In private equity, one of the main strategies employed by private equity firms when purchasing a public portfolio company, is to subsequently take that company private. This is believed to be beneficial because it allows the private equity fund and the management of the portfolio company to operate the business without pressure from shareholders, allowing them to focus on improving the operations of the company.1 Fairly recently however, some of the most prominent and successful private equity firms have opted to take their own fund public, including firms such as KKR, Blackstone, Carlyle Group, and Apollo Management.2 At first glance, this seems like a good idea. Many more individuals would have the opportunity to invest in private equity, more transparency into the operations of the private equity firms, and increasing liquidity. However, upon closer examination, publicly traded private equity may not be the best choice for investors looking to gain exposure to private equity investments.
One substantial difference between publicly listed private equity firms and standard private equity is the ability for average people to invest in private equity. In order to invest in private equity, the investor must usually contribute a minimum of $250,000.3 Many private equity firms solicit individuals or entities that are able to invest a minimum of $25,000,000.4 These contribution requirements exclude all but the wealthiest of investors. With private equity firms trading publicly, the average investor is able to invest and thereby diversify their portfolio by gaining exposure to private equity investments. While it may be true that these same investors could gain exposure to private equity through mutual funds or other funds, this specific type of investment allows the investor to be more proactive in their investments by choosing the specific private equity fund that is most suitable for their portfolio. The larger number of potential investors is also a great advantage for the private equity firms themselves.5
In addition to being able to attract large institutional investors, they can also attract the smaller investors as well, thereby raising more money to fund their projects.6
Another benefit of private equity firms going public is the increased transparency.7 In order for a private equity firm to go public, they must comply with the SEC disclosure requirements allowing investors to gain a better understanding of the operations of the fund.8 Shareholders will be able to see what portfolio companies the private equity firm is investing in.9 This allows investors to better diversify their portfolios by knowing exactly what industries and sectors they are being exposed to through their investment in private equity.
Another benefit of publicly traded private equity firms is the increased liquidity.10 Typically, ownership in a private equity firm is extremely illiquid.11 However, since these firms are trading in open and public markets, the shares are much more liquid.12 This liquidity gives partners in the fund the ability to exit more easily from the fund.13
One potential negative of publicly listed private equity is the external pressure added from taking the fund public.14 Instead of focusing solely on the prosperity of the portfolio companies, managers will begin to focus on the share price, quarterly earnings, and other metrics that may not be favorable for the vitality of the portfolio companies. Many argue that the ability to be free from the pressures of, for example, quarterly earnings, is one of the main attractions of private equity.15 For example, with the increased transparency, managers may have to spend more time selling shareholders on certain acquisitions, or defending their actions regarding certain acquisitions.
Whether investing in publicly traded private equity firms will prove to be lucrative in the long run remains to be seen. Through the duration of their life span as a publicly traded fund, both KKR and Blackstone have been extremely volatile.16 It’s unclear how much of this volatility can be attributed to the economic crisis or to the inherent nature of publicly traded private equity. This year has been fairly successful for publicly traded private equity; both KKR and Blackstone have seen their stock price almost double this year and are currently trading well above their IPO price. However, traditional privately held private equity firms have been very successful following the economic crisis, so it’s very likely that private equity in general is on the upswing.17
In theory, it seems that publicly traded private equity is a very promising investment for the average investor looking to diversify their portfolio. It will be interesting to see how publicly traded private equity funds fare in the future. It may well be that this year has been an aberration and publicly traded private equity funds will subsequently plummet in the next couple years. If this happens while at the same time privately held private equity firms are thriving, it would seem to suggest that private equity should stay away from the public markets.
Davies, Investors Question ‘Public’ Private Equity, Reuters, http://www.reuters.com/article/2010/08/24/uk-dealtalk-privateequity-idUSLNE67N00J20100824. ↩
Id. ↩
How to Invest in Private Equity, Investopedia, http://www.investopedia.com/articles/mutualfund/07/private_equity.asp (last visited Nov. 23, 2013). ↩
Id. ↩
See Davies & Herbst, supra note 1. ↩
See id. ↩
See Listed Private Equity Benefits, Red Rocks Capital, http://www.redrockscapital.com/?q=listed-private-equity/benefits (last visited Nov. 23, 2013). ↩
See id. ↩
Id. ↩
See Adam Goldman, Publicly Traded Private Equity Vehicles: A Different Kind of Model, Red Rocks Capital, http://www.innovestinc.com/storage/A%20Different%20Kind%20of%20Model%20PEI%20Media.pdf (last visited Nov. 23, 2013). ↩
Id. ↩
Id. ↩
See Davies & Herbst, supra note 1. ↩
See id. ↩
See id. ↩
Matthew Weinschenk, Carlyle Group: Be Wary of Public Investments in Private Equity, Wall Street Daily (July 12, 2012), http://www.wallstreetdaily.com/2012/07/12/carlyle-group-cg-be-wary-of-public-investments-in-private-equity/. ↩
See Timothy Spangler, Hedge Funds and Private Equity are Thriving… Thanks to Pension Funds, The Guardian (Sept. 23, 2013, 7:30 AM), http://www.theguardian.com/commentisfree/2013/sep/23/hedge-funds-private-equity-thrive (demonstrating the success of private equity this year). ↩