Private Equity Q1 2020 earnings analysis

As the global economy continues to navigate volatile markets through the global pandemic, private equity (PE) continued to register healthy results in Q1 2020. Assets under management (AUM) are likely to keep trending upwards. This is due to continuous success in raising fresh capital as institutions don’t want to lose out on unique buying opportunities, combined with a reluctance from PE managers to sell assets in the current environment. 

Capital raises into PE firms have shown no signs of slowing down with Blackstone’s chairman, Steve Schwarzman, noting that $27.3 billion was raised during the first quarter, with $12 billion raised in March alone. This trend was echoed across the Big Five (Apollo, Ares, Blackstone, Carlyle Group and KKR) with Apollo aiming to increase target sizes for certain funds. Additionally, the CFO of Ares, Michael McFerran, commented in the latest earnings call that 74% of the capital raised in Q1 was from existing institutional clients increasing their commitments to take advantage of the environment.

However, it is worth noting that private equity firms must adhere to Generally Accepted Accounting Principles (GAAP) and, as such, uncrystallized gains and losses must be included in all reporting figures. As firms hold onto devaluing assets, this reporting principle has created steep drops across the Big Five’s reported profits. 

To put this into perspective, stock market performance in Q1 showed the Big Five dropping between 44% and 54% compared to the S&P 500’s 33.9%. However, they still significantly outperformed the S&P 500 over the past year to date, even when considering the S&P 500 hit its all-time high while riding the biggest bull run in history. Apollo, as the lowest performing of the Big Five firms, showed a peak gain of +43.2% year to date, while the peak gain of the other four averaged out at a phenomenal +88.4%.

The Big Five, and PE as an industry, are navigating through market volatility, by increasing assets under management due to a weaker exit environment whilst still luring in fresh droves of capital. Management fees have enabled consistency and PE firms are continuing to see fundraising success. New strategies through mergers and acquisition activity will likely also add to AUM and future earnings, in order to weather the current storm and foster further success.