stocks Fend Off Third Day Of Losses Despite Biotechs, Netflix Falling (Forbes)

I’m a reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business journalism and economics while working for UNC’s Kenan-Flagler Business School as a marketing and communications assistant. Before Forbes, I spent a summer reporting on the L.A. private sector for Los Angeles Business Journal and wrote about publicly traded North Carolina companies for NC Business News Wire. Reach out at jponciano@forbes.com.

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

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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.

Latest Forex News

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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Tesla, Netflix Slammed As Stocks Fall On Weak Jobs Data, Trump Covid Case

The announcement that Donald Trump tested positive for coronavirus triggered a sell-off in early morning trading around the world on Friday that tapered off by day’s end. Tech stocks, however, failed to recover, as Wall Street investors prepare for increased volatility in the weeks leading up to the election.

Key Facts

The tech-heavy Nasdaq ended the day down 251 points, or 2.2%, while the Dow Jones Industrial Average shed 134 points, or 0.5%, and the S&P 500 fell 1%.

Tech stocks were among Friday’s biggest losers, with Tesla and Netflix falling 7% and 5%, respectively, while Apple and Microsoft were each down 3%.

Cboe’s VIX Index, which measures volatility expectations based on options contracts, at one point jumped up more than 7%, reaching its highest point since early September, when tech stocks corrected and the Nasdaq had its fastest 10% plunge in history.

U.S. airline stocks proved a bright spot in the Friday market after House Speaker Nancy Pelosi said lawmakers were preparing relief for the industry through either a broad-based stimulus bill or standalone legislation.

The S&P 500 Airlines Industry Index ended the day up 2.3%.

Jobs data released before the market open revealed that U.S. employers added just 661,000 jobs in September, about 25% less than the 859,000 new jobs economists were forecasting and less than half of the nearly 1.5 million jobs the economy added back in August.

The unemployment rate of 7.9% was better than the forecast of 8.2%, but it’s still far below the 3.5% unemployment rate in February–before governments shut down businesses after a domestic spike in coronavirus cases.

Key Background

Donald Trump announced in a tweet shortly after midnight on Friday that he and First Lady Melania had tested positive for Covid-19, adding that they’d begin quarantining “immediately.” The announcement triggered an immediate sell-off in stock futures and initially rattled global equity markets, but losses have since pulled back: Japan’s Nikkei Index closed down about 0.7%, but France’s CAC 40 and the United Kingdom’s FTSE 100 managed to turn positive for the day, though their gains remained below 1%.

The Dow and S&P 500 each ended Thursday, the first day of fourth-quarter trading, virtually flat after stimulus negotiations between House Speaker Nancy Pelosi (D-Calif.) and Treasury Secretary Steven Mnuchin reached a standstill. September was the worst month for U.S. stocks since May, and history has shown that October is generally a volatile month for stocks–even more so during election years.

Crucial Quote

“The news of Trump contracting Covid-19 could completely change the direction of the campaign and adds to our already cautious outlook on the stock market,” said James McDonald, the CEO of Los Angeles-based Hercules Investments. “[It] will elevate institutional money’s preparation for a Democratic White House and all the tax, trade and budget implications that go along with it. We expect institutional investors to start de-risking portfolios and increasing hedges in preparation for market volatility.”

Further Reading

Trump’s Covid Diagnosis Rattles Markets: Here’s What Wall Street Thinks Happens Next (Forbes)

Here’s What The Last Jobs Report Before The Presidential Election Means For Voters (Forbes)

U.S. Futures, European Stocks Drop Following Trump’s Covid-19 Diagnosis (Forbes)

Dow Futures Down 400 Points After Trump Tests Positive For Covid-19 (Forbes) Follow me on Twitter. Send me a secure tip.

Jonathan Ponciano

 Jonathan Ponciano

I’m a reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business journalism and economics while working for UNC’s Kenan-Flagler Business School as a marketing and communications assistant. Before Forbes, I spent a summer reporting on the L.A. private sector for Los Angeles Business Journal and wrote about publicly traded North Carolina companies for NC Business News Wire. Reach out at jponciano@forbes.com.

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CNBC’s “Squawk on the Street” watch how stocks perform as the market opens, and the team discusses how the White House is responding to President Trump’s coronavirus diagnosis. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGeIvi U.S. stocks fell in volatile trading on Friday after President Donald Trump’s coronavirus diagnosis fueled concerns about the election and a worsening pandemic. Major averages clawed back some of the steep losses after House Speaker Nancy Pelosi signaled aid for the airline industry could be coming soon, perhaps even as part of a much-anticipated broad relief bill. The Dow Jones Industrial Average closed 134.09 points, or 0.5%, lower at 27,682.81 after dropping 430 points at its session low. The S&P 500 slid 1.0%, or 32.36 points, to 3,248.44 after falling as much as 1.7% earlier. The Nasdaq Composite declined 2.2%, or 251.49 points, to 11,075.02. Shares of airlines jumped higher in unison after Pelosi called on the industry to delay furloughs, saying relief for airline workers is “imminent.” American Airlines and United erased earlier losses and popped 3.3% and 2.4%, respectively. “We will either enact Chairman DeFazio’s bipartisan stand-alone legislation or achieve this as part of a comprehensive negotiated relief bill, extending for another six months the Payroll Support Program,” Pelosi said in a statement. Earlier Friday, Pelosi said Trump’s illness changed the dynamic of stimulus talks, adding lawmakers will find the “middle ground” and will “get the job done.” The House passed the $2.2 trillion Democratic coronavirus stimulus bill Thursday night, while Treasury Secretary Steven Mnuchin has offered a $1.6 trillion package. Still, the president’s diagnosis added more uncertainty to the election, an event that was already weighing on the market and keeping traders on edge as they attempted to evaluate the possible outcomes. It also raised concerns about a second wave of the virus and a slower reopening. » Subscribe to CNBC TV: https://cnb.cx/SubscribeCNBCtelevision » Subscribe to CNBC: https://cnb.cx/SubscribeCNBC » Subscribe to CNBC Classic: https://cnb.cx/SubscribeCNBCclassic Turn to CNBC TV for the latest stock market news and analysis. From market futures to live price updates CNBC is the leader in business news worldwide. The News with Shepard Smith is CNBC’s daily news podcast providing deep, non-partisan coverage and perspective on the day’s most important stories. Available to listen by 8:30pm ET / 5:30pm PT daily beginning September 30: https://www.cnbc.com/2020/09/29/the-n… Connect with CNBC News Online Get the latest news: http://www.cnbc.com/ Follow CNBC on LinkedIn: https://cnb.cx/LinkedInCNBC Follow CNBC News on Facebook: https://cnb.cx/LikeCNBC Follow CNBC News on Twitter: https://cnb.cx/FollowCNBC Follow CNBC News on Instagram: https://cnb.cx/InstagramCNBC

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