RPT-Fitch: IPO Surge to Boost 4Q Alternative Asset Manager Results

Tue Jan 21, 2014 9:17am EST

Jan 21 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings expects most large, U.S. alternative asset managers (AAMs) will benefit from the surge in IPO activity near the end of 2013, with firms reporting solid realized and unrealized gains for their managed funds in the fourth quarter. The strong finish in 2013 capped a year in which buoyant equity markets supported a strong exit environment for private equity deals, which boosted AAM performance and supported issuer credit profiles.

Among the higher profile IPO transactions in the quarter were Blackstonea€™s successful IPOs of Hilton Hotels, Extended Stay and Chenier Energy. Additionally, AMC Entertainment went public in December, which should generate gains for Apollo, Carlyle and two other partners in the movie chain, which was taken private in 2004.

Regardless of whether the company shares trade higher post-IPO, the IPO price generally represents a meaningful write-up from carrying value for AAMs exiting the investments.

Blackstone recently indicated that over a 10-year period, IPO write-ups from carrying value have been in the 25%-30% range and can be even higher in a strong market. For example, Blackstonea€™s IPO of SeaWorld Entertainment, Inc. in April 2013 resulted in a 50% mark-up from the prior quartera€™s fair value. As a result, we expect firms with strong IPO activity to book healthy gains in their funds and increased incentive and investment income at the management company level.

Furthermore, AAMs generally sell only a small amount of their fundsa€™ ownership in the initial sale and complete a variety of secondary sales in subsequent years to fully exit, with the hope that the companya€™s valuation will increase over time. Stronger equity markets in 2013 have supported unrealized appreciation in holdings of now-publicly traded companies.

The pick-up in IPO transactions accelerated in the fourth quarter, driving up the total number of IPOs for the year to 303, up 53% year on year. Total private equity exits for alternative managers were $309.3 billion for all of 2013, according to industry data tracker Preqin. This represented a 4.4% increase over 2012.

For the fourth quarter, 77 private equity exits were completed through IPOs, up from 44 in the third quarter and 41 a year earlier. The value of exits via trade sales and sales to general partners still tops going-public deals, but the share of IPO exits continues to rise as equity markets have remained hot and investor interest in IPOs has grown.

Early indications of fourth-quarter asset values also point to solid results. Carlyle reported earlier this month that valuations for corporate private equity investments were up strongly in the fourth quarter. Buyout fund values were up by 9% sequentially in the quarter, while growth funds rose by 20%.

Market trends have been positive for exits, but AAMs have a significant amount of capital to deploy when valuations are high and conditions are competitive. According to Preqin, uncalled capital in buyout funds amounted to $413.9 billion this month; up 16.8% from year-end 2012. We expect managers to demonstrate restraint in the current environment and deploy capital at a measured pace in order to sustain strong fund performance.

Fitch continues to focus on fund management fees as the primary source of income and debt repayment for the AAMs. However, strong underlying fund performance supports capital-raising efforts and the AAMs ability to generate management fees in the future. Additionally, while incentive income can be volatile over time, an AAMa€™s ability to generate performance fees does help to support the relatively high credit ratings in the space.

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