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Private Equity Stock Review, Monday, 3/29/2010.

Los Angeles, CA 55..76F Sunny.
Chicago, IL, 34..50F Sunny.
Port Jefferson, NY, 49..54F Rain. 198.5
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1. KKR to Launch IPO.
2. WSJ on Private Equity.
3. Interview with Powerful Investment Banker.
4. Disclaimer.

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Private Equity Stock Review
http://privateequitystockreview.ning.com/

1. KKR to Launch IPO.

KKR is filing to go public* on the NYSE, this may bring the whole group -- back into the limelight. Or maybe we should say this could be the beginning of the group, getting some limelight, because visibility-wise, they are still very much in the shadows. The press really never reports on them (until events like KKR going public happen), we know of no brokers talking about them and lastly the group as a whole can actually be moved much, much higher with retail interest -- because combined, the market capitalization of the group is minuscule.

As we've mentioned before, we'd much rather (in bull markets) own a mutual fund or hedge fund manager's shares, than give our money to a mutual fund or hedge fund manager.

Here is our Watch List:

Rodman & Renshaw (RODM) $3.98 up 302%
Och-Ziff (OZM) $$15.04 up 141%
The Blackstone Group (BX) up 84%
Fortress Group (FIG) $$4.07 up 80%
MVC Capital (MVC) $13.65 up 71% (can you imagine)
KKR Financial (KFN) $8.38 up 34%
GLG Partners (GLG) $3.22 up 29%
Ares Capital (ARCC) $$14.81 up 11%


When we launched the Private Equity Stock Review, our big picture reasoning for the launching the site (aside from getting to meet-n-greet, a whole bunch of nice hedge fund guys over cocktails) was a triple barreled valuation proposition or what we like to call "TBV" for short !

Most of you should be aware of what's called a double barreled valuation proposition, or "DBV."

DBV traditionally refers to buying a stock whose shares you believe can go up due to both rising earnings AND a rising PE ratio. Let's say a stock is selling at $10 and earning $1.00. Next year you expect earnings to rise to $1.20, so normally you would expect the shares to trade to $12 (maintaining a PE of ten). Now lets say you expect the PE ratio to rise to 20. In this case the shares would rise to $24 ($1.20 x 20). That's the double barrel.

Here's how TBV works, because we're sure you're dying to know.

As with DBV, you have an expectation of rising earnings and a rising valuation. But what's different with Private Equity firms (and firms like Rodman & Renshaw RODM, in particular) is that since they are more of an "investing" company, than they are an "operating" company -- we can all benefit greatly by investing in them during bear markets, while they themselves are investing in a bear market. It's genius to say the least.

(The pattern not to lose you, is to invest in a bear market and own during a bull market.)

We believe more people "knowing" about the group, accounts for only a small portion of the group's recent performance. Meaning we think that there is still huge potential for the group, if you can look out five years. And again, the valuation of the entire group combined is small. The WSJ article below says:

Chris Kotowski, an analyst at Oppenheimer & Co., says the industry is starting to emerge for the first time as a distinct sector on Wall Street. "Much like when investment banks and REITs first started going public," he wrote in a recent note, "the private equity companies are currently seen as "one-off" oddities, with unfamiliar accounting and no trading history. This should change with time.... We think it's still early, but that the potential is considerable."

(We could call that a fourth barrel, but lets not go there.)

Follow this mostly hypothetical bouncing ball, for an explanation of what we like about the group.

#1. Fortress Group (FIG), despite being run by some of the brightest folks on Wall Street, falls from $35 (spring of 2007) to $2.25. This is good for us, mainly because we didn't buy at $35 and so we don't have to wait until 2020 to break even. (Not that we would ride anything from $35 down to $2 anyway. We added FIG to the Watch List on 1/7/09 at $2.25.)

FIG Chart: http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=fig...


#2. Fortress sees a company (lets call it Down Auto Parts) it would like to invest in the spring of 2007. But Down Auto thinks the $250 million offer is $50 million to low and manages to battle Fortress and stay independent. They all celebrate winning their independence from the "evil" New Yorkers that night (who would presumably slash and burn).

#3. In the summer of 2008 Down Auto starts to go down and so does its sales and earnings and they start slashing expenses.

#4. Things start to get desperate by the fall of 2008 and they do what would have been thought "unthinkable" only 16 months earlier -- the board decides to call Fortress for help.

#5. As much as Fortress would like to help Down Auto in the fall and winter of 2008 (let's call it a new "post-no" valuation of $100 million) Fortress is having problems of its own and not only can't they raise new funds, they actually have to bar the doors -- to prevent their own outside investors from getting their money back. It was a spooky time.

#6. When the market bottoms (at least perceptions of...to some) in March of 2009, FIG trades as high as $8. While it doesn't stay there, what it does do is break the air of desperation that was surrounding the entire group and that was prompting some "less then forward" thinkers in the press, to predict that hedge funds and private equity were a thing of the past (which is exactly the time to buy).

#7. In the fall of 2009 people are feeling good again (about equity investing) and so the head of investing picks up the phone and calls Down Auto. While things eventually will (may) turn around for Down Auto, they have just filled their last safety boat and violin players have taken their position at the Captains' station. Despite the market recovery, funds available for investing in companies like these are 10% of what they used to be. Fact is fact.

Good news for Down Auto, Fortress has called. Bad news for Down Auto, Fortress has called. So Fortress while rebuffed a couple years earlier at $250 million, it now gets to do some "vulture style" investing and picks up Down Auto for a $50 mere million. What will Fortress get, when it wants float Down Auto back to the public markets 5 years from now ? Only time will tell, but you get the point.

This then, is what the triple barrel is all about.

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2. WSJ on Private Equity.

Great article as is usual, from the Wall Street Journal (a guiding light for most of our life). There are a couple of "conceptual" mistakes though, which leads them to conclude that "...all but the most adventurous private investors should probably look elsewhere."

Their list of problems with the group:

1. "Just look at the record."

"Those who invested in Fortress when it went public have so far lost three-quarters of their money. In the first two years after the offering, the stock plummeted 95%."

(Well that's like saying it is a bad idea to buy Apple Computer, because it fell from $34 to $7 in year 2000. The idea wasn't bad, the timing was.)


3. "Do you really need more boom and bust in your life? The corollary of this is that the best time to invest in these types of stocks is during the depths of a panic -- which is precisely when you can least afford to."

(Well duh, that's exactly when you're supposed to. Would "common-sense" suggest buying stocks at the peak of enthusiasm -- which is precisely when you can most afford to ? We think that is the sure recipe for disaster.)

4. "...it's always dangerous to invest in something you don't fully understand inside and out."

(We understand the logic here, but that would leave your choice of investments to about 5% of what is available, if that. Long time subscribers know our opinion is you don't have to be a Doctor to invest in Biotech and you don't have to be an Algorithmic scientist to invest in Internet stocks. In fact you can do better in Biotech and Internet than the Doctors and Scientist (easily we might add) by following the simple rules of diversification, cutting your losses short and letting your winners run.

We feel you can buy "whatever" you want, regardless of your understanding of the company or industry. What is important, is what you do AFTER you buy it. That is what needs to be understood inside and out.

5. "But the fifth and final problem with investing in these firms may be even more fundamental. Private equity is too crowded."

(Again, we understand the logic, but in reality -- the funding world "outside" of private equity is (was) ten times larger and it's all but disappeared. And on top of that, the valuations being half of what they have to pay versus a couple years ago, leads us to believe the ground for finding new investments is very fertile indeed. Just give it time.)

Oh and not to state the obvious caution, if the market turns around and head back to 6000 like Prechter is predicting, run for the hills.

(See Prechter calling this the "biggest bubble in history" at our bear site: http://viciousshortseller.ning.com/ )

WSJ Article:

http://finance.yahoo.com/banking-budgeting/article/109182/private-e...

Also In The Wall Street Journal

http://online.wsj.com/article/SB10001424052748704131404575117304074...

KKR In the Financial Times

http://www.ft.com/cms/s/0/67c52f04-2e40-11df-85c0-00144feabdc0.html

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3. Interview with Powerful Investment Banker.

In the past year since we've launched the Private Equity Stock Review, we've had the opportunity to speak to some of the most amazing (and wealthy) private equity fund managers. And the fun thing, is when we began to speak to them (January of 2009) it is was when things really looked the bleakest. Some of the guys we spoke to soon later lost their jobs (and have since rebounded better than Michael Jordan at his finest).

Also interesting was the fact that we got to speak to them as (in hindsight) the market rebounded. We spoke to some folks at Rodman & Renshaw (RODM) when the stock plunged to $0.20 in March of 2009 -- when no one, nowhere had any job (analyst, fund raiser, investment banker, portfolio manager) which could even remotely be defined at "secure." And then we had another chat when it was trading at $1.00 and another chat when it was trading at $2 (a ten fold increase) and when it was trading at $5. The change in attitude was just amazing ! Guys who once had taken their office art down, were now once again Kings of their universe.

Rodman Chart: http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=rod...


As for getting "non-insider" tips (a run of the mill, what do you think type conversation) from insiders, there wasn't a guy at any one of these firms (or publicly traded broker-dealer) who could look you straight in the eye and say "jump all over this stock, it's a screaming bargain." Not one. They were scared and they had good reason to be, their world was about to end.

But that is exactly what "buy low -- sell high" is all about. Now many of these stocks are 300-400% higher. Buy low, sell high is easy to say, but hard to do. Especially when you see your friends liquidating their Central Park condo, handing the keys to the Lambo back to the dealer and desperately trying to punt their "interest" in a Cessna ! Just try selling a fractional interest in a Cessna in the first half of 2009. Ah sure.

Jayme Kurtyka, Managing Partner, Resource Holdings. From Technology Investment Banker to Real Assets Investment Banker.

In any event, one of the most impressive and powerful investment bankers we had a chance to speak to was a fellow named Jayme Kurtyka from Advanced Equities out of Chicago. They are known in the industry as the "venture capital investment bank" because they specialize in late-stage private equity finance for the U.S. technology sector. They rose to prominence as investment firms that serviced the Silicon Valley disappeared. Now they serve as a strategic co-investor with some of the world's leading venture capital firms with a goal of building and realizing maximum shareholder value.

The firm has raised billions for start-ups previously backed by industry leaders like Kleiner Perkins Caufield & Byers, Benchmark Capital, New Enterprise Associates and Vinod Khosla. Advanced Equities was named as the nation's fastest growing privately held brokerage firm by Inc. magazine in 2006. In 2007, Advanced Equities raised $600 million and near $1 billion in 2008. Tier-one venture backed clean-tech companies Mr. Kurtyka had a key role in financing include Bloom Energy, Altra Biofuels, Cilion, Range Fuels and Suniva. Silicon Valley type companies he was instrumental in financing included Infera, RMI, Pergrine Semiconductor, eAsic Corp and Foveon.

What makes our interview (which we will post later in the week) most interesting is that Mr. Kurtyka has left his high ranking position at Advanced Equities to form Resource Holdings, LLC which is designed to take advantage of what he describes as a; "higher than historically norm" pending era of inflation.

So think about that. A technology genius, flipping into hard assets and real assets like timber and shipping. Very interesting.

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go public* (actually transfering its listing from Euronext Amsterdam)
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Going Concern Statements.
We would like to point out that the majority of companies listed on the
OTC Bulletin Board have factors which create an
uncertainty about the their ability to continue as a going concern. These
concerns are typically related to financing (or lack of), competitive
environments, lack of operating history and operating at loss levels which
is typical of most start-ups.
These statement can usually be found in their most recent 10Q filings and
typically you don't have to dig to far down past the financial tables. We
like to use http://www.pinksheets.com for quick and easy access to SEC
filings. We think it would be wise for most investors to assume that all
companies listed on the OTC Bulletin Board (and many on NASDAQ) have going
concern issues.
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