By Christine Williamson
Managers of hedge and private equity funds may manage alternative investments, but many are joining the mainstream.
Judging by the success of the last eight months of public offerings — including those of Blackstone Group and Fortress Investment Group LLC and Oaktree Capital Management LLC — the markets have formally acknowledged that alternative investment managers have entered the ranks of grown-up public money managers such as T. Rowe Price Associates Inc., BlackRock Inc., Franklin Resources Inc. and Legg Mason Inc.
Sources said the popularity of alternative manager IPOs is testimony to the growth and substantial transformation of hedge fund and private equity managers, from small boutiques run in a laissez-faire manner to substantial firms replete with growth and succession plans, full legal and compliance staffs and massive investment infrastructure.
Hedge fund and private equity managers have become so entrenched in money management that they’ve attracted close attention from Washington.
“When the little niche you belong to becomes the focus of not one but three congressional hearings in one day, people have noticed you. You’re not flying under the radar any more,” said Steven Foresti, managing director and head of the investment research group in the consulting division of Wilshire Associates Inc., Santa Monica, Calif.
New paradigm
Alternative investment consultant Aoifinn Devitt predicted that the current spate of public ownership offerings will result in a new investment paradigm. “These are very large, grown-up, public financial services companies that happen to be alternatives managers,” said Ms. Devitt, a principal at Clontarf Capital, London.
Other sources agree that a new investment company model is being created.
“We view this transformation by hedge fund and private equity managers from private to public company as part of the continuing evolution of the capital markets. Structural changes are inevitable, and this move is inevitable,” said David Hammerstein, principal and chief strategist at investment consultant Yanni Partners Inc., Pittsburgh.
Added Kevin P. Quirk, principal at vendor consultant Casey Quirk & Associates LLC, Darien, Conn.: “I’ve always believed that new, professionally managed alternative businesses were going to emerge because the demand is there both in terms of assets to be managed and doing business with high-quality (institutional-quality) companies.”
Mr. Quirk and Ms. Devitt agreed that more alternative investment companies will likely tap the public for capital.
But Ms. Devitt added: “I think it very much remains to be seen how much activity there will be. Apollo (Management LP) has delayed its planned IPO, listing instead on a proprietary trading system of Goldman Sachs (& Co.). JPMorgan (Chase & Co.) and a number of other groups have resorted to private listings or sales of a stake. I think that the IPO route will be relevant for only the very large ‘brand name’ firms, as other firms simply aren’t well known outside the world of alternative asset investors and I don’t think that there would be sufficient interest (from investors).”
David Tsujimoto, director of portfolio management for alternative investments and head of hedge funds of funds at Russell Investment Group, Tacoma, Wash., thinks more hedge fund and private equity managers will be drawn to listing an ownership stake on private exchanges such as Goldman Sachs’ GS Tradable Unregistered Equity OTC Market and others that are being developed.
Because the disclosure requirements are so much lower in a 144A private placement, Mr. Tsujimoto predicts many alternative managers will emulate Oaktree Capital and, perhaps, Apollo Management, and choose a private listing.
“I think it’s a great development, because the hedge fund managers will be much more focused on performance. I think it will work like listed closed-end funds do. The hot managers with good performance will trade at a premium on the exchanges. Those managers with mediocre performance will trade at a discount to the offering price,” Mr. Tsujimoto said.
Regardless of how many alternative managers decide to sell a stake to the public, sources said arguments about potential downsides for institutional investors, such as principals paying more attention to share price than investment performance or a drop in employee motivation (see “KKR facing a tougher sell,” Pensions & Investments, July 9), are overblown.
Public offerings to date are designed to retain the firm’s principals, align investor interests with those of company management and control conflicts between owners and managers.
And if anything, the increased scrutiny will keep alternative managers on their toes, said Ted Gooden, principal at boutique investment bank Berkshire Capital Securities LLP, New York. “Managers are going to be twice as careful about their performance because if it drops, you are going lose assets, your own personal assets. An IPO only accelerates the rate of attention managers pay to their businesses and growth,” Mr. Gooden said.
Some institutional investors may be concerned about losing an edge in getting information from their hedge fund and private equity managers, he noted.
“In the past, although all investors were treated equally, any (particular) investor could call … to discuss performance issues and any concerns. If a company is public, major performance issues or personnel changes in the offing might have a material affect on the stock price, and this could then be deemed ‘inside information,’” Ms. Devitt said.
When it comes to disclosure about the specific investment strategies by listed managers, the impact will vary, depending on the investment strategy, Russell’s Mr. Tsujimoto said.
“For strategies trading in less liquid or longer-term investments, like asset-backed securities, for example, it’s not a big deal. But it could be for more sensitive, trading-oriented strategies,” Mr. Tsujimoto said.
