Blackstone, Carlyle CFOs Say LBO Firms Are Undervalued

The finance chiefs of the world’s two biggest buyout groups said the stocks of private-equity firms will benefit as public investors gain more understanding of their earnings.

“I still think that the value of carry is undervalued in the market,” Adena Friedman, Carlyle Group LP’s departing chief financial officer, said yesterday at the inaugural Bloomberg CFO Conference in New York, referring to carried interest, or the share of investment profits collected by buyout firms.

Blackstone Group LP (BX) CFO Laurence Tosi echoed Friedman’s comments when he also spoke at the conference, which was sponsored by Bloomberg Link, a division of Bloomberg LP. Tosi said the valuation discount of the largest alternative-asset managers to traditional stock and bond fund companies “is just not sustainable” and will improve over time.

“The story hasn’t been fully told and there’s a long way to go,” Tosi said.

Friedman, who started her career at Nasdaq OMX Group (NDAQ) Inc. in 1993 and became its CFO in 2009, will return to the stock-exchange operator on June 12 as president of global corporate, information and technology solutions, New York-based Nasdaq said in a statement last week. She will report to Chief Executive Officer Bob Greifeld, according to the statement.

Friedman, 44, joined Washington-based Carlyle in 2011 and helped guide the alternative-asset investor through its May 2012 initial public offering, when it listed its shares on the Nasdaq stock exchange. The shares have gained 38 percent since then, through yesterday’s close.

Profits Surge

Blackstone hired Tosi, 46, in 2008 from Merrill Lynch & Co., where he was a managing partner. Blackstone earned a record $3.5 billion in economic net income, a measure of realized and unrealized profits that excludes some costs, in 2013 while its stock more than doubled.

The firm oversees $272 billion in private-equity investments, real estate, credit assets and hedge funds, the most among peers. It was founded in 1985 by Steve Schwarzman, the CEO, and Peter G. Peterson, who retired in 2008.

Carlyle benefited by not being the first private-equity firm to go public, Friedman said, because it took advantage of greater investor understanding of the leveraged-buyout business and it was able to time the offering with a market upswing. Fortress Investment Group LLC (FIG) and Blackstone completed their IPOs in 2007 and are trading below their IPO prices.

Fortunate Timing

“We were fortunate to wait a bit,” Friedman said. “The economic environment was a better one. The other firms paved the way of trying to understand how to interpret our financial results and made it a lot easier for us.”

Friedman said she’s eager to take risks as president of Nasdaq, where she will be responsible for profits and losses in a large segment of the company. Her knowledge of Nasdaq’s evolution will help her in the role, she said.

“As I said to the founders, after five years of being a risk mitigator, I’m kind of ready to be a risk taker again,” Friedman said, referring to Carlyle founders Bill Conway, Dan D’Aniello and David Rubenstein. “I understand it intimately,” she said of Nasdaq’s history.

Carlyle manages $199 billion in private-equity investments, real estate, credit assets, hedge funds and other alternatives to stocks and bonds, making it second in size to New York-based Blackstone. The firm said Curtis Buser, the chief accounting officer, will assume Friedman’s responsibilities until it finds a replacement.

Friedman said Glenn Youngkin, Carlyle’s chief operating officer, was her “foil” and best partner at the firm, teaching her the business of LBOs and answering her questions. Youngkin, who is set to become co-president next month, is considered a top candidate for a CEO role at the firm, a title currently shared by Conway and Rubenstein.

To contact the reporter on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net Josh Friedman, Pierre Paulden

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