Blackstone earnings miss forecasts as investments weaken

Blackstone underperforms, especially its credit group.  Perhaps if they had a greater industry versus generic focus the returns would be better.  Aivars Lode

Blackstone Group LP (BX.N), the world’s largest alternative asset manager, reported weaker-than-expected fourth-quarter earnings on Thursday as falling oil prices and a choppy credit market dragged on its investments.

Economic net income, which accounts for unrealized gains or losses in investments, dropped 70 percent to $435.7 million, or 37 cents per share, from $1.4 billion, or $1.25 a share, a year earlier.

On that basis, analysts on average had expected 45.5 cents per share for this key metric for private equity firms, according to Thomson Reuters I/B/E/S.

It has been a tough few months for private equity firms. Besides smarting from energy investments as oil prices tanked, dealmaking has also suffered since November due to the toughest financing conditions since the 2008 global financial crisis.

The market for high-yield bonds, the lifeblood of buyout deals, has frozen as banks struggle to sell them in syndicated sales. Banks are also lending fewer of the riskiest junk-rated loans that fund buyouts, further tightening financing conditions.

Blackstone’s income based on the performance of its investments slid across the board. The private equity, real estate, hedge fund and credit divisions all suffered, but the credit arm took the biggest hit as losses doubled to $90.5 million from a year earlier.

But even as investments weakened, investors handed Blackstone more cash to manage. Assets under management increased 16 percent to $336.4 billion, with growth in each of its investment arms.

Distributable earnings, which show the actual cash that Blackstone has available to pay dividends, slumped 23 percent to $878 million, or 72 cents per share.

Founded in 1985 with just $400,000, Blackstone is a leading buyout firm due to the sheer amount of cash that it manages. It was the first of its peers to report fourth-quarter results.

- Reuters

PE activity in U.S. MM still at record high as value falls 12%

What will that mean for the future of those deals done at a much higher valuation???  Aivars Lode

Private equity dealmakers kept up a torrid pace of investment in U.S. middle-market companies last year, closing over 2,000 deals for the second year in a row. Yet, in another instance of the general PE slackening we have observed as of late, total deal value declined by nearly 12%, according to our 2015 Annual U.S. PE Middle Market Report. The report delves into how trends affecting the overall U.S. PE landscape are manifested in the middle market, analyzing activity by MM segment and sector. It also covers MM exits and fundraising. Click here for free access to the full report, sponsored by Madison Capital Funding.

Strategists advise real estate investors to prepare for next downturn

So where next to invest if strategists advise real estate investors to prepare for next downturn?  Aivars Lode

As concerns about the global economy weigh on stock markets, real estate investors are being advised to prepare for the next downturn in their sector.

LaSalle Investment Management has published its latest strategic note, advising investors “to take out cycle insurance” to safeguard against the advent of falling or plateauing values.

The company’s investment strategy annual recommends taking precautions as more markets enter a mature phase in the “real estate pricing cycle”.

It recommends reducing portfolios of non-strategic assets, reducing leverage and being aware of liquidity needs if and when credit tightens.

In the short-term, investors should focus on taking leasing risk where markets are strong, pursuing development in strong, supply-constrained markets and “bidding on strategic long-hold assets that are most likely to be able to withstand a downturn”.

Jacques Gordon, global head of research and strategy at LaSalle, said: “Real estate investors have enjoyed six consecutive years of positive value increases in most countries and now is the time for them to take out ‘cycle insurance’ – to assess their portfolios in preparation for the inevitable transition from rising values to either a plateau or falling values.

“In this mature phase of the capital markets cycle, we highlight various forms of defensive ‘insurance’ that portfolio managers can use to prepare for an uncertain future.”

American Realty Advisors has also warned investors against the temptation to “stretch for additional yield and shoot for making outsized gains”.

In a research note, the company said: “Rather, conditions suggest that now is the time to focus on stability, superior income growth, and pricing resiliency as the likelihood of an economic downturn or financial instability event increase.”

Prepared by Chris Macke, managing director of research and strategy at American Realty Advisors, the report said: “There is more downside to being overly aggressive than overly conservative”.

It continues: ”Despite the warning signs, some investors continue to take on more risk, seeking out smaller markets in search of marginally higher yields at a time when prices are elevated, the economic recovery is entering the mature phase, global growth is weakening, and financial market volatility is increasing.

“This is likely happening since multi-asset investors are facing weak equity and bond returns and are incorrectly relying on commercial real estate to be the alpha generator in their portfolio.”

- Richard Lowe, IPE Real Estate

Returns diminish in challenging year for pension funds worldwide

Greater need for transparency and stability in investing as returns diminish ..... Aivars Lode

Lackluster returns the norm in eventful year

In a year of exciting macroeconomic and market situations — with unprecedented monetary policy, the return of volatility, and the bottoming out of the commodities supercycle — one would be forgiven for expecting great things from pension fund investment returns in 2015.

But interesting happenings in the macro environment failed to translate into strong investment returns of pension funds in six of the world's major markets. 

The average pension fund in each of Australia, Canada, Japan, the Netherlands, the U.K. and the U.S. all produced investment returns lower than in 2014.  Canada and Australia were the standout markets for the year, helped along by falling currencies. 

The average Canadian pension fund returned 6% before taking inflation into consideration, said Bruce B. Curwood, director, investment strategy at Russell Investments Canada, Toronto. Last year was a “poor year for Canada,” he said. In 2014, Canadian pension funds returned on average 10.1% before inflation was taken into account. 

Mr. Curwood highlighted slowing growth in China and “the ineffectiveness of the OPEC oil cartel” leading to falling material and energy prices across the globe. These issues led to subdued domestic growth in Canada and low inflation, which Mr. Curwood said was hovering around 1.5%. 

As well as macro issues, Canada's major stock index, the S&P/TSX, was one of the worst performing stock markets in the developed world last year, returning -8.32%, he said. Interest rates also fell in Canada, increasing pension liabilities. He said five-year government bonds fell by 58 basis points, while 10-year yields dropped by 38 basis points and 30-year government bonds slipped 18 basis points in 2015. 

“Based on these three events, one would have expected extremely weak Canadian pension fund outcomes. However ... the silver lining for many domestic pension funds was the falling Canadian dollar and the extent of their global diversification strategy,” Mr. Curwood said. The Canadian dollar fell 16% vs. the U.S. dollar in 2015. “In short, any unhedged international investments resulted in a rebound to performance.”

Diversification pays 

Canadian pension funds' diversification strategies saw them move further away from the typical 60/40 portfolio, he added, investing more in alternatives, and in particular global infrastructure and global real estate. “In addition, many funds concentrated on better matching their investments (to their liabilities), while others utilized downside protection strategies, such as defensive equity,” said Mr. Curwood. 

Australian pension funds also benefited from currency depreciation. With the Australian dollar falling 10.9% vs. the U.S. dollar in the calendar year, investment returns were boosted to an average 5.6% before inflation, said researcher SuperRatings Pty. Ltd. That compared with returns of 8.1% in 2014. 

The key driver of Australian retirement fund returns in 2015 was international shares, with the median international shares investment option increasing 8.8%. In comparison, the ASX200 Accumulation index grew 2.6%. 

“We have noted in recent years many funds moving greater portions of their assets into international shares” and away from the domestic stock market, said Adam Gee, Sydney-based CEO at SuperRatings. The firm also has seen many not-for-profit pension funds gaining greater exposure to unlisted assets, such as infrastructure, private equity and hedge funds, he said. 

It was not just pension funds that failed to impress in 2015. The Russell 3000 index gained 0.48% over the year, vs. 12.53% in 2014; while the MSCI All-Country World index lost 1.79% in 2015, vs. a 5.62% gain the year previous. Bond markets also fared poorly, with the Barclays Capital U.S. Aggregate Bond index gaining 0.55% vs. 5.97% in 2014. 

These elements hit U.S. pension funds hard. Preliminary analysis of the 219 portfolios in Bank of New York Mellon (BK) Corp. (BK)'s universe shows an average investment return of -0.08%. John Houser, senior consultant for BNY Mellon's global risk solutions group, in Boston, said the last time the universe posted negative results to close the year was 2008, “when the universe median finished down with a -25.23% return.” 

The U.S. equity segment of its analysis produced a median result of 0.14% — that “significantly underperformed its historic average,” said Mr. Houser, with third-quarter median losses of 7.44% proving to be too much. The U.S. fixed-income segment median was -0.03%. 

“The real estate segment continues to be the asset class of choice as its median one-year return closed at 12.68%,” he said. 

For the average U.K. pension fund, which returned between 0% and 2% in 2015, “many will look back on 2015 as, I think, a bit of a damp squib,” said Phil Edwards, Bristol, England-based principal at MercerLtd. The year in the U.K. looks particularly weak compared with 2014's average investment return of 11% before inflation. 

These pension funds have continued to derisk, he said, with asset allocation analysis likely to reveal a reduced reliance on equities. “And also schemes are looking to add dynamism to portfolios,” using multiasset credit strategies that allow managers to shift across asset classes as the environment and opportunities change. 

Japan's pension funds also produced single-digit returns, with Russell Investments' universe of corporate pension funds in Japan returning on average less than 2%. 

“In the public pension area, the topic in 2015 which had the biggest impact was the allocation change of public pensions,” said Konosuke Kita, director of consulting at Russell Investments in Tokyo. He highlighted the $1.2 trillion Government Pension Investment Fund, Tokyo, which increased its equity allocation to 50% from 24%, and others that have followed this move. 

Corporate governance, he said, was another hot topic, following the publication of the Corporate Governance Code in 2015. “It will create pressure for investment managers to be conscious of corporate governance more than ever,” he said.

Fallen angel 

The biggest year-over-year fall in returns came from pension funds in the Netherlands, which produced an average investment return of 1.1% before inflation. That compared with a 15.8% return in 2014. 

Edward Krijgsman, Amstelveen-based principal and investment consultant at Mercer, said one reason for this “modest” return was an increase in interest rates. The 30-year swap rate in the eurozone increased to 1.61%, from 1.46%. The average Dutch pension fund has hedged about 40% of the interest rate risk of nominal liabilities. 

Mr. Krijgsman added that Dutch pension funds benefited from falling allocations to hedge funds and commodities. “The ambition of Dutch pension funds to invest more in hedge funds has reduced the last three years, driven by increased transparency (demands) from De Nederlandsche Bank, plus poor performance. It is the same for commodities, although transparency requirements are a bit less for them.” 

The HFRI Fund Weighted Composite index returned -1.02% in 2015; and the Bloomberg Commodity index returned -24.66%. 

Dutch pension funds also benefited from another year of euro depreciation vs. the dollar, with a 10.22% drop in 2015. Mr. Krijgsman said Dutch pension funds on average hedge 50% of their currency risk. 

Alongside lower investment returns were lower funded ratios, falling to 104% from 108% in 2014. 

However, Dennis van Ek, principal and investment consultant also at Mercer in Amstelveen, said the average funded ratio actually would be 110% were it not for a change in Dutch pension fund rules last year under the Financial Assessment Framework, known as the FTK. 

De Nederlandsche Bank, the Dutch financial regulator, dropped the ultimate forward rate — the discount rate used to calculate liabilities — to 3.3% from 4.2%, in 2015. “Because of that, and other changes, the funded ratio fell to 104%,” Mr. Van Ek said, with the change leading to an increase in liabilities. The change means many pension funds in the Netherlands are dealing with having to recalculate their recovery plans. 

By Sophie Baker - Pensions & Investments

Private Equity's Golden Age Wasn't So Golden After All

Interesting stats in here on how the golden age of private equity was not...Aivars Lode

Henry Kravis called it private equity’s golden age. From 2005 to 2007, buyout firms paid fat prices to buy about 20 supersized companies, from Hilton Worldwide Holdings Inc. to Hertz Global Holdings Inc.

Now, a decade later, the results of that debt-fueled spree can be tabulated -- and it’s hardly golden. The mega-deals produced mostly mediocre returns, falling well short of the profits that leveraged buyout shops typically seek, according to separate compilations by Bloomberg and asset manager Hamilton Lane Advisors. In more than half the deals -- each valued at more than $10 billion -- the firms would have been better off if they had put their investors’ money into a stock index fund.

Henry Kravis

 

Photographer: Daniel Acker/Bloomberg

Have the Masters of the Universe learned a lesson? They say they have. Caution is now a watchword and less is more. TPG Capital has sworn off buyouts as large as $30 billion, people with knowledge of its thinking said, while other shops will consider enormous deals only if the price is right. But so far none has led a $10 billion or bigger transaction since the financial crisis.

Read full article here

Fondo Priamo tenders Italian private debt mandate in alternatives push

Another Pension fund allocating to private debt.  Aivars Lode

Fondo Priamo, Italy’s second-pillar pension fund for public transport sector employees, is tendering an Italian private debt mandate.

Priamo, which managed €1.2bn at the end of last year, intends to implement the allocation to private debt through a fund-of-funds structure.

The size of the mandate will be €15m, around 1.2% of total assets.

Managers have until 3 February to provide the required documentation. 

Throughout the manager search, Priamo is being assisted by Link Institutional Advisory, a consultant based in Lugano, Switzerland.

If the allocation is successful, the fund will be among the first second-pillar trade union-backed pension funds in Italy to invest in private debt.

Osvaldo Marinig, chairman at Priamo, told IPE the fund-of-fund structure was chosen to ensure appropriate diversification.

He said implementing the allocation through a fund-of-funds structure would be a challenge, given the lack of similar investment by Italian schemes.

The project will require intense dialogue with the pension regulator, COVIP, Marinig added.

The fund is planning to add private debt to its evolving alternative assets portfolio, following a review of the strategic asset allocation that took place at the end of 2015.

As part of the review, Priamo increased the strategic allocation target for alternatives from 5% to 7%.

Marinig said the fund was evaluating other asset classes for the rest of the alternatives portfolio.

Marinig explained that private debt was preferred to real estate, for reasons including the timing of the investment.

The fund had foreseen an allocation to real estate around two years ago but never implemented the strategy.

But Maring said the time to invest in real estate was now less than ideal.

Other incentives for the investment were the potential risk-adjusted returns and cashflow profile of investments.

During 2015, the fund moved from a benchmark approach to an absolute return one.

Among the reasons for this change were fluctuating membership figures.

Marinig noted the fund was maturing more quickly than others, with the members’ age profile getting older.

However, 2016 will see a review of collective public transport sector agreements, and a wave of redundancies is expected.

At the same time, Marinig expects the fund will receive a significant influx of members, as the sector’s trade unions agree to a form of automatic enrolment as part of the new contractual agreements.

The model – whereby employees are automatically enrolled in the fund with a minimum employer contribution but no obligation to contribute themselves – has already been adopted by Prevedi, Italy’s construction sector scheme.  As a result of the likely introduction of automatic enrolment at Priamo, Marinig foresees that membership could double, although assets will grow much more slowly.

BY CARLO SVALUTO MOREOLO

Investment and Pensions Europe

Why debt managers love volatility

Why debt managers love volatility and why execution is important....
Aivars Lode

It’s not yet clear if the leveraged finance market will continue to stutter or if it’s just taking time for bank lenders and high-yield investors to return to business as usual. In the meantime, private debt managers are making hay.  

The high-yield bond and syndicated loan markets have had private debt managers transfixed lately, with all eyes in particular on Symantec’s sale of data storage business Veritas to The Carlyle Group and GIC.

Agreed in August 2015, the deal’s original $3.3 billion loan and $2.28 billion bond package took months to come together, and was shunned by both the high-yield and leveraged loan markets even when the underwriters reportedly took measures to sweeten the deal for investors. The latest twist came this week, when the sale price was cut from $8 billion to $7.4 billion, allowing the debt financing underwriters to reduce the deal’s debt package by $1.2 billion. 

This isn’t the only private equity deal struggling to syndicate its financing. Last week, it emerged that KKR’s private equity arm had struggled to find lenders to back its $1.2 billion acquisition of Mill Fleet Farm, a US regional retail chain. After shopping the deal with around 20 banks, KKR reportedly sold the debt financing down to pension funds and asset managers itself, according to Reuters.

The reason this deal and, more broadly, the high-yield bond and syndicated loan markets are holding the attention of debt managers is that a stuttering liquid leveraged finance market means a positive trickle down for more flexible private credit providers. 

The wobbles in the US large-cap leveraged finance market started last year and have continued into the first three weeks of 2016. One mid-market private lender estimated that pricing has increased around 100bps since the summer on the back of syndicated loan and high-yield bond market wobbles. 

In Europe, in the last quarter of 2015, lenders were forced to reduce the leverage on Global Blue’s €572 million loan from 4.5x to 3.7x. Since the market reopened in January high-yield bond prices have fallen. On the leveraged loan market, deals have launched this year but one advisory source says everyone is waiting to see how syndications go for the first transactions. One such is the £620 million-equivalent ($890 million; €822 million) of sterling and euro debt backing TDR Capital’s £1.3 billion acquisition of fuel retailer Euro Garages which was launched in the first week of January. 

Substantial falls in equity markets and wider macro disquiet have had an impact on the more liquid elements of the leveraged finance markets that the bulk of private debt managers focus on. Those same managers aren’t just hanging around waiting to see how it all pans out, of course. Funds are actively pitching for business that in a stronger credit market would go elsewhere, says the advisory source. 

Their pitch of flexibility, long-term match funding and most importantly, certainty of execution, is brought most sharply into relief when there is less confidence in other credit markets. 

Thus, in contrast to the rest of the investment community, debt managers are, for the medium-term at least, hoping that the very volatility drawing attention among the business titans gathered this week in Davos doesn’t halt too quickly. 

Private Debt Investor