5 turnaround plays in private equity

After underperforming since 2008, these stocks can finally get a boost.

By TheStockAdvisors Aug 13, 2012 10:10AM

By George Putnam, The Turnaround Letter

 

One group that has proved most disappointing to IPO investors in recent years is the private-equity sector. Private companies have garnered big profits, only to largely fizzle after going public.

 

Results have generally been lackluster since 2008. Nevertheless, these companies tend to be run by smart people, and we expect private-equity firms to begin taking steps to boost their stock prices. Here are five potential turnarounds.

 

Apollo Global Management (APO) began operations in 1990 when several executives of the collapsed Drexel Burnham turned their attention to buying distressed companies.

 

While distressed debt remains a core activity, Apollo today covers many aspects of private equity. Like others, Apollo is looking at distressed opportunities in Europe, but deals have been slow to develop.

 

As with many companies we review here, Apollo's dividend will vary. While the base rate is $0.07 quarterly, management will disburse all free cash flow not required for operating expenses. The shares, trading below their IPO price from March 2011, appear attractive for long-term investors.

 

Blackstone Group (BX) has operations that span private equity, real estate, hedge funds, and credit products and advisory services.

 

Though operating results have struggled because of challenges with existing investments and tight lending conditions, the company has grown assets under management to more than $190 billion. Blackstone is also raising money to take advantage of expected opportunities in Europe.

 

More patience may be required before the company really begins to capitalize on its portfolio holdings, but in the meantime the firm is well financed and pays an attractive core dividend.

 

Fortress Investment Group (FIG) was the first private-equity group to tap the public markets in early 2007, just in time to see its stock crushed by the recession. But operations have improved steadily since.

 

Key markets include senior living, financial services, transportation and infrastructure. The dividend was reinstated at the end of 2011. One sign of Fortress' improving outlook is its recent agreement to sell its RailAmerica unit for $1.39 billion.

 

Icahn Enterprises L.P. (IEP) is run by Carl Icahn, a well-known stockholder activist. The company has interests in automotive, gaming, rail car, food packaging, metals, real estate and home fashions.

 

The company is structured as a master limited partnership, so earnings are passed through to shareholders.

 

The stock took a hit in 2008, and after a modest rebound it has stagnated for about three years. As a result, its valuation looks attractive.

 

Kohlberg Kravis Roberts & Co. (KKR) is one of the best-known private-equity firms, having been immortalized in the 1990 book (and subsequent HBO movie) "Barbarians at the Gate," which chronicled the firm's battle to take over RJR Nabisco.

 

The firm went public in 2010, and the stock has been fairly volatile since then. Senior management is made up of some of the most experienced executives in the sector, and it is backed up by plenty of hungry younger managers.

 

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