Since last year, private equity companies have been under pressure due to high benchmark interest rates and stagnant asset valuations. Private equity firms could remain under pressure due to higher borrowing costs, lower valuations, and below-par investment returns in the near term.
Amid this backdrop, avoiding fundamentally weak stocks, The Carlyle Group Inc. (CG) and Prospect Capital Corporation (PSEC) could be wise.
Before diving deeper into their fundamentals, let’s discuss why the private equity industry will likely remain under pressure.
Despite the geopolitical tensions and high inflation, the private equity industry started 2022 on a positive note thanks to the low cost of borrowing. During the post-pandemic bull market, the value of global private equity deals crossed $1 trillion for the first time.
However, with the start of aggressive interest rate hikes by central banks worldwide last year, the industry witnessed a sharp decline in deals, exits, and fund-raising while banks pulled back from leveraged transactions.
The struggles of the private equity industry can be gauged from Bain & Company’s Global Private Equity Report 2023, which showed that approximately $3.7 trillion of dry powder was looking to be deployed globally at the end of 2022. Moreover, PitchBook’s data shows that at least 18 private-equity-backed companies filed for bankruptcy in the United States during the first five months of 2023.
As financing has become expensive with continued increases in interest rates, the near-term prospects of private equity firms look bleak.
Let’s take a closer look at the fundamentals of these stocks.
The Carlyle Group Inc. (CG)
CG is a global investment company that operates through three segments: Global Private Equity, Global Credit, and Global Investment Solutions.
In terms of forward EV/EBITDA, CG’s 15.79x is 44.7% higher than the 10.91x industry average. Likewise, its 6.12x forward EV/S is 112% higher than the 2.89x industry average. Its 11.96x forward non-GAAP P/E is 22.7% higher than the 9.75x industry average.
CG’s total revenues for the first quarter ended March 31, 2023, declined 45.7% year-over-year to $859 million. Its net income attributable to CG declined 82.4% year-over-year to $100.70 million. Its EPS came in at $0.28, representing a decline of 82.2% year-over-year.
Analysts expect CG’s EPS and revenue for the quarter ended June 30, 2023, to decline 42.8% and 29.3% year-over-year to $0.67 and $821.42 million, respectively. Over the past year, the stock has declined 3.5% to close the last trading session at $34.29.
CG’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It is ranked #32 out of 35 stocks in the D-rated Private Equity industry. It has a D grade for Growth. Click here to see the other ratings of CG for Value, Momentum, Stability, Sentiment, and Quality.
Prospect Capital Corporation (PSEC)
PSEC is a closed-end investment company. The company is also a financial services company that primarily lends to and invests in middle-market privately held companies.
In terms of forward EV/Sales, PSEC’s 7.49x is 159.4% higher than the 2.89x industry average. Likewise, its 3.10x forward Price/Sales is 27.1% higher than the 2.44x industry average.
For the third quarter ended March 31, 2023, PSEC’s net loss applicable to common shareholders came in at $108.95 million, compared to a net income applicable to common shareholders of $157.16 million in the prior-year quarter. Its NAV per common share declined 12.3% year-over-year to $9.48.
For fiscal 2024, PSEC’s EPS and revenue are expected to decline 5.8% and 0.6% year-over-year to $0.82 and $841.83 million, respectively. Over the past year, the stock has declined 13.6% to close the last trading session at $6.53.
PSEC’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, equating to a Sell in our proprietary rating system.
Within the same industry, it is ranked #30. It has a D grade for Quality. To see the other ratings of PSEC for Growth, Value, Momentum, Stability, and Sentiment, click here.
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CG shares were trading at $34.92 per share on Friday morning, up $0.63 (+1.84%). Year-to-date, CG has gained 19.67%, versus a 20.33% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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