Investors Question “Public” Private Equity

Private equity and hedge funds going public have not had a smooth ride, and as more weigh navigating the choppy waters, investors in such funds are questioning the benefits.

Others waiting in the wings to follow the path of Blackstone Group (BX.N) and Kohlberg Kravis Roberts & Co (KKR.N) include Apollo Global Management, which is planning to move its listing from a private exchange to the NYSE at some point.

Carlyle Group has also been weighing going public for some time, sources familiar with the matter said. A spokesman for the firm said it had “no plans to go public at this time”.

Going public can help firms retain and hire staff, potentially give an exit route for retiring founders and boost the ability to raise money to make acquisitions.

Still, investors in private equity funds are concerned that if a firm decides to go public, management will become consumed with generating fees, quarterly earnings and the company’s daily stock price.

“More transparency could be a good thing,” said Jason Goeller, investment officer responsible for hedge fund investing at New Mexico’s state pension fund, in a recent interview.

However, he said he could be concerned if a firm ended up tending its share price more than its investment business.

“That could open a potential can of worms,” said Goeller. “We would have to get comfort that there would be no conflicts.”

From a share price perspective, private equity and hedge funds that have gone public recently have disappointed.

The aftermath of the credit crisis hurt shares of funds, as financing for new deals dried up, portfolio companies struggled with the recession and fund returns suffered. Shares have in many cases come off their lows as fund performance improves. Still, most private equity and hedge funds shares are trading far below their highs.

Blackstone is trading at a third of its IPO price, and Fortress Investment Group (FIG.N) is worth less than a quarter of its IPO price. KKR, trading around its NYSE listing price, recently said it would pull a $500 million share offer because of market volatility.

Candover Investments (CDI.L), once a leading light of the European private equity industry, was forced to call a halt to new deals earlier this year.

“The general sense is that historically (‘public’ private equity funds) have not done that well, but the question is whether things will be different going forward,” said Josh Lerner, a Harvard Business School professor specializing in private equity. “If you’re inclined to make the case that things will be different, you’d emphasize the point that these are very different entities than pure private equity firms.”


Those that have followed the public route have in part used it to diversify away from being a pure private equity business. Still, investors are skeptical.

“It is hard to see (as an investor in the funds) the benefits that private equity business derives from being attached to a public asset management business,” said one institutional investor who spoke on condition of anonymity.

That person added that it then becomes a game of building assets under management, meaning the interests of private equity firms and limited partners are less aligned.

Another complaint is that the very premise of private equity is that firms add value to portfolio companies away from the stress of quarterly earnings, said one fund-of-fund investor. Taking the private equity firm itself public goes against the essence of that principle, the person said.

Private equity firms aim to buy undervalued companies, restructure them and sell them later at a hefty profit — without the constraints of quarterly reporting and pressure from shareholders.

Still, investors are willing to withhold judgment on private equity firms that pursue a public route.

“No institutional (investor) will say, ‘if you go public, I’m not re-upping you again,'” that investor said.

Such investors are distinct from those who invest in the stocks of listed companies themselves.

“Most investors interested in buying listed vehicles are smaller shareholders looking to diversify away from other asset classes and trying to gain the … profits in the private equity space,” said Antoine Drean, chairman of Triago, a company that helps private equity firms raise capital.


Volatile markets and a struggling economy have not been a source of encouragement and could cause firms to adopt a wait and see approach.

“Is it the right moment to do it? I think private equity is coming back to some extent,” said Drean. “I’m still wondering whether there is a new bubble or not … It seems investors are paying pretty high prices again.”

New York-based Apollo has announced plans to move its shares — currently traded on a private exchange — to the NYSE, and in March proposed offering up to $50 million of shares as part of that, in order to add liquidity. The firm has not stated a time frame for moving the listing.

Carlyle is often cited by investors and observers as one of the most likely to go public. Carlyle’s David Rubenstein, a prominent co-founder, has frequently predicted that private equity firms in general will take the public route.

Firms have also resorted to selling stakes in themselves a means to add liquidity. An investment unit of the Abu Dhabi government bought a $1.35 billion stake in Carlyle Group in September 2007 and a Dubai fund took a $1.26 billion stake in U.S. hedge fund Och Ziff Capital Management Group in October 2007 before it went public. 

This post was co-authored by Svea Herbst, with additional reporting by Simon Meads