Private Equity Firms Are Undervalued. Still

 

Measured on Price/Earnings ratios to comparables sectors the leading private equity firms like Blackstone, KKR, Apollo, Carlyle are undervalued, according to Wolfteam Ltd.' projections and estimates.

The leading private equity and alternative investments firms were grossly undervalued when they publicly listed their shares several years ago. The valuation gap closed up a bit, but even nowadays the market seems to be underestimating the private equity portfolio firms and assets' earnings potential and the private equity firms' assets appreciation potential.

The intrinsic worth of Blackstone, KKR, Apollo and Carlyle is roughly double their current market capitalization, according to Wolfteam Ltd.' projections and estimates.

Blackstone Strategic Investment In Insurance

 

Blackstone Inc,  the world's largest alternative asset manager has four main segments of its investment portfolio, namely real estate, private equity, credit & insurance and multi asset investing where its hedge funds business is situated.

Blackstone has made the strategic, long-term decision to invest in insurance businesses, according to Wolfteam Ltd.'s investment analysis. Insurance businesses are essentially investments businesses, driven by the income the company derives from investing its insurance premiums. By its nature insurance premiums are stable long-term cash flows, which do not need to be redeemed for quite a long period of time. Blackstone is using the acquired hundreds of billions of insurance premiums to invest the insurance premiums in its other business lines, namely real estate, private equity, credit & insurance and multi asset investing for the long-term.

The model of investing long-term insurance premiums in other unrelated business lines was pioneered by Warren Buffett via the controlled and majority owned by him Berkshire Hathaway conglomerate of businesses spanning energy, manufacturing, insurance and other business lines under the firm Berkshire Hathaway. Berkshire Hathaway has been a huge success making Warren Buffett consistently one of the top 5 world's richest persons since the 2000s. Currently, the publicly listed Berkshire Hathaway sports a market capitalization of 984 billion USD, making it the top 7 publicly listed companies in the world, according to market capitalization.

According to Blackstone's second quarter 2024 earnings statement ASSETS UNDER MANAGEMENT
Total AUM
($ in billions)
Fee-Earning AUM
($ in billions)
Perpetual Capital AUM
($ in billions)
Private EquityReal Estate Credit & Insurance Multi-Asset Investing
▪ Total AUM increased to $1,076.4 billion, up 7% year-over-year, with $39.4 billion of inflows in the quarter
and $151.5 billion over the LTM.
▪ Fee-Earning AUM of $808.7 billion was up 11% year-over-year, with $53.0 billion of inflows in the quarter
and $151.5 billion over the LTM.
▪ Perpetual Capital AUM reached $418.6 billion, up 9% year-over-year.

The perpetual capital from insurance premiums reached 418.6 billion USD or 40 % of Blackstone's total assets under management of 1.0764 trillion USD.  The stable premiums of insurance helped to a large extent Blackstone reach 10.3 billion USD of revenue and net income of 2.0 billion USD in the second quarter of 2024:

$ in thousands, except per share data) (unaudited) 2Q'23 2Q'24 2Q'23 YTD 2Q'24 YTD 2Q'23 LTM 2Q'24 LTM
Revenues
Management and Advisory Fees, Net 1,709,370$ 1,787,313$ 3,367,685$ 3,514,461$ 6,633,877$ 6,818,036$
Incentive Fees 153,077 188,299 295,953 367,640 616,993 766,858
Performance Allocations 616,479 653,870 504,161 1,752,330 405,208 1,780,342
Principal Investments 218,924 42,269 (164,435) 582,489 (1,001,693) 447,593
Interest and Dividend Revenue 148,505 104,999 238,990 202,838 394,042 480,345
Other (31,664) 19,631 (45,818) 64,451 (89,718) 17,340
Total Revenues 2,814,691$ 2,796,381$ 4,196,536$ 6,484,209$ 6,958,709$ 10,310,514$
Expenses
Compensation and Benefits 1,060,595 1,206,202 1,823,706 2,514,506 3,088,003 4,003,770
General, Administrative and Other 275,034 311,928 548,428 681,878 1,111,137 1,250,755
Interest Expense 108,096 108,616 212,537 216,819 393,373 436,150
Fund Expenses 31,585 5,960 79,984 9,910 104,032 48,913
Total Expenses 1,475,310$ 1,632,706$ 2,664,655$ 3,423,113$ 4,696,545$ 5,739,588$
Other Income (Loss) 87,595$ 44,934$ 153,451$ 27,167$ 123,294$ (210,281)$
Income Before Provision for Taxes 1,426,976$ 1,208,609$ 1,685,332$ 3,088,263$ 2,385,458$ 4,360,645$
Provision for Taxes 223,269 260,246 270,944 543,917 224,029 786,434
Net Income 1,203,707$ 948,363$ 1,414,388$ 2,544,346$ 2,161,429$ 3,574,211$
Redeemable NCI in Consolidated Entities 17,688 258 10,988 (39,411) (162,829) (295,917)
Non-Redeemable NCI in Consolidated Entities 584,745 503,691 716,314 1,291,957 1,077,022 1,874,534
Net Income Attributable to Blackstone Inc. (''BX'') 601,274$ 444,414$ 687,086$ 1,291,800$ 1,247,236$ 1,995,594$
Net Income Per Share of Common Stock, Basic 0.79$ 0.58$ 0.91$ 1.69$ 1.67$ 2.62$
Net Income Per Share of Common Stock, Diluted 0.79$ 0.58$ 0.91$ 1.69$ 1.67$ 2.62

Federal Reserve Cuts On Labour Market And Political Pressure?

 

In addition to the worsening US labor market the Federal Reserve could have cut the Federal Funds Rate by 0.50 % due to possible political pressure from both parties on the eve of the 2024 US Presidential election in 2024, according to Wolfteam Ltd.'s projections and estimates.

A deep rate cut followed by a string of 0.25 % rate cuts, which could bring the Federal Funds Rate to near 3.00 % seems to be in favor of both the Republicans and Democrats who both want and need a strong US economy.

Blackstone Investments

 

Blackstone Inc., the worlds largest alternative asset manager active predominantly in private equity, real estate and credit and insurance has fully evolved into a quasi banking institution, a 'shadow bank' financing activities eschewed under heavy and punitive regulations by regular corporate, money center banks.

Blackstone, however has followed buying into insurance like its nearest competitors KKR Inc and Carlyle Group Inc, tempted by the long-term investment opportunities insurance premiums provide. Balckstone Inc, KKR Inc and Carlyle Group Inc use the long-term nature of insurance premiums to invest the insurance premiums they receive from their fully owned insurance business lines into their private equity, real estate and credit and lending businesses akin to the way Warren Buffett's controlled Berkshire Hathaway invests its insurance premiums into public stocks and the other business lines of Berkshire Hathaway like manufacturing, energy etc., according to Wolfteam Ltd.'s projections and estimates.

Here is an excerpt from Blackstone Inc.'s second quarter 2024 financial statement:

BLACKSTONE’S SECOND QUARTER 2024 SEGMENT EARNINGS
Fee Related Earnings per Share is based on end of period DE Shares Outstanding (see page 24, Share Summary). DE per Common Share is based on DE Attributable
to Common Shareholders (see page 23, Shareholder Dividends) and end of period Participating Common Shares outstanding. YTD FRE per Share and DE per
Common Share amounts represent the sum of the last two quarters. See pages 32-33 for the Reconciliation of GAAP to Total Segment Measures. Effective April 1,
2024, GP Stakes is included in the Private Equity segment as part of the Secondaries business and Harvest is included in the Multi-Asset Investing segment. See
note on page 34 for additional details on segment organizational updates.% Change % Change
($ in thousands, except per share data) 2Q'23 2Q'24 vs. 2Q'23 2Q'23 YTD 2Q'24 YTD vs. 2Q'23 YTD
Management and Advisory Fees, Net 1,703,186$ 1,779,938$ 5% 3,355,573$ 3,487,509$ 4%
Fee Related Performance Revenues 266,738 177,067 (34)% 414,982 472,568 14%
Fee Related Compensation (568,808) (552,913) (3)% (1,077,779) (1,106,990) 3%
Other Operating Expenses (257,366) (293,122) 14% (509,014) (582,100) 14%
Fee Related Earnings 1,143,750$ 1,110,970$ (3)% 2,183,762$ 2,270,987$ 4%
Realized Performance Revenues 388,423 542,889 40% 1,029,949 1,079,282 5%
Realized Performance Compensation (178,370) (251,057) 41% (474,394) (504,081) 6%
Realized Principal Investment Income (Loss) (7,461) 16,572 n/m 36,230 26,510 (27)%
Net Realizations 202,592 308,404 52% 591,785 601,711 2%
Total Segment Distributable Earnings 1,346,342$ 1,419,374$ 5% 2,775,547$ 2,872,698$ 4%
Distributable Earnings 1,212,072$ 1,252,221$ 3% 2,461,164$ 2,518,599$ 2%
Additional Metrics:
Net Income Per Share of Common Stock, Basic 0.79$ 0.58$ (27)% 0.91$ 1.69$ 86%
FRE per Share 0.94$ 0.91$ (3)% 1.80$ 1.86$ 3%
DE per Common Share 0.93$ 0.96$ 3% 1.90$ 1.94$ 2%
Total Segment Revenues 2,350,886$ 2,516,466$ 7% 4,836,734$ 5,065,869$ 5%
Total Assets Under Management 1,001,355,959$ 1,076,371,811$ 7% 1,001,355,959$ 1,076,371,811$ 7%
Fee-Earning Assets Under Management 731,145,065$ 808,656,801$ 11% 731,145,065$ 808,656,801$ 11%

Blackstone Inc.'s strategy of using insurance premiums to invest for the long-term seems to be paying off for Blackstone, which sports 193 billion USDs market capitalization.

Carlyle Second Quarter 2024 Results Analysis

 

Carlyle has large part of its investments in perpetual earning capital, which are long-term fees.

 Assets Under
Management
• Total Assets Under Management: $435 billion, up 13% year-over-year
• Fee-earning Assets Under Management: $307 billion, up 13% year-over-year
• Perpetual Capital Fee-earning AUM: $90 billion, representing 29% of total Fee-earning AUM
• Pending Fee-earning AUM: $18 billion, up 19% year-over-year
• Available Capital for investment: $83 billion, up 15% year-over-year

(Dollars in millions, except per share amounts) 2Q'23 2Q'24 YTD 2Q'23 YTD 2Q'24
REVENUES
Fund management fees $ 507.8 $ 534.4 $ 1,008.6 $ 1,058.0
Incentive fees 21.0 31.3 40.8 57.5
Investment income (loss), including performance allocations (254.0) 286.3 (81.5) 202.4
Revenue from consolidated entities 137.1 165.6 259.0 330.5
All other revenues 50.2 52.1 94.2 109.7
Total Revenues 462.1 1,069.7 1,321.1 1,758.1
EXPENSES
Cash-based compensation and benefits 270.6 206.3 530.8 428.2
Equity-based compensation 68.0 125.2 122.4 233.5
Performance allocations and incentive fee related compensation (92.2) 144.2 13.5 71.4
General, administrative and other expenses 168.5 187.9 327.7 335.6
Expenses from consolidated entities 102.1 152.1 195.8 276.7
Interest and other non-operating expenses 30.7 30.1 60.5 61.1
Total Expenses 547.7 845.8 1,250.7 1,406.5
Net investment income (loss) of consolidated funds 15.6 (5.1) 19.2 (12.1)
Income (loss) before provision for income taxes1 (70.0) 218.8 89.6 339.5
Provision (benefit) for income taxes (7.3) 69.5 27.0 91.4
Net income (loss) (62.7) 149.3 62.6 248.1
Net income attributable to non-controlling interests 35.7 1.1 60.3 34.3
Net income (loss) attributable to The Carlyle Group Inc. Common Stockholders $ (98.4) $ 148.2 $ 2.3 $ 213.8
Net income (loss) attributable to The Carlyle Group Inc. per common share:
Basic $ (0.27) $ 0.41 $ 0.01 $ 0.59
Diluted $ (0.27) $ 0.40 $ 0.01 $ 0.58
Income (loss) before provision for taxes margin2 (15.1) % 20.5 % 6.8 % 19.3 %
Effective tax rate 10.4 % 31.8 % 30.1 % 26.9 %
Net performance revenues3 $ (154.6) $ 54.0 $ (99.5) $ (30.2)

This lets Carlyle make longer term investment which bring higher long-term yield. Carlyle's portfolio is modeled along the lines of the long-term capital of the Warren Buffett controlled Berkshire Hathaway.

This is evidenced by Carlyle's second quarter 2024 earnings above.

US Stocks Could Rally Into Year End On Federal Reserve Rate Cuts

 

US stocks might well rally into year end on Federal Reserve cutting rates.

The US economy seems to be in a worse shape than most Wall Street analysts thought. It remains to be seen whether the Federal Reserve could jolt the US economy back into growth with interest rate cuts.

The main beneficiaries of the rate cuts and the likeley pending stock market rally will be AI stocks again like NVIDIA, Apple, Microsoft, Alphabet, Amazon, Meta. Technology stocks as a whole would do well in the near term, in Wolfteam Ltd.'s view.

75 % Probability Of A 0.25 % Rate Cut, 25 % Probability Of A 0.50 % Rate Cut

 

There is a 75 % probability of a 0.25 % rate cut and a 25 % probability of a 0.50 % rate cut by the Federal Reserve at the meeting ending today, according to Wolfteam Ltd.'s projections and estimates.

The Federal Reserve interest rate announcement is pending in little more than 2 hours.

Actually, a 0.50 % decrease of the Federal Funds Rate by the Federal Reserve could provide a much greater jolt to financial markets than a 0.25 % interest rate cut. Actually, the effect could be very negative, because a 0.50 % cut could signal that the Federal Reserve is more worried about the economy than one could tell by recent Fed speak. It could clearly show that the Federal Reserve sees strong negative underwater currents in both the US and global economy.

And since 0.50 % rate cut would most probably would not be the end of the road in this tightening cycle. The signaled number of further interest rate cuts could foretell a much larger slowdown of the US economy, then currently expected and built into Wall Street research analysts' models.

A 0.25 % interest rate cut is much more incorporated into Wall Street macro-economists, economists and equity research analysts and investors' globally models and expectations and would be taken in stride by the markets, according to Wolfteam Ltd.'s projections and estimates.

Half Or Quarter Point Rate Cut By The Federal Reserve?

 

More and more Wall Street economists forecast half a point cut of the Federal Funds Rate by the Federal Reserve at the upcoming meeting.

The Federal Reserve will cut rates by a quarter of a percentage, according to Wolfteam Ltd.'s projections and estimates.

That said, however, the Federal Reserve might add one or two more quarter of a percentage points cut to its dot-plot forecasts. A dovish quarter of a percentage point cut in interest rates we might have in Wolfteam Ltd.'s view. A bigger, half a percentage point cut could disrupt markets into thinking the economic situation is worse than economic data points show on the surface.

A quarter of a percentage point cut in rates by the Federal Reserve will please most, it seems.

The US Presidential Election Stock Market Rally

 

We are in for a US Presidential election stock market rally, helped also by interest rate cutting by the Federal Reserve, according to Wolfteam Ltd.'s projections and estimates

Historically, after the end of a US Presidential election the US stock market rallies.

The main beneficiaries from the rally will be US AI stocks like NVIDIA, Apple, Microsoft, Alphabet, Meta, Amazon.

KKR Second Quarter 2024 Earnings Analysis

 

In the second quarterl, KKR & Co, the global investment management company realized several times more fees from its insurance business than the private equity, private credit and lending and real estate business lines:


Second Quarter 2024 GAAP Results (Unaudited)
GAAP Net Income (Loss) Attributable to KKR & Co. Inc. Common Stockholders was $0.7 billion for the quarter and
$1.4 billion YTD.
($ in thousands, except per share data) 2Q'23 2Q'24 2Q'23 YTD 2Q'24 YTD
Revenues
Asset Management and Strategic Holdings $ 1,451,344 $ 1,560,449 $ 2,577,378 $ 3,516,917
Insurance 2,175,174 2,611,461 4,176,622 10,311,731
Total Revenues $ 3,626,518 $ 4,171,910 $ 6,754,000 $ 13,828,648
Expenses
Asset Management and Strategic Holdings $ 970,293 $ 1,222,960 $ 1,781,801 $ 2,840,929
Insurance 2,152,189 2,723,369 4,200,764 10,418,344
Total Expenses $ 3,122,482 $ 3,946,329 $ 5,982,565 $ 13,259,273
Total Investment Income (Loss) - Asset Management and Strategic Holdings $ 946,977 $ 984,624 $ 1,088,013 $ 2,003,881
Income Tax E xpens e (B enefit) 324,955 216,969 473,702 486,170
R edeemable Noncontrolling Interes ts (1,740) 29,666 (9,043) 62,344
Noncontrolling Interes ts 266,086 295,644 193,083 674,602
P referred S tock D ividends 17,249 — 34,499 —
Net Income (Loss) - KKR Common Stockholders $ 844,463 $ 667,926 $ 1,167,207 $ 1,350,140
Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Common Stock
Basic $ 0.98 $ 0.75 $ 1.36 $ 1.52
Diluted $ 0.94 $ 0.72 $ 1.32 $ 1.45
Weighted Average Shares of Common Stock Outstanding
Basic 861,553,274 887,394,513 861,332,121 886,200,169
Diluted 912,147,881 932,046,386 913,068,567 928,593,777

This is of course before netting due to international GAAP.

KKR & Co is slowly turning into insurance conglomerate along the lines of Warren Buffett's controlled Berkshire Hathaway.

KKR & Co is using the insurance proceeds to fund longer-term, stable capital investments in private equity, private credit and lending and real estate or the other lines of KKR & Co.

This is reflected also in the assets under management, where the insurance business commands the largest share of 42 %:

Assets Under Management
• AUM of $601 billion, up 16% year-over-year, with $32 billion of organic new capital raised in the quarter and $108 billion in the
LTM
• Fee Paying AUM of $487 billion, up 16% year-over-year, with $29 billion of organic new capital raised in the quarter and $109
billion in the LTM
• Perpetual Capital of $250 billion, up 25% year-over-year driven primarily by the organic growth of Global Atlantic. Perpetual
capital represents 42% of AUM and 50% of FPAUM

All in all the insurance based, long-term capital management of KKR seems to be working quite well as evidenced by KKR's 109 billion USD market capitalization. The more stable, long-term insurance capital seems to be providing for more strategic, long-term investment decisions that bring in more value creation for KKR as evidenced by its market capitalization.

Coinbase Is Undervalued Currently

Coinbase, the cryptocurrency exchange is undervalued currently.

Coinbase's intrinsic value is 160 billion USD, according to Wolfteam Ltd.'s projections and estimates.

Multiples above Coinbase's current market capitalization of 40 billion USD.

Wolfteam Ltd.'s Coinbase intrinsic valuation is predicated on the assumption of Bitcoin's price surpassing 100 000 USD in 5 years.

The Stock Market Could Fall 15 % More From Here

 

The US Stock market measured by the main indices S&P 500, DJIA, Nasdaq Composite could fall 15 % more form current levels due to temporary overvaluation.

The artificial intelligence, AI transformation of the world's business is fully on its way. However, for the time being Wall Street equity research analysts and investors are extrapolating too high revenues and profits for the leading AI companies, which drive the market.

AI has to show additional potential to live up to such expectations. So correction seems to be in full swing on the US Stock market.

KKR Investments Portfolio Strategy

 

KKR & Co, Inc the global investment management firm has staked its future on its insurance business. KKR collects the insurance premiums from its Global Atlantic insurance business line and uses them for long-term capital investments in private equity, private credit and lending and real estate.

This kind of strategy will drive KKR's future, in Wolfteam Ltd.'s view.

A proprietary investment of sort, since the insurance premiums were not raised from investors in the first place. Second quarter 2024 earnings statement excerpt:

($ in thousands, except per share data) 2Q'23 2Q'24 2Q'23 YTD 2Q'24 YTD
Revenues
Asset Management and Strategic Holdings $ 1,451,344 $ 1,560,449 $ 2,577,378 $ 3,516,917
Insurance 2,175,174 2,611,461 4,176,622 10,311,731
Total Revenues $ 3,626,518 $ 4,171,910 $ 6,754,000 $ 13,828,648
Expenses
Asset Management and Strategic Holdings $ 970,293 $ 1,222,960 $ 1,781,801 $ 2,840,929
Insurance 2,152,189 2,723,369 4,200,764 10,418,344
Total Expenses $ 3,122,482 $ 3,946,329 $ 5,982,565 $ 13,259,273
Total Investment Income (Loss) - Asset Management and Strategic Holdings $ 946,977 $ 984,624 $ 1,088,013 $ 2,003,881
Income Tax E xpens e (B enefit) 324,955 216,969 473,702 486,170
R edeemable Noncontrolling Interes ts (1,740) 29,666 (9,043) 62,344
Noncontrolling Interes ts 266,086 295,644 193,083 674,602
P referred S tock D ividends 17,249 — 34,499 —
Net Income (Loss) - KKR Common Stockholders $ 844,463 $ 667,926 $ 1,167,207 $ 1,350,140
Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Common Stock
Basic $ 0.98 $ 0.75 $ 1.36 $ 1.52
Diluted $ 0.94 $ 0.72 $ 1.32 $ 1.45
Weighted Average Shares of Common Stock Outstanding
Basic 861,553,274 887,394,513 861,332,121 886,200,169
Diluted 912,147,881 932,046,386 913,068,567 928,593,777

The size of the insurance premiums is reflected in the revenues from the Asset Management and Strategic Holdings and Insurance business. The insurance business dwarfs Asset Management and Strategic holdings with 10.3 billion USD in revenue compared to 3.5 billion USD revenue for Asset Management. All this is before international GAAP is applied to net revenue premiums.

The Private Equity business line is the biggest revenue generator netted for KKR & Co:

($ in thousands) 2Q'23 2Q'24 2Q'23 YTD 2Q'24 YTD
Management Fees $ 320,081 $ 350,650 $ 636,422 $ 693,135
Transaction and Monitoring Fees, Net 33,142 16,640 67,416 32,445
Fee Related Performance Revenues — — — —
Fee Related Revenues $ 353,223 $ 367,290 $ 703,838 $ 725,580
Realized Performance Income $ 146,232 $ 327,943 $ 309,284 $ 593,240
Capital Metrics:
Assets Under Management $ 170,139,000 $ 185,265,000 $ 170,139,000 $ 185,265,000
Fee Paying Assets Under Management $ 103,730,000 $ 118,240,000 $ 103,730,000 $ 118,240,000
New Capital Raised (AUM) $ 1,992,000 $ 2,071,000 $ 2,341,000 $ 5,661,000
Capital Invested $ 3,207,000 $ 2,578,000 $ 6,070,000 $ 3,728,000
Uncalled Commitments $ 61,171,000 $ 54,925,000 $ 61,171,000 $ 54,925,000

Can NVIDIA Become A 10 trillion USD Company?

 

Yes, NVIDIA can achieve the 10 trillion USD in market capitalization milestone, according to Wolfteam Ltd.'s projections and estimates.

Artificial intelligence, AI computing could change everything, every sector of our life. And NVIDIA is leader in AI with its GPUs for data centers, which compute AI.

AI will go through the usual boom and bust as any new technology. But according to Wolfteam Ltd.'s view the AI bust will be followed by an even bigger AI boom, which could drive NVIDIA's market capitalization to new highs. We are at the cusp of the fourth industrial revolution and NVIDIA is leading the way into transforming our world via artificial intelligence, AI.