This Much-Anticipated Stock Isn't for You

For KKR (NYSE: KKR  ) , the LBO firm that was immortalized in Barbarians at the Gate, today marks the culmination of a long and circuitous road to a listing on the New York Stock Exchange. Three years ago, KKR was preparing an IPO when the credit crisis struck, putting those plans on hold. Now that shares are finally trading on the NYSE, should investors consider buying into this buyout firm?

Coming to America
In fact, KKR shares have been trading on Euronext Amsterdam since October 2009; however, today marks their New York debut. KKR went through this back door because it missed the boat back in 2007, while archrival Blackstone (NYSE: BX  ) timed its IPO perfectly in June of that year, right at the height of the private equity boom.

Here is how the shares of so-called "alternative asset" managers (i.e., leveraged buyout and hedge fund firms) have performed since their initial offerings:

Company

IPO Date

Annualized % Return Since IPO*

Annualized % Return, S&P 500 Total Return

KKR

Oct. 1, 2009

+11%**

+10%

Och-Ziff Capital Management Group (NYSE: OZM  )

Nov. 14, 2007

(25%)

(8%)

The Blackstone Group

Jun. 22, 2007

(28%)

(8%)

Fortress Investment Group (NYSE: FIG  )

Feb. 9, 2007

(46%)

(6%)

GLG Partners (NYSE: GLG  )

Jan. 29, 2007

(19%)

(5%)

Goldman Sachs (NYSE: GS  )

May 4, 1999

+7%

0%

Source: Calculated based on price data from Yahoo! Finance and NYSE Euronext.
*At July 13, 2010.
**Does not include dividends; the current dividend on KKR shares is 0.78%.

As we can see, the performance of those firms that went public prior to 2007 is pretty horrific. Goldman Sachs is the exception, but as I argued here, it's not clear that the return on the shares has been adequate compensation for the risk shareholders have borne. Furthermore, despite being an important player in private equity and hedge funds, Goldman isn't a pure-play alternative asset manager.

A decent performer
Meanwhile, KKR has actually performed decently since its offering, outperforming the S&P 500 by more than 1%. The two-year-plus lag in the public share offering with respect to its peers made all the difference, as investors were no longer willing to pay absurdly inflated prices once private equity firms had fallen from their exalted perch.

Put this one in the 'too hard' pile
That being said, I think KKR's offering is fundamentally unsuitable for most individual investors. The ownership structure is extremely complex, which doesn't make it any easier to value the shares ("common units," technically). When I looked at one of the firms in the above table a few years ago, I found that this complexity had tripped up a well-known financial data provider -- the number of shares outstanding was being misreported, and, thus, so too was the market capitalization.

Finally, if you believe, as I do, that investment banks are essentially run for the benefit of their employees rather than their public shareholders, I think you'll find it is much the same with private equity firms. KKR may be a long-awaited debut on the New York Stock Exchange, but that is no reason for individual investors to spend their time looking at these shares -- in this market, there are other opportunities that are much easier to understand.

Don't bother with private equity firms or their portfolio companies. Jim Royal explains why and offers some much better alternatives.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 15, 2010, at 6:16 PM, MegaEurope wrote:

    What about KFN which has traded on the NYSE for several years? Any difference between KKR and KFN?

  • Report this Comment On July 15, 2010, at 6:22 PM, MegaEurope wrote:

    I think KKR is a far superior investment to OZM, BX, FIG and GLG. But I wouldn't buy it at this price.

  • Report this Comment On July 15, 2010, at 7:32 PM, TMFAleph1 wrote:

    There certainly is a difference between KKR (NYSE: KKR) and KKR Financial Holdings (NYSE: KFN). From KKR's prosepctus:

    "KKR Financial Holdings LLC (NYSE: KFN), or KFN, is a New York Stock Exchange-listed specialty finance company that commenced operations in July 2004. Its majority owned subsidiaries finance and invest in a broad range of debt investments, including residential mortgage-backed securities, syndicated corporate debt as well as special situations opportunities, which range from private debt instruments to mezzanine and distressed opportunities. We [KKR] serve as the external manager of KFN under a management agreement and are entitled to receive a monthly base management fee equal to an annual rate of 1.75% of KFN's equity as defined in the agreement and a quarterly incentive fee that is generally equal to the amount by which KFN's net income (before incentive fees and share-based compensation expenses) per weighted average share outstanding for the quarter exceeds a specified hurdle rate. The management agreement may be terminated only in limited circumstances and, except for a termination arising from certain events of cause, upon the payment of a termination fee to KKR."

  • Report this Comment On July 15, 2010, at 7:47 PM, MegaEurope wrote:

    OK ... but what is the significance of the difference? If KFN and KKR are investing side by side then the difference might be small.

  • Report this Comment On July 15, 2010, at 8:08 PM, TMFAleph1 wrote:

    KFN does co-invest in private equity investments with KKR on occasion. However, from a shareholder's perspective, there is HUGE difference between investing in a REIT (KFN) and investing in the group that manages that REIT (KKR). The same difference that exists between owning a mutual fund that is managed by BlackRock and owning shares of BlackRock (NYSE: BLK).

    I hope that clears things up -- I'm not sure I understand what you're trying to get at.

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