By William Louch
Large share-price gains posted by some of the world's biggest private-equity firms over the past 18 months all but vanished over the past week.
Shares in alternative asset managers, including Blackstone Group Inc., Carlyle Group Inc. and Apollo Global Management Inc. have been hit by a broad market selloff, with the stocks down 25%, 28% and 22%, respectively, from the March 6 close as of Monday afternoon.
The declines in shares of big buyout firms have outstripped the broader market, even as U.S. stocks recorded their worst one-day performance Thursday since Black Monday in October 1987. Thursday's dive brought the market's 11-year bull run to an abrupt end.
Over the first four days of last week, two major U.S. market barometers, the Dow Jones Industrial Average and the S&P 500 index dropped 18% and 16.5%, respectively. Both indexes rebounded Friday, with the Dow posting a nearly 9.4% gain and the S&P 500 rising 9.3%. However, major stock indexes declined sharply again Monday, after the U.S. Federal Reserve announced it would slash interest rates to near zero, among other actions aimed at mitigating expected economic shocks from the spread of the novel coronavirus.
The sharp fall in private-equity stocks partly reflects broader macroeconomic concerns as a reaction to the rapid rises in their share prices over the past 12 to 18 months, said Patrick Davitt, an analyst at Autonomous Research USA. But it also shows some of the risks of converting publicly traded partnerships to conventional corporations, which opened their shares to a broad array of indexes, mutual funds and exchange-traded funds.
"The stocks have outperformed so well over the past year with the C-Corp trade," Mr. Davitt said. "There was probably already a view getting into the market that maybe it was time to take a breather."
Publicly traded private-equity houses saw their share prices soar over the roughly 18 months through February, boosted largely by the decision to abandon partnership structures and become corporations, a move that helped expand who could buy the stocks. Index and mutual funds typically don't invest in partnership structures.
Historically, publicly traded private-equity firms have complained that stock markets didn't accurately value their performance. Private-equity firms earn steady fees from investors from managing assets and share a slice of profits made on successful investments -- a lucrative but unreliable source of gains.
After Blackstone announced its switch to a corporation in April last year, its shares rose fast, nearly doubling from around $35 to an intraday high of $64.97 last month. The conversion took effect July 1. The fall last week took the stock back down to near where it was before the conversion.
Investors have other concerns though. The rapid expansion of many of the publicly traded buyout shops into private credit over the past decade has stoked fears among some investors, Mr. Davitt said, mainly due to the lack of visibility around the performance of their debt investments.
As banks pulled back from lending to riskier businesses in the wake of the financial crisis more than a decade ago, private-equity firms stepped in.
The likes of Blackstone, with its GSO unit; Apollo; KKR; and Carlyle have all raised billions of dollars to lend to small and midsize companies. GSO, for instance, manages $144 billion in assets; substantially more than the $90 billion managed by Blackstone's buyout arm.
Apollo shares were at $31.55 on Monday, down 39% from a closing peak of $52.14 on Jan. 23. KKR shares were at $23, which is 32% below their $33.93 closing peak on Feb. 19, and Carlyle's were trading at $18.92, down 45% from the Jan. 23 close of $34.45.
"Credit is top of mind. They have all become quite big in the shadow banking market, and that's where the growth has come since the financial crisis in" assets under management, Mr. Davitt said. "The visibility on the positions there is very, very low relative to what we have in their private-equity or real estate businesses."
A prolonged economic downturn could provide more opportunities for firms to purchase assets at more attractive prices, at a time when deal valuations are at record highs. If this happens, it is likely to make private-equity stocks all the more tempting to investors in the future.
"There are probably lots of large businesses out there that they have had their eye on but maybe they didn't want to buy because of valuations and/or the company didn't want to sell. Now the economy is less certain and pricing is lower, you might start to see more transactions," Mr. Davitt said. "I think you will see more interest in stepping in and buying the stocks of private-equity firms on the view that they are going to be putting more money to work at lower valuations."
Write to William Louch at email@example.com