Should the market get ready for large private equity firms to gobble up the smaller ones? That is one hint suggested in a research report by Craig Siegenthaler of Credit Suisse. The report is actually a positive one on private equity giant Carlyle Group L.P. (NASDAQ: CG), but the report has positive implications for the likes of Blackstone Group LP (NYSE: BX) and other private equity giants.

First and foremost, Siegenthaler did not predict that there would be large mergers in the private equity arena. The suggestion is that firms like Carlyle and Blackstone would go out and make smaller strategic acquisitions of private equity firms. These would be of smaller players that are generally too small to come public and/or where the principals running these firms are getting older.

When Siegenthaler asked what the market missing, he said:

We think Carlyle does not get proper credit for its future distributable earnings power (and dividend distributions) that the company will generate over the next few years given its $2 billion of net accrued (unrealized) performance fees. Longer-term, we think Carlyle’s $38 billion of dry powder positions its business defensively for future market dislocations, and supports a high level of free cash flow in the 2017 to 2021 time frame. We also think there could be future M&A opportunities for Carlyle, given the number of smaller alternative asset managers that have aging principals, and are probably too small to become public companies. We remain hopeful that Carlyle can produce a product for the 401k channel that could garner significant fee paying assets by providing long-term focused retail investors access to the strong performance of its less liquid product offering.

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Another opportunity named was that Carlyle could buy an insurance company, a move that could provide it with a stable source of long-term capital. Siegenthaler thinks the alt-insurance industries are in the early stages of consolidation, with previous acquisitions/ventures (APO-Athene, GreenLight, ThirdPoint, Highbridge) still representing a minority of the alternative asset management industry.

Craig Siegenthaler further said:

We view the current investing environment as challenging’ given where asset valuations are across most asset classes — especially in credit. The monetary stimulus from the key central banks (US, Euro, Japan) has caused credit valuations to be full to expensive in most markets — except where Dodd-Frank/Basel have forced a bank exodus (infrastructure, energy, middle market). Valuations are broadly more attractive in the US than Europe, given the health of the underlying economy, lower default rates, and a more appropriate valuation broadly.

A serious issue in the space of private equity is that barriers to entry are high and expanding in the alternative asset management sector. Strong historical performance and an established brand are helping Carlyle and the other large alternative managers build higher barriers to entry across the industry. Siegenthaler believes that key private equity clients are becoming more likely to allocate increased capital to the larger and established players rather than allocating funds to new entrants. Another strength is that Carlyle has met with the largest global investors for over 20 years and that it takes a very long time to establish the type of relationships that it and the other larger asset managers have with the largest pension plans, endowments and sovereign wealth funds.

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Is this a case for mergers in private equity ahead? Perhaps. At a minimum, at least a 401(k) product may be coming that would allow the public to get in on the action. Hopefully that isn’t so late to the game that it signals a top.

Siegenthaler rates Carlyle units as Outperform and he has a $36 price target. The current price is $29.15, and the consensus price target is $35.25. Its 52-week range is $26.34 to $39.38.

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