Honest John of the week award for KKR's Roberts
On Wednesday, KKR co-founder George Roberts said that stocks haven’t caught up with the credit turmoil. Thursday, they plummet before a late day “buy on dips” rally. Or was it short covering induced? Likely the former. But the finish didn’t qualify as the “catch-up” that Mr. Roberts predicted.
“Life will go on, markets will adjust themselves,” Roberts said. “We’ve just come off a period of a major bull market for corporate credit. That’s subsiding.”
What Mr. Roberts didn’t say outright, but is implicit in his remarks (“investors have cut back on riskier assets such as the loans and bonds that fund LBOs”), is a point that I made to BNN Host Howard Green last week. Institutional investors will have to lower their sights regarding what financial returns are possible for private equity firms to achieve over the next few years (see post “BNN interview on global credit crunch” August 9-07).
Is that the time to be buying shares of Blackstone, KKR and Apollo? When LBO returns might be dropping? Perhaps it doesn’t really matter.
Check the prospectus for the percentage of revenue derived from management fees versus “profit sharing”. If the average deal return dropped from 20% to 16% (calculated after management fees but before the “20% promote”), then KKR’s share of the post-fees profit drops from 4% (20% of a 20% return) to 3.2% (20% of 16% return). Depending on the percentages between fees and promote, revenues may not shrink that much, and with new funds being raised all the time, management fees can still grow even as the profit participation figure wilts a tad.