The private equity industry is poised for substantial growth this year and beyond, owing to the surge in global private equity transactions, an expanding base of High-Net-Worth Individuals (HNWI), and the improved capacity of the sector to manage market volatility.
Given the industry’s bright growth prospects, investing in fundamentally sound private equity stocks IRSA Inversiones y Representaciones Sociedad Anónima (IRS) and Saratoga Investment Corp. (SAR) could be wise. However, given its weak fundamentals and dim outlook, Blackstone Inc. (BX) is best avoided now.
Before delving into the fundamentals of these stocks, let’s examine the current state of the private equity landscape.
Despite encountering several headwinds, such as bank failures, a sluggish leveraged loan market, and an unfavorable fundraising environment, private equity persevered in the first quarter of 2023. Managers successfully mitigated these risks and ensured that PE-backed transactions went forward without hindrance.
Private equity managers strategically focused on smaller target companies, prioritizing deals that had lower leverage dependence and required smaller equity contributions in order to navigate the challenges encountered in the first quarter. Moreover, dealmakers progressively relied on non-traditional sources of capital to compensate for the funding shortfall.
The United States dominates the global private equity sector, with assets exceeding $6 trillion. In the first quarter of this year, U.S. private equity firms completed more than 2,000 deals worth $261 billion. Despite a 9.3% quarter-over-quarter decline in deal volume, it remained substantially higher than pre-pandemic levels.
Private equity is presently better equipped to handle volatility than ever before. With over $1.2 trillion in dry powder, firms have ample capital available. Additionally, they have diversified their portfolios by incorporating new asset classes, enhancing their resilience and flexibility in the face of changing market conditions.
Furthermore, increasing global transactions and a growing number of HNWIs are expected to drive the industry’s growth. According to Technavio, the private equity market is estimated to increase by $734.93 billion, growing at a CAGR of 9.3% between 2022 and 2027.
Given the favorable industry outlook, investing in quality private equity stocks, IRS, and SAR could be wise. However, it could be wise to steer clear of struggling private equity stock BX for now.
Let’s discuss the featured stocks in detail.
Stocks to Buy:
IRSA Inversiones y Representaciones Sociedad Anónima (IRS)
Headquartered in Buenos Aires, Argentina, IRS acquires, develops, and operates rental properties such as shopping malls, office buildings, and non-mall properties. It also purchases and manages luxury hotels, sells residential properties, and acquires undeveloped land for future development or sale.
On March 7, IRS announced its purchase of a property at Paseo Colón 245, near the Casa Rosada, the National Government headquarters. The acquisition was made through a public auction held by the Government of the Autonomous City of Buenos Aires. Additionally, the company acquired 12 parking spaces at Paseo Colón 275.
The property, boasting mixed-use potential, encompasses 13 office floors spanning an area of approximately 13,700 sqm, complemented by a basement with parking facilities. Such strategic expansion moves are enabling the company to expand its property portfolio.
For the third quarter that ended March 31, 2023, IRS’ income increased 20.1% year-over-year to ARS 16.27 billion ($64.24 million). The company’s gross profit grew 27.2% from the year-ago value to ARS 10.57 billion ($41.74 million).
Furthermore, comprehensive income attributable to shareholders of the controlling company stood at ARS 12.02 billion ($47.44 million), compared to a loss of ARS 35.91 billion ($141.75 million) in the prior year’s period.
Also, profit for the period attributable to shareholders of the parent company per share came in at ARS 13.89, compared to a loss ARS 43.91 in the previous year’s quarter.
Analysts expect IRS’ EPS to grow 13% per annum over the next five years. The stock has gained 61% over the past six months and 118.8% over the past year to close the last trading session at $8.05.
IRS’ solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
IRS has a B grade for Sentiment. It has topped the 35-stock Private Equity industry.
In addition to the POWR Ratings I’ve just highlighted, you can see IRS’ ratings for Growth, Value, Momentum, Stability, and Quality here.
Saratoga Investment Corp. (SAR)
SAR is a business development firm specializing in leveraged and managed buyouts, acquisition financings, growth financings, recapitalization, debt refinancing, and transitional financing transactions at the lower end of the middle market. It invests through direct lending as well as participation in loan syndicates.
On May 22, SAR declared a quarterly dividend of $0.70 per share for the first quarter that ended May 31, 2023, reflecting an increase of $0.01 from the fourth quarter of 2022. This dividend was payable to all stockholders on June 29, 2023.
SAR pays a $2.80 per share dividend annually, translating to a 10.65% yield on the current price level. The company’s dividend payments have grown at a CAGR of 16.1% over the past three years, and its four-year average dividend yield is 8.11%.
For the fourth quarter that ended February 28, 2023, SAR’s total investment income increased 70.3% year-over-year to $32.32 million. Its net investment income grew 66.5% from the year-ago value to $9.65 million.
Its EPS rose 131.4% year-over-year to $1.62. Also, as of February 28, 2023, the company’s total assets stood at $1.08 billion, compared to $876.24 million as of February 28, 2022.
The consensus revenue estimate of $128.81 million for the fiscal year (ending February 2024) reflects a 30% year-over-year improvement. Likewise, the consensus EPS estimate of $3.42 for the ongoing year indicates a 16.4% rise year-over-year. Moreover, the company topped the consensus EPS estimates in all four trailing quarters, which is impressive.
Over the past year, the stock has gained 10.3% to close the last trading session at $26.28.
SAR’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
SAR has an A grade for Sentiment and a B for Growth and Momentum. It is ranked #2 out of 35 stocks within the Private Equity industry.
Click here to access additional SAR ratings (Value, Stability, and Quality).
Stock to Sell:
Blackstone Inc. (BX)
BX is an alternative asset management firm specializing in real estate, private equity, hedge fund solutions, credit, secondary funds, public debt and equity, and multi-asset class strategies. It primarily invests in early-stage companies and provides capital markets services.
On June 27, it was reported that Blackstone Loan Financing Limited is seeking shareholder approval for winding down the fund. This decision stems from several factors, including the shares trading at a significant discount compared to the value of the underlying assets and the liquidity challenges associated with those shares.
As of June 26, Blackstone Loan Financing traded at a 23% discount to its net asset value. The company said, “While the company’s share price continues to trade at a discount to net asset value, it is limited in its reinvestment opportunities and ability to grow through further share issuance.”
For the first quarter that ended March 31, 2023, BX reported a total investment loss of $495.68 million, compared to an income of $3.42 billion in the prior year’s quarter. Its revenue decreased 73% year-over-year to $1.38 billion.
In addition, the company’s net income and net income per share of common stock declined 91.6% and 93.4% year-over-year to $210.68 million and $0.11, respectively.
Analysts expect BX’s revenue to decrease 10.9% year-over-year to $11.22 billion for the fiscal year ending December 2023. The company’s EPS for the current year is expected to decline 15.7% from the prior year to $4.36. Shares of BX have plunged 9.3% over the past year to close the last trading session at $88.78.
BX’s poor outlook is reflected in its POWR Ratings. The stock has an overall rating of D, translating to Sell in our proprietary rating system. It also has an F grade for Value. It has ranked #28 out of 35 stocks within the same industry.
Click here to access additional BX ratings (Growth, Momentum, Stability, Sentiment, and Quality).
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
BX shares were trading at $91.58 per share on Tuesday morning, up $2.80 (+3.15%). Year-to-date, BX has gained 25.76%, versus a 14.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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