I take (1) carry eligible capital, multiply by (2) estimate what returns should be, eg adjusted downward a bit because current private markets multiples are kind of elevated, multiply by (3) estimate of the average carry rate and (4) shareholder take rate, then finally I tax it.
Then there's a range around that for the base/downside case.
I push that number out by about 5 years given the time it takes for funds to season and enter the capital return period. So for example if you have $300b carry-eligible capital, I assume you'll be generating free cash flow from carry on that capital in year 5, not today, since the funds have to invest the money, fix the assets, then sell them. I then grow carry thereafter with the existing AUM growth, lagged by 5 years. So if this year’s AUM growth or growth in carry eligible capital is 10%, from $300 to $330b, then in 5 years I assume the carry-based free cash flow grows by 10%.
I used to do a fund by fund analysis but decided it was an exercise in false precision. It's also hard to maintain and didn't seem worth the time.
I’m guessing you are looking at what kind of valuation the sell side puts on carry. They are all wrong, well mostly. Their underlying assumption is that carry is more uncertain than fees and hence deserves a lower price. The reality is carry is worth just as much because the two have the same driver. For example, if investment returns are poor for an extended period, then AUM growth will slow because nobody wants to invest with a shitty manager. Investment performance generates both fee growth and carry. Carry volatility, like all volatility, is both upside and downside. So for example if this year funds are marked down against falling public market comps (like the S&P 500 has fallen, etc.), they will get marked back up again in a year or two. So in the worst case, volatility just means the carry you get is just pushed out by another year or two.
I think at best my estimated timing for carry is too aggressive for some funds and managers, and 5 years is too short, especially for longer duration infrastructure funds and for a European waterfall structure for carry payout.
My estimates generally come out higher than most sell-side estimates, but I don't think I'm wrong. When I look at their justifications for the multiples, none of them actually really match the economic drivers of the business, whereas my method does.
If people want to sell me carry for a 5x multiple, that’s their mistake to make.
I analyzed this multiple based on the initial acquisition of Oaktree by Brookfield. I do not know any other case when it was possible to calculate carry’s multiples directly. The result was in low to mid single digits. Later on Marc Rowan mentioned single digit multiples in a couple of his presentations. Even Brookfield, known for its hype, values carry at 10x.
Ah yeah, I get what you're saying. I don't use a precedent-transaction-based approach since the business is going to reinvest or distribute the cash flows rather than be sold. I also I don't believe Brookfield paid a fair price for Oaktree, and believe they got a good deal for the asset.
I know my base case values for carry tend to look higher than others and I'm alright with that. I've never paid anywhere near what I felt was fair value for this business, either.
Keep in mind when you look at Brookfield management's numbers, they value the steady-state carry at that multiple, not the current carry.
The difference between my estimate and Brookfield's internal analysis is also $2/sh, 5% of the price, and about 3% of intrinsic value. I'm OK with my calculation, maybe it's high, maybe it's not, but this isn't material within the context of a business where I think I paid ~50% of intrinsic value in 2023, and then added for a 35-50% discount this year. Mid-single-digit error is more than fine with me considering the price vs. value gaps we search for. If I put $0 into the DCF as the value for carry, the stock's still plenty cheap.
I loosely follow valuations for all Big 6 alt managers and own 3 - APO, OWL, and BX. They are all moving in sync, and their valuations are similar, though not precisely the same. My choice is based more on business models, though I admit that KKR is very comparable to the ones I own. Brookfield is comparable too, but their filings are terrible. You cannot value subs based on their filings (except for BAM) and have to trust the supplementary reports for BN. When you say that you bought KKR at the discount, I am nearly confident that one could buy APO or BX at similar discount at the same time.
Another thing I am slightly skeptical about is GA valuations. I am using similar valuations for Athene which is better than GA - I once compared them directly.
How did you come up with multiples for carry? They seem very aggressive to me.
DCF is the main tool for everything we do.
I take (1) carry eligible capital, multiply by (2) estimate what returns should be, eg adjusted downward a bit because current private markets multiples are kind of elevated, multiply by (3) estimate of the average carry rate and (4) shareholder take rate, then finally I tax it.
Then there's a range around that for the base/downside case.
I push that number out by about 5 years given the time it takes for funds to season and enter the capital return period. So for example if you have $300b carry-eligible capital, I assume you'll be generating free cash flow from carry on that capital in year 5, not today, since the funds have to invest the money, fix the assets, then sell them. I then grow carry thereafter with the existing AUM growth, lagged by 5 years. So if this year’s AUM growth or growth in carry eligible capital is 10%, from $300 to $330b, then in 5 years I assume the carry-based free cash flow grows by 10%.
I used to do a fund by fund analysis but decided it was an exercise in false precision. It's also hard to maintain and didn't seem worth the time.
I’m guessing you are looking at what kind of valuation the sell side puts on carry. They are all wrong, well mostly. Their underlying assumption is that carry is more uncertain than fees and hence deserves a lower price. The reality is carry is worth just as much because the two have the same driver. For example, if investment returns are poor for an extended period, then AUM growth will slow because nobody wants to invest with a shitty manager. Investment performance generates both fee growth and carry. Carry volatility, like all volatility, is both upside and downside. So for example if this year funds are marked down against falling public market comps (like the S&P 500 has fallen, etc.), they will get marked back up again in a year or two. So in the worst case, volatility just means the carry you get is just pushed out by another year or two.
I think at best my estimated timing for carry is too aggressive for some funds and managers, and 5 years is too short, especially for longer duration infrastructure funds and for a European waterfall structure for carry payout.
My estimates generally come out higher than most sell-side estimates, but I don't think I'm wrong. When I look at their justifications for the multiples, none of them actually really match the economic drivers of the business, whereas my method does.
If people want to sell me carry for a 5x multiple, that’s their mistake to make.
I analyzed this multiple based on the initial acquisition of Oaktree by Brookfield. I do not know any other case when it was possible to calculate carry’s multiples directly. The result was in low to mid single digits. Later on Marc Rowan mentioned single digit multiples in a couple of his presentations. Even Brookfield, known for its hype, values carry at 10x.
Ah yeah, I get what you're saying. I don't use a precedent-transaction-based approach since the business is going to reinvest or distribute the cash flows rather than be sold. I also I don't believe Brookfield paid a fair price for Oaktree, and believe they got a good deal for the asset.
I know my base case values for carry tend to look higher than others and I'm alright with that. I've never paid anywhere near what I felt was fair value for this business, either.
Keep in mind when you look at Brookfield management's numbers, they value the steady-state carry at that multiple, not the current carry.
The difference between my estimate and Brookfield's internal analysis is also $2/sh, 5% of the price, and about 3% of intrinsic value. I'm OK with my calculation, maybe it's high, maybe it's not, but this isn't material within the context of a business where I think I paid ~50% of intrinsic value in 2023, and then added for a 35-50% discount this year. Mid-single-digit error is more than fine with me considering the price vs. value gaps we search for. If I put $0 into the DCF as the value for carry, the stock's still plenty cheap.
I loosely follow valuations for all Big 6 alt managers and own 3 - APO, OWL, and BX. They are all moving in sync, and their valuations are similar, though not precisely the same. My choice is based more on business models, though I admit that KKR is very comparable to the ones I own. Brookfield is comparable too, but their filings are terrible. You cannot value subs based on their filings (except for BAM) and have to trust the supplementary reports for BN. When you say that you bought KKR at the discount, I am nearly confident that one could buy APO or BX at similar discount at the same time.
Another thing I am slightly skeptical about is GA valuations. I am using similar valuations for Athene which is better than GA - I once compared them directly.