DEALTALK-Investors question ‘public’ private equity

* Investors concerned that interests stay aligned

* Share price, focus on fees a concern, say investors

By Megan Davies and Svea Herbst

NEW YORK/BOSTON, Aug 23 (BestGrowthStock) – 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 [APOLO.UL], which is
planing to move its listing from a private exchange to the NYSE
at some point.

Carlyle Group [CYL.UL] 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. [ID:nLDE6071SZ]

“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.”

DIVERSIFICATION, GROWTH

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.

WAITING IN THE WINGS

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.
(Reporting by Megan Davies and Svea Herbst; Additional
reporting by Simon Meads in London; Editing by Steve Orlofsky)

DEALTALK-Investors question ‘public’ private equity