EFTA01452571.pdf

Deutsche Bank Markets Research North Amer Ica Industry Date United States 28 January 2014 Einem:Eat Alternative Asset Brokers, Asset Manager Initiation Initiation of Coverage Managers & Exchanges Brian F3exion. CFA. Strong Cyclical and Secular Trends Should Drive More Outperformance lu nit ilia Cover 3ge of the Alzeinative Asset Managers, BX i:, top pick HIM hi:,' ciugo,.. We initiate coverage of 5 alternative asset managers (the "Alts") with Buys on Company Target Price Rating Blackstone (BX), Carlyle Group (CG), & Oaktree Capital (OAK) & Hold ratings on OAK.N NA to 68.001USD) NR to Buy Apollo Global Mgmt (APO) & KKR & Co (KKR). Overall, these Alts are well- KKR.N NA to 25.00(USO) NR to Hold positioned amid favorable cyclical tailwinds & strong secular dynamics, while BX.N NA to 39.001USD) NR to Buy valuations remain attractive. We favor the more-diversified Alts possessing less CG.00 NA to 43.00(USD) NR to Buy earnings variability & good distributable earnings (DE) growth profiles for 2014- APO.N NA to 31.001USD) NR to Hold 2015; this dynamic favors BX & CG over APO & KKR for now, in our view, & we &son Datae,A• Sank see 4Q earnings as a positive catalyst upon a better DE outlook for next 1-2 years. We also like OAK's more-traditional asset manager business profile. 100 ri , k‘ Valuations still attracti -e as debate on valuing the Alts continues The Blackstone Group 18/C1405030.52 Buy With volatile and less predictable earnings, the market has been reluctant to Sarno 0/anewSire assign a comparable traditional asset manager P/E on the Alts' carried interest t`,011f.i;fl income stream, which accounted for over half of Alt's pretax income over the past 2 years. However, we see limitations in this legacy sum-of-parts valuation Apollo Global Management Hold approach (valuing fee-earnings at much higher multiples than carried interest) (APO.N1.USD31.74 primarily because of the longer-term reliability of carried interest converting 2012A 2013E 2014E into cash distributions for public unit holders. Thus, we prefer to value the Alts EPS (USD) 3.82 4.65 2.50 on longer-term 'distributable earnings' (DE), which is a proxy for cash flow and P/E (xl 3.7 7.0 12.7 the basis for cash distributions to unit holders. On this approach, we think EV/EBITDA (xl these 5 Alt managers can trade at a median 12-13x P/E on our 2015 DE The Blackstone Group IBX.NLUS030.52 Buy forecasts, a year from now, which implies about 2 points of multiple expansion 2012A 2013E 2014E and over 15% price appreciation, and about 22% total return inclusive of EPS (USD) 1.77 2.56 3.09 median 6-7% distribution yields at current price levels. P/E (x) 8.1 11.9 9.9 Both cyciEf.ili and themee-, are .ter? posit :,e EV/EBITDA lxl - - - In the current economic/capital markets cycle, the Alts are likely to increasingly The Carlyle Group MC.001,1.6035.72 Buy benefit from realizing the value of their long-term investments (from sales via 2012A 2013E 2014E M&A, IP0s, etc.) and distributing more cash to unit holders over 2014-15. EPS (USD) 2.04 2.84 2.70 Thus, we see a greater convergence of DE and the more volatile mark-to- P/E (x/ 11.8 12.6 13.2 market-driven economic net income (ENI), as the realization cycle gains EV/EBITDA (xl momentum in 2014. Asset organic growth rates should remain healthy as strong investment performance track records enable fundraising to outpace KKR & Co. (KKR.N).USD24.00 Hold outflows from realized distribution to LPs. Key secular trends favoring Alts are 2012A 2013E 2014E 1) rising allocations globally to alternative assets by institutions, and EPS (USD/ 2.90 2.87 2.33 increasingly, individuals, 2) a major competitive advantage in ability to P/E (al 4.8 8.4 10.3 generate patient capital and invest long-term and influence investment EV/EBITDA outcomes, 3) a greater role for Alts in financing, creating more capital Oakum Capital Group (OAK.NIMSD57.36 Buy deployment opportunities globally, & 4) increasing concentration of asset flows 2012A 2013E 2014E to the largest Alts, which favors these 5 stocks. EPS (USD) 4.06 6.06 4.36 These stocks have above-average risk profiles P/E (xl 9.7 9.5 13.2 With greater leverage to economy & capital markets, the stocks should EV/EBITDA lxl maintain higher betas vs. traditional asset managers. Key risks are: 1) a seem Aar Sr* downturn in the US & global economy and market prices, 2) a major slowdown in capital deployment that could cause 2015 earnings to peak out, 3) an inability to narrow P/E gap vs. traditional managers given inherent earnings volatility and complicated financial structures & modeling, and 4) speculation of greater regulatory scrutiny and/or higher taxation on carried interest and/or the Alts' income within their partnership structures. Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/0412013. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SONY-0109687 CONFIDENTIAL SDNY_GM_00255871 EFTA01452571