Ariel Investments LLC, one of Chicago's biggest mutual fund money managers, is getting into private equity for the first time, buying stakes in KKR & Co. LP and Blackstone Group LP as the financial sector and equity markets slumped last month.
Ariel CEO John Rogers Jr. said the firm decided to invest in two of private equity's top firms because he expects them to profit when the economy recovers and they cash out their holdings by taking them public. In addition, both are strong franchises that were trading at attractively low prices, Ariel portfolio manager John Miller added.
“If you have faith that an economic recovery will happen eventually, KKR will be a prime beneficiary of it,” Mr. Rogers said in an interview; he noted the same is true for Blackstone.
With corporate valuations relatively low and rock-bottom interest rates allowing less expensive financing, private equity firms should be able to make smart acquisitions at good prices, Mr. Miller said.
The two managers wouldn't say how many shares Ariel bought or at what prices, but Mr. Miller said the stock makes up less than 1% of the firm's portfolios. Still, the firm is likely to add to the positions under its long-term investor motto, he noted. Ariel holds a stake on average for five years.
Blackstone and KKR, both based in New York, are part of the alternative asset management sector, which can include hedge fund, real estate and other non-stock investing.
“The whole sector of alternative investment is a sector that is very interesting to us,” Mr. Rogers said in the interview.
Another private equity titan, Carlyle Group LP, apparently agrees that investors will see the value of the industry. On Tuesday, the Washington-based company filed with the Securities and Exchange Commission for an initial public offering. Blackstone sold shares to the public for the first time in 2007, and KKR went public last year.
Still, Josef Schuster, who researches IPOs for his Chicago-based IPOX Schuster LLC, said private equity IPOs have generally underperformed the market. He also noted that private equity companies are likely to have a tougher path to recovery because the weak IPO market is making it harder for them to sell publicly traded shares in the private companies they own.
“Right now, I think they will tread water for a while,” Mr. Schuster said.
Blackstone's daily closing stock prices were between $11.53 and $16.61 in August, down at least 15% from a high of $19.63 in April. KKR shares traded between $10.50 and $14.14 that month, down at least 26% from a high of $19.16 in April.
“Given the significant market decline we've experienced, it has allowed us to initiate positions in names that we had deemed somewhat expensive,” Mr. Miller said.
Ariel also “added aggressively” to its existing position in New York-based Lazard Ltd., Mr. Rogers said. That's another financial services firm that has seen its stock decline substantially, dropping about 40% since February.
While the two Ariel managers wouldn't point to any stock exits the firm has made recently, Mr. Rogers said Ariel has been trimming some of its positions as well.
Lynne Marek is a reporter with Crain's Chicago Business, a sister publication of Pensions & Investments.