Looking at 2015, it has not been the most monumental year for a few industries, in particular private equity companies. As a result, Merrill Lynch took it upon itself not only to downgrade a few of these companies, but also to pick a winner out of the group for 2016. The companies highlighted in the report are Apollo Global Management LLC (NYSE: APO), Blackstone Group L.P. (NYSE: BX), Carlyle Group L.P. (NASDAQ: CG) and Ares Management L.P. (NYSE: ARES).

Merrill Lynch moved a few major alternative asset managers (Apollo, Blackstone and Carlyle) to a Neutral rating from Buy due to a less favorable risk/reward this late in the cycle. Although, the firm upgraded Ares to a Buy rating, considering a relatively attractive calculation on fee-related earnings.

The firm noted that while downgrading these companies to Neutral following a weak year never feels good, it didn’t see a sustained catalyst in 2016 that would re-price the stocks higher. That said, it does not see a lot of downside unless the market turns negative.

The long-term growth trends remain attractive for the alternative managers, as their product returns are for the most part superior to other traditional asset classes and firms are well positioned competitively. Merrill Lynch continues to view the long-term structural growth outlook as favorable, despite the cyclical pressures.

While the firm sees attractive structural growth for most firms in the sector (particularly for Blackstone, while Apollo could surprise with strategic transactions), given the cyclical uncertainty, Merrill Lynch is more cautious on firms that overly rely on performance based earnings.

In the report, Merrill Lynch detailed:

Given a few years of strong returns and healthy distributable earnings and distributions, looking ahead we see a less attractive return and distribution outlook given higher market valuations today, uncertainty over growth (especially abroad), and some waning market confidence. As we are later in the cycle, we think the risk/reward is less compelling, given the likelihood for lower returns, less seasoned capital post firms selling many of their seasoned investments made post financial crisis, slower recent deployment (which can hinder seasoning and future distributions), and macro/cycle risks.

Shares of Apollo were trading down 1.7% at $15.44 Tuesday afternoon, with a consensus analyst price target of $24.03 and a 52-week trading range of $15.07 to $25.80. Merrill Lynch now has an $18 price target for this stock, down from $22.

Blackstone shares were trading down 2% at $29.76, within a 52-week trading range of $28.56 to $44.43. The consensus price target is $41.86, and Merrill Lynch now has a $33 price target, down from $40.

Shares of Carlyle were trading down 2.2% at $16.80 and the 52-week trading range is $16.44 to $31.88. The consensus price target of $24.04 is greater than Merrill Lynch’s $20 target, which is down from $23.

Ares was trading up 0.6% at $13.70. It has a 52-week trading range of $13.49 to $21.84 and a consensus price target of $20.00. The new Merrill Lynch target is $19, up from $18.

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