Publicly traded private equity

Publicly traded private equity (also referred to as publicly quoted private equity or publicly listed private equity) refers to an investment firm or investment vehicle, which makes investments conforming to one of the various private equity strategies, and is listed on a public stock exchange.

This article is about investments in private equity through publicly traded vehicles. For Private Investments in Public Equity or PIPEs, see Private investment in public equity.

There are fundamentally two separate opportunities that private equity firms pursued in the public markets. These options involved a public listing of either:

  • A private equity firm (the management company), which provides shareholders an opportunity to gain exposure to the management fees and carried interest earned by the investment professionals and managers of the private equity firm. The most notable example of this public listing was completed by The Blackstone Group in 2007
  • A private equity fund or similar investment vehicle, which allows investors that would otherwise be unable to invest in a traditional private equity limited partnership to gain exposure to a portfolio of private equity investments.

Business Development Companies
Main article: Business Development Company

Historically, in the United States, there had been a group of publicly traded private equity firms that were registered as business development companies (BDCs) under the Investment Company Act of 1940.[1]

Typically, BDCs are structured similar to real estate investment trusts (REITs) in that the BDC structure reduces or eliminates corporate income tax. In return, REITs are required to distribute 95% of their income, which may be taxable to its investors.

As of the end of 2008, among the largest BDCs (by market value, excluding Apollo Investment Corp, discussed elsewhere) are: American Capital Strategies (Nasdaq: ACAS), Ares Capital Corp. (Nasdaq: ARCC), BlackRock Kelso Capital Corp, Gladstone Investment Corp (Nasdaq: GAIN) and Kohlberg Capital Corp (Nasdaq: KCAP).

Venture capital trusts
Main article: Venture capital trust

A venture capital trust or VCT is a highly tax efficient UK closed-end collective investment scheme designed to provide capital finance for small expanding companies and capital gains for investors. VCTs are companies listed on the London Stock Exchange, which invest in other companies which are not themselves listed.

First introduced by the Conservative government in the Finance Act, 1995 they have proved to be much less risky than originally anticipated. The last created VCTs to encourage investment into new UK businesses.

History

Although there had previously been certain instances of publicly traded private equity vehicles, the convergence of private equity and the public equity markets attracted significantly greater attention when several of the largest private equity firms pursued various options through the public markets. Taking private equity firms and private equity funds public appeared an unusual move since private equity funds often buy public companies listed on exchange and then take them private. Private equity firms are rarely subject to the quarterly reporting requirements of the public markets and tout this independence to prospective sellers as a key advantage of going private.

Blackstone Group IPO
Schwarzman's Blackstone Group completed the first major IPO of a private equity firm in June 2007.[2]

On March 22, 2007, the Blackstone Group filed with the SEC[3] to raise $4 billion in an initial public offering. On June 21, Blackstone swapped a 12.3% stake in its ownership for $4.13 billion in the largest U.S. IPO since 2002. Traded on the New York Stock Exchange under the ticker symbol BX, Blackstone priced at $31 per share on June 22, 2007.[4][5]

KKR Private Equity

In May 2006, Kohlberg Kravis Roberts raised $5 billion in an initial public offering for a new permanent investment vehicle (KKR Private Equity Investors or KPE) listing it on the Euronext exchange in Amsterdam (ENXTAM: KPE). KKR raised more than three times what it had expected at the outset as many of the investors in KPE were hedge funds seeking exposure to private equity but could not make long term commitments to private equity funds. Because private equity had been booming in the preceding years, the proposition of investing in a KKR fund appeared attractive to certain investors.[6] However, KPE's first-day performance was lackluster, trading down 1.7% and trading volume was limited.[7] Initially, a handful of other private equity firms and hedge funds had planned to follow KKR's lead but shelved those plans when KPE's performance continued to falter after its IPO. KPE's stock declined from an IPO price of €25 per share to €18.16 (a 27% decline) at the end of 2007 and a low of €11.45 (a 54.2% decline) per share in Q1 2008.[8] KPE disclosed in May 2008 that it had completed approximately $300 million of secondary sales of selected limited partnership interests in and undrawn commitments to certain KKR-managed funds in order to generate liquidity and repay borrowings.[9]

Less than two weeks after the Blackstone Group IPO, in 2007 Kohlberg Kravis Roberts filed with the SEC[10] in July 2007 to raise $1.25 billion by selling an ownership interest in its management company.[11] KKR had previously listed its KKR Private Equity Investors (KPE) private equity fund vehicle in 2006. The onset of the credit crunch and the shutdown of the IPO market would dampen the prospects of obtaining a valuation that would be attractive to KKR and the flotation was repeatedly postponed.

Response to private equity IPOs

The initial public offering completed by Blackstone intensified the level of attention directed toward the private equity industry overall as media commentators focused on the large payout received by the firm's CEO Steve Schwarzman.[12] Schwarzman received a severe backlash from both critics of the private equity industry and fellow investors in private equity. An ill-timed birthday event around the time of the IPO led various commentators to draw comparisons to the excesses of notorious executives including Bernie Ebbers (WorldCom) and Dennis Kozlowski (Tyco International). David Bonderman, a co-founder of the private equity firm TPG Capital, remarked, "We have all wanted to be private – at least until now. When Steve Schwarzman's biography with all the dollar signs is posted on the web site none of us will like the furor that results – and that's even if you like Rod Stewart."[12]

Meanwhile, other private equity investors would also seek to realize a portion of the value locked into their firms. In September 2007, the Carlyle Group sold a 7.5% interest in its management company to Mubadala Development Company, which is owned by the Abu Dhabi Investment Authority (ADIA) for $1.35 billion, which valued Carlyle at approximately $20 billion.[13] Similarly, in January 2008, Silver Lake Partners sold a 9.9% stake in its management company to CalPERS for $275 million.[14]

Additionally, Apollo Management completed a private placement of shares in its management company in July 2007. By pursuing a private placement rather than a public offering, Apollo would be able to avoid much of the public scrutiny applied to Blackstone and KKR.[15] [16] In April 2008, Apollo filed with the SEC[17] to permit some holders of its privately traded stock to sell their shares on the New York Stock Exchange.[18] In April 2004, Apollo raised $930 million for a listed business development company, Apollo Investment Corporation Nasdaq: AINV, to invest primarily in middle-market companies in the form of mezzanine debt and senior secured loans, as well as by making direct equity investments in companies. The company also invests in the securities of public companies.[19]

See also

References
  1. Companies must elect to be treated as a "business development company" under the terms of the Investment Company Act of 1940 (Investment Company Act of 1940: Section 54 -- Election to Be Regulated as Business Development Company Archived 2008-05-27 at the Wayback Machine)
  2. Photographed at the World Economic Forum in Davos, Switzerland in January 2008.
  3. The Blackstone Group L.P., FORM S-1, SECURITIES AND EXCHANGE COMMISSION, March 22, 2007
  4. SORKIN, ANDREW ROSS and DE LA MERCED, MICHAEL J. "News Analysis Behind the Veil at Blackstone? Probably Another Veil." New York Times, March 19, 2007.
  5. Anderson, Jenny. "Blackstone Founders Prepare to Count Their Billions." New York Times, June 12, 2007.
  6. Timmons, Heather. "Opening Private Equity's Door, at Least a Crack, to Public Investors." New York Times, May 4, 2006.
  7. Timmons, Heather. "Private Equity Goes Public for $5 Billion. Its Investors Ask, ‘What’s Next?’." New York Times, November 10, 2006.
  8. Anderson, Jenny. "Where Private Equity Goes, Hedge Funds May Follow." New York Times, June 23, 2006.
  9. Press Release: KKR Private Equity Investors Reports Results for Quarter Ended March 31, 2008 Archived March 20, 2009, at the Wayback Machine, May 7, 2008
  10. KKR & CO. L.P., FORM S-1, SECURITIES AND EXCHANGE COMMISSION, July 3, 2007
  11. JENNY ANDERSON and MICHAEL J. de la MERCED. "Kohlberg Kravis Plans to Go Public." New York Times, July 4, 2007.
  12. Sender, Henny and Langley, Monica. "Buyout Mogul: How Blackstone's Chief Became $7 Billion Man – Schwarzman Says He's Worth Every Penny; $400 for Stone Crabs." The Wall Street Journal, June 13, 2007.
  13. Sorkin, Andrew Ross. "Carlyle to Sell Stake to a Mideast Government." New York Times, September 21, 2007.
  14. Sorkin, Andrew Ross. "California Pension Fund Expected to Take Big Stake in Silver Lake, at $275 Million." New York Times, January 9, 2008
  15. SORKIN, ANDREW ROSS and de la MERCED, MICHAEL J. "Buyout Firm Said to Seek a Private Market Offering." New York Times, July 18, 2007.
  16. SORKIN, ANDREW ROSS. "Equity Firm Is Seen Ready to Sell a Stake to Investors ." New York Times, April 5, 2007.
  17. APOLLO GLOBAL MANAGEMENT, LLC, FORM S-1, SECURITIES AND EXCHANGE COMMISSION, April 8, 2008
  18. de la MERCED, MICHAEL J. "Apollo Struggles to Keep Debt From Sinking Linens ’n Things." New York Times, April 14, 2008.
  19. FABRIKANT, GERALDINE. "Private Firms Use Closed-End Funds To Tap the Market." New York Times, April 17, 2004.


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