LP Skepticism Over Buyout Firm IPOs

Private equity firms going public will eventually be viewed like investment banks going public (maybe even with similar P/E ratios), but some of their investors aren’t quite ready to make the leap. The newest skeptic is the California State Teachers’ Retirement System (CalSTRS), which had nearly $11 billion in private equity assets through the end of May.

Christopher Ailman, chief investment officer for CalSTRS, told The Financial Times that alignment of interest between GPs and LPs could weaken as the former begins paying more attention to short-term stock performance than to long-term portfolio value. Not only could this mean hasty exits, but perhaps additional diversification into non-core business segments like M&A advisory, consulting and fund placement work.

“It is a radical departure,” Ailman said. .A different business model and, given the choice, I think [buy-out funds] operate better as private partnerships. This creates a distraction and a potential risk.”

He added that firms like Blackstone and KKR are probably large enough to manage the conflict, but said that he had warned some of its GPs not to list. He didn’t give specifics, but CalSTRS is invested in funds from both Blackstone and KKR. It also is in other public possibilities like Apollo Management, Carlyle Group, Oaktree Capital and TPG (see full portfolio: CalSTRS1.pdf).

It’s worth noting that Blackstone tried to partially manage this conflict in its public offering, by declining to provide quarterly earnings guidance. But that’s really just kicking the can down the road a bit, and it’s possible that more selective LPs – CalSTRS is not really one, given its large amount of allocation dollars – will shun listed firms for private ones (which most of them will remain).

Still, no need to worry for Blackstone. Any cash it loses from traditional LPs it can make up from new overseas capital, or those suckers in the public market.