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No. of Recommendations: 5
A number of the alts presented at the Goldman Sachs Financial Services conference this week. Here are a few random thoughts I had on their presentations:

(1) Apparently Leon Black and Steve Schwarzmann have lunch each quarter. Wonder who pays. I have not yet been invited. I assume they are both readers of this board, so I'll let it be known that I am open to an invite.

(2) There are still some huge markets out there. Insurance is a huge market that only APO has taken significant advantage of so far. Credit remains a huge market. Real estate/real assets is a huge market. I am not particularly optimistic, but 401(k)s and IRAs would be a huge market.

(3) APO and BX seemed a little more reserved about C-Corp conversion than previously. My expectation is still that both will convert, but my confidence level on that has gone done. I don't factor conversion (or non-conversion) into my investments on these. Need to be comfortable either way.

(4) Leon Black discussed valuation by working from FRE. He mentioned FRE of almost $2, but I use $1.92 for my purposes. At today's prices, the stock is trading at about 14x FRE. Mr. Black said it was trading at 15x FRE and now 12x FRE. Then, incentive fee for free and balance sheet for free.

In discussing valuation, he also said the market doesn't value incentive fees. I think it is true that the market doesn't value incentive fees as highly as FRE. All the valuation write-ups I have seen value it lower. But, I also think that the cyclicality of the incentive fees plays into the incentive fee valuation (or lack thereof). If the incentive fees should be valued at 8x, the question then becomes 8x of what. 8x of the $1.50-$2 Mr. Black says? 8x of the anemic incentive fee of the most recent quarter?

(5) I think the capital light model continues to be under-appreciated. Steve S. made a big deal of it at the BX investor day, and I think he is correct to do so. They can pay out over 80% and grow double-digits. You just don't see that a lot. Either a cash-cow or a fast grower. But, a grower that also throws off cash like that is unusual.

Anyway, returns in the alts haven't been any good this year. The companies I follow still are doing well. I continue to like APO the best. Even though I am critical of excessively discounting incentive fees, I do have to say one of the big things I like about APO is the base of FRE.

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