EFTA01452571

Deutsche Bank Markets Research North Amer Ica United States Einem:Eat Brokers, Asset Managers & Exchanges Industry Alternative Asset Manager Initiation Strong Cyclical and Secular Trends Should Drive More Outperformance lu nit ilia Cover 3ge of the Alzeinative Asset Managers, BX i:, top pick We initiate coverage of 5 alternative asset managers (the "Alts") with Buys on Blackstone (BX), Carlyle Group (CG), & Oaktree Capital (OAK) & Hold ratings on Apollo Global Mgmt (APO) & KKR & Co (KKR). Overall, these Alts are well- positioned amid favorable cyclical tailwinds & strong secular dynamics, while valuations remain attractive. We favor the more-diversified Alts possessing less earnings variability & good distributable earnings (DE) growth profiles for 2014- 2015; this dynamic favors BX & CG over APO & KKR for now, in our view, & we see 4Q earnings as a positive catalyst upon a better DE outlook for next 1-2 years. We also like OAK's more-traditional asset manager business profile. Valuations still attracti -e as debate on valuing the Alts continues With volatile and less predictable earnings, the market has been reluctant to assign a comparable traditional asset manager P/E on the Alts' carried interest income stream, which accounted for over half of Alt's pretax income over the past 2 years. However, we see limitations in this legacy sum-of-parts valuation approach (valuing fee-earnings at much higher multiples than carried interest) primarily because of the longer-term reliability of carried interest converting into cash distributions for public unit holders. Thus, we prefer to value the Alts on longer-term 'distributable earnings' (DE), which is a proxy for cash flow and the basis for cash distributions to unit holders. On this approach, we think these 5 Alt managers can trade at a median 12-13x P/E on our 2015 DE forecasts, a year from now, which implies about 2 points of multiple expansion and over 15% price appreciation, and about 22% total return inclusive of median 6-7% distribution yields at current price levels. Both cyciEf.ili and themee-, are .ter? posit :,e In the current economic/capital markets cycle, the Alts are likely to increasingly benefit from realizing the value of their long-term investments (from sales via M&A, IP0s, etc.) and distributing more cash to unit holders over 2014-15. Thus, we see a greater convergence of DE and the more volatile mark-to- market-driven economic net income (ENI), as the realization cycle gains momentum in 2014. Asset organic growth rates should remain healthy as strong investment performance track records enable fundraising to outpace outflows from realized distribution to LPs. Key secular trends favoring Alts are 1) rising allocations globally to alternative assets by institutions, and increasingly, individuals, 2) a major competitive advantage in ability to generate patient capital and invest long-term and influence investment outcomes, 3) a greater role for Alts in financing, creating more capital deployment opportunities globally, & 4) increasing concentration of asset flows to the largest Alts, which favors these 5 stocks. These stocks have above-average risk profiles With greater leverage to economy & capital markets, the stocks should maintain higher betas vs. traditional asset managers. Key risks are: 1) a downturn in the US & global economy and market prices, 2) a major slowdown in capital deployment that could cause 2015 earnings to peak out, 3) an inability to narrow P/E gap vs. traditional managers given inherent earnings volatility and complicated financial structures & modeling, and 4) speculation of greater regulatory scrutiny and/or higher taxation on carried interest and/or the Alts' income within their partnership structures. Date 28 January 2014 Initiation of Coverage Brian F3exion. CFA. HIM hi:,' ciugo,.. Company Target Price OAK.N NA to 68.001USD) KKR.N NA to 25.00(USO) BX.N NA to 39.001USD) CG.00 NA to 43.00(USD) APO.N NA to 31.001USD) &son Datae,A• Sank Rating NR to Buy NR to Hold NR to Buy NR to Buy NR to Hold 100 ri , k‘ The Blackstone Group 18/C1405030.52 Sarno 0/anewSire Buy t`,011f.i;fl Apollo Global Management Hold (APO.N1.USD31.74 2012A 2013E 2014E EPS (USD) 3.82 4.65 2.50 P/E (xl 3.7 7.0 12.7 EV/EBITDA (xl The Blackstone Group IBX.NLUS030.52 Buy 2012A 2013E 2014E EPS (USD) 1.77 2.56 3.09 P/E (x) 8.1 11.9 9.9 EV/EBITDA lxl - - - The Carlyle Group MC.001,1.6035.72 2012A 2013E Buy 2014E EPS (USD) 2.04 2.84 2.70 P/E (x/ 11.8 12.6 13.2 EV/EBITDA (xl KKR & Co. (KKR.N).USD24.00 Hold 2012A 2013E 2014E EPS (USD/ 2.90 2.87 2.33 P/E (al 4.8 8.4 10.3 EV/EBITDA Oakum Capital Group (OAK.NIMSD57.36 2012A 2013E Buy 2014E EPS (USD) 4.06 6.06 4.36 P/E (xl 9.7 9.5 13.2 EV/EBITDA lxl seem Aar Sr* Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/0412013. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SONY-0 109687 SDNY_GM_00255871 EFTA01452571