There's not just Wilbur Ross who will serve as Commerce Secretary, but also Blackstone (NYSE:BX) CEO Steve Schwarzman who will chair the President’s Strategic and Policy Forum, and attorney Jay Clayton - who has advised on numerous major P-E deals - to lead the SEC.
Aside from those official posts, the president-elect has met with the heads of Carlyle Group (NASDAQ:CG) and KKR since his election.
"There seems to be more interest in the advice of real-world practitioners than in the past,” says the head of the P-E industry's D.C. lobbying group. "This is encouraging."
Indeed. Among P-E's top priorities is carried interest - one of the few things Trump and Clinton agreed on during the campaign. Carried interest is currently taxed at 23.8% vs. the top ordinary income tax rate of 39.6%. Like Clinton, Trump wanted carried interest taxed as ordinary income, though Trump would lower the top rate to 33%. Other tax law changes Trump is proposing could cut the effective tax rate further - perhaps to as low as 25%, or just marginally higher than currently.
Another big priority is retaining the tax deductibility of interest. Trump wants to give companies the ability to either keep that deduction or pass and gain the ability to immediately expense capital investment. A plan by House Republicans might not be as favorable.
While markets have been unkind to the publicly traded units of KKR - down nearly 40% since 2014 - the underlying business has been thriving, with both AUM and investment returns growing at double-digit paces.
What gives? It's not about operations, writes Vito Racanelli in Barron's, but instead concern over the complexity of the partnership structure and lumpy quarterly results.
The partnership structure means extra tax reporting requirements for unitholders, and also prevents KKR from being included in most equity indexes (the S&P 500, for example). Nor can it be held in ETFs, most of which are prohibited from owning partnership units.
As for lumpiness, it's typical of the P-E industry's irregular timing of realized gains and losses, and the need to mark to market the value of holdings on a quarterly basis. Still, KKR's funds have average annual returns of 20-25%, with some having done so for decades.
Selling for 8.1x economic net income, the units are cheap on an absolute and relative basis, with peers like Blackstone (NYSE:BX), Apollo Global (NYSE:APO), Oaktree (NYSE:OAK), and Ares Management (NYSE:ARES) trading at significantly higher multiples.
"It is a hard company to understand, but owning a unit means you get to be a partner of legendary investor Henry Kravis at a significant discount to the long-term value of the units,” says Ariel Focus fund manager Charles Bobrinskoy. He figures KKR is worth $26 per unit, or 55% above Friday's close.
Christopher Harris and team raise their Q4 estimates for alternatives by 27%, with Oaktree (NYSE:OAK) and Apollo Global (NYSE:APO) getting the biggest increases. At work was the stock market's strong end-of-year run which should boost investment returns.
For 2017 though, they're leaving estimates mostly unchanged.
"It is not a great time to be particularly aggressive in this sector, as we are quite far along in this economic cycle," says the team, which argues Outperform-rated Ares Management (NYSE:ARES) is the most defensive of the group thanks to its relatively high fee earnings vs. peers.
Analyst Alexander Blostein raises the trust banks (STT, BK, NTRS) to attractive and upgrades State Street (STT +2.1%) to Buy from Neutral. He sees 2017 as bringing an inflection point in the banks' high-margin revenue streams, with currency trading set to recover thanks to rising global uncertainty.
He also sees "room to run" in the exchanges, and gives CBOE Holdings (CBOE +1.5%) a two-notch upgrade to Buy. ICE and Virtu Financial (NASDAQ:VIRT) remain top picks.
Turning to alternative investment managers, Blostein wonders if they could lead this year after lagging in 2016. He upgrades Apollo Global (NYSE:APO) to Buy, and it, along with Oaktree (NYSE:OAK) and Blackstone (NYSE:BX) are top picks.
It's the same old story for traditional asset managers, and Blostein remains negative. He downgrades Artisan Partners (APAM -3.3%) to Sell and BlackRock (BLK -0.5%) to Neutral. Affiliated Managers (AMG +0.1%) is pulled from the Conviction List.
Since 2010, Aleris has been owned and controlled by a group led by investment funds of Oaktree Capital Management (NYSE:OAK).
Aleris is in the midst of a $350M expansion of its Lewisport, Ky., rolling mill to produce automotive body sheet for U.S. auto manufacturers, and hopes to produce 200K metric tons/year and begin shipping in 2017.
Shares of other publicly traded aluminum companies are up, including Alcoa (AA +2.4%), Century Aluminum (CENX +2.7%), Kaiser Aluminum (KALU +1%) and Constellium (CSTM +12.9%).
With London's status as a financial hub, Brexit raises questions over just how firms - including U.S. asset managers - will do business on the Continent from the City (such as selling financial products) under the new regime.
The good news, says Citi's William Katz, is the poor performance of most of the sector means investors may have already priced in falling NAVs and AUM.
The worst of the fallout, says Katz, will hit those managers with the largest presence in the U.K., including Invesco (IVZ -13%) and Affiliated Mangers Group (AMG -10.8%). Again, the recent struggles for both these stocks means the blow could be softer than feared.
While the whole affair could make for good buying opportunities for private-equity funds, that doesn't mean the stock prices of players like Carlyle Group (CG -2.8%), Blackstone (BX -5%), KKR (KKR -6%), Fortress (FIG -3.9%), and Oaktree (OAK -1.7%) couldn't come under a great deal of pressure in the short term.
Led by nearly $1B of net inflows in May in the DoubleLine Total Return Bond Fund (MUTF:DBLTX), assets under management at Jeff Gundlach's shop reached $100B last month.
Year-to-date inflows at DoubleLine are $9.05B, led by $7.2B from the Total Return Bond Fund.
It's good news for Oaktree Capital (NYSE:OAK), which paid $20M in 2009 for a stake in DoubleLine that's so far paid out more than $150M and now is likely worth $1B or more ... a pretty fair ROI for Howard Marks and company.
Former BofA banker Bill Egan was hired by Oaktree (OAK +0.9%) two years ago to start a reinsurance venture. and his exit follows a struggle to raise enough funds to set up an operation with enough scale.
Oaktree had hoped to team up with XL Group, but investor interest in the industry isn't exactly strong thanks to too much pricing competition. John Paulson recently shuttered a reinsurer and Dan Loeb's Third Point Reinsurance is selling for less than its 2013 IPO price.