Potential sales by some of the leading names in the buyout world might be great for their principals’ pocketbooks, but not so good for the firms’ institutional investors.
With such powerhouse names as Blackstone Group and Apollo Management LP looking to sell stakes in their firms in the public market or privately to investors, that issue is surfacing.
For one thing, going public could shift the alignment of interests that now exists between a firm and its investors.
David Swensen, chief investment officer of Yale University’s $18 billion endowment fund, New Haven, Conn., said initial public offerings of buyout firms create a disconnect between incentive compensation and fund performance. If the firms are public, general partners would be getting compensation based on stock performance, he said.
“The question of alignment of interest is key,” said Larry Schimmel, director of pension policy and deputy general counsel, Office of the Public Advocate for the City of New York.
“You have to feel confident the firm will be there to fulfill its obligations,” said Mr. Schimmel, who sits on the board of trustees of the $37 billion New York City Employees’ Retirement System as designee of Public Advocate Betsy Gotbaum.
The system is an investor in Blackstone funds, and top executives have addressed trustees’ fears about the firm’s plan to raise $4 billion in an IPO, he said.
Less access
Another problem is that institutional investors might have less access to future funds and co-investment deals.
James Sullivan, partner and head of the private equity group in the New York office of Alston & Bird, said: “The Blackstones of the world would not need as much cash for the next fund from the limited partner because the public markets provide a source of capital that they can tap without the same requirement to return the money in a fixed time horizon. It alleviates the need for money with strings attached.”
Private equity firms might use proceeds from public offerings to launch new funds, reducing the amount of capital needed from limited partners, Mr. Sullivan said.
Institutional investors might also have a tough time investing in private equity when the size of the firms’ substantial fees are spelled out in public filings, said Michael J. Napoli, chairman of Absolute Return Group, Beverly Hills, Calif.
“These firms are highly leveraging their investments resulting in very good returns for their investors and astronomical fees for themselves,” Mr. Napoli said.
For this reason, “after careful consideration I think that you will see more firms deciding to remain private, taking in private outside investors,” he said.
Even when private equity firms do not go public, but launch funds on the public market like Apollo Management, the Carlyle Group and Kohlberg Kravis Roberts & Co have done on Euronext Amsterdam, it can be bad news for institutional investors. (In the U.S., KKR and Apollo filed business development companies and KKR has a real estate investment trust.)
While public sales of private equity firms are new in the United States, selling slices of firms privately to investors is not. The $241.7 billion California Public Employees’ Retirement System, Sacramento, bought a 5.5% stake in The Carlyle Group in 2001 for $175 million, said Clark McKinley, spokesman. The same year, CalPERS bought a $60 million stake in TPG Ventures, a subsidiary of TPG that invests in venture capital.
“The jury is still out whether it is a better business model to be public,” said Brian M. Powers, chief executive officer of Hellman & Friedman, the San Francisco private equity firm.
