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M&A The Focus For Blackstone, KKR’s Results

29 October, 2010

Private equity giants Blackstone Group and Kohlberg Kravis Roberts & Co’s upcoming earnings announcements will likely focus on the pace they are investing money, as leveraged buyout deals finally start to resurface.

Worldwide private equity backed-dealflow has doubled so far this year compared to last year, totaling $162 billion as of October 18, according to recent Thomson Reuters data.

Private equity firms are under pressure to invest billions of dollars raised over the past few years, with some funds facing deadlines on their investment periods. That, along with improved financing markets has spurred recent deal activity.

Buyout firms have been circling assets such as hard drive maker Seagate Technology and beauty firm Regis Corp while Bain Capital recently clinched a $1.8 billion deal to buy children’s clothing maker Gymboree Corp and Carlyle is in talks to buy communications cable maker CommScope  for $3 billion.

Blackstone, itself in the process of trying to buy U.S. power company Dynegy Inc (DYN.N), in September said that the debt markets have recovered to such an extent that it should be possible for a $10 billion leveraged buyout deal to happen soon.

Analysts at Oppenheimer estimate that private equity firms have put more than two-and-a-half times the amount of money to work in the year-to-date than they did last year.

Oppenheimer analysts note that this part of the economic cycle sees private equity firms investing capital rather than “harvesting” it, with exits — such as by either initial public offerings or sales — still minimal.

That means that distributions — or payouts — to investors for the rest of 2010 and early 2011 are likely to be modest, the research said, but should be substantially higher by 2012.

Buyout firms have also been working on expanding their businesses further beyond the mature Western economies in the past quarter, and there is likely to be investor interest in which emerging markets are in favor.

Blackstone in September made a large bet on the fast-growing Brazilian economy by striking a deal to buy a 40 percent stake in Brazilian private equity firm Patria Investimentos.

KKR recently offered up to $1.73 billion for Australian fund manager Perpetual. KKR is also expanding into new areas in the U.S. with the recent acquisition of nine members of Goldman Sachs Group Inc’s proprietary trading team, giving it an opportunity to expand into the potentially lucrative long/short hedge fund space.

Blackstone is scheduled to announce third quarter results on Thursday and KKR will report on Nov 3.

EARNINGS EXPECTED STABLE

Oppenheimer analysts expect core net fee-related earnings from private equity firms to be stable, and economic net income to be strong.

ENI, a measure of profitability which private equity firms prefer to use and that analysts follow, strips out items such as noncash charges for vesting equity-based compensation and the amortization of intangible assets.

Analysts on average expect Blackstone to report adjusted ENI per share of 25 cents; up from 18 cents reported in the second quarter of 2010 and the same as 25 cents a year ago, according to Starmine.

Investors will also be looking for any update on fundraising.

Blackstone, which has about $15 billion to invest in its private equity business, recently raised a sixth buyout fund of about $13.5 billion, and expects that it will finish investing its $21 billion fifth buyout fund in the coming months.

Kohlberg Kravis Roberts said in August that it expects to start fundraising for its next private equity fund sometime in the next few quarters.

Investors have been anticipating KKR raising a new fund for more than a year, but do not expect it to be close to the size of the global $18 billion buyout fund it raised in 2006. KKR has about $5 billion left to spend from that fund, it told analysts in August.


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M&A The Focus For Blackstone, KKR’s Results

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