American investors who are wondering how a Blackstone or any other US private equity firm will fare as a publicly traded stock should look across the pond to Europe, where numerous buyout groups have been publicly traded for decades, says the Wall Street Journal’s Heard on the Street column.
The records of such firms – going back decades or sometimes even centuries – show that the asset class can be lucrative for investors willing to dig through their many different structures to get a handle on their various fee arrangements.
Philip Yea, chief executive of UK-based 3i Group, one of the largest of the publicly-traded private equity firms, says that being publicly traded enables the group to use its own balance sheet to start new businesses quickly or buy minority stakes in other companies.
Going public has several advantages for firms in an industry dominated by private partnerships. It can make them appear more reputable and enduring than rivals that operate funds that typically exist for no more than 10 years. It also can help them raise money from the stock market for a variety of uses, cash that is better suited to more long-term investments because it doesn’t need to be paid back like money raised from institutional investors and the wealthy.
The different structures of the many types of public companies involved in private-equity investing give investors access to a variety of sources of profit – from the returns on the investments themselves to fees from managing other investors’ money. Some, such as 3i, are a mix, making minority investments through the publicly traded company and also earning money from managing funds from other partners.
Canada’s Onex Corp was founded in 1984 with money from rich individuals and institutions. Since raising C$240m ($207.9m) in its 1987 IPO on the Toronto Stock Exchange, Onex now has C$4bn in capital, which it invests along with private money it raises from outside investors, or limited partners. In total, it has C$7.5bn in assets under management and has seen its shares climb an annual average of 18 per cent since its IPO.
The stock, however, is viewed by some analysts as a good deal because it is trading at about a 5 per cent discount to the company’s net asset value. Some analysts argue it deserves a premium because of the fees the firm generates. It is trading at 13.7 times estimated 2007 earnings, about flat against the financial sector.
But groups like Onex can also suffer from shareholder concerns that management’s fees are too hefty. Ewout Heersink, Onex’s chief financial officer, said structuring different classes of shares, compensation and distribution of fees between management and shareholders have been key areas of concern for management. Gerald Schwartz, Onex’s founder, maintains control through multiple-voting shares, giving him the right to elect 60 per cent of the board, even though he owns less than a quarter of the company.
Blackstone’s future shareholders will have even fewer voting rights, as they won’t be able to elect directors, and the firm’s offering is structured as that of a master limited partnership, instead of a traditional public company.
As private equity firms attempt to buy increasingly high-profile companies, they are facing some backlash from shareholders in the targets who complain that the vehicles are secretive and chasing only short-term profits. Being a public stock, with some disclosure obligations, can help argue against that attack, private equity executives say.
Among Continental Europe’s publicly traded buyout firms, two of the oldest are in France: Wendel Investissement, which dates back 300 years, and Eurazeo SA, which competes with big US firms for deals and dates to 1881. Both companies have market capitalisations of more than $8bn. Wendel shares have more than doubled in the past two years, and Eurazeo is up more than 80 per cent in the same time period.
If buying directly into Blackstone’s IPO is not the preferred route, a smaller way in for patient investors to invest in the buyout boom is to buy shares in funds that the private-equity firms list. Last May, KKR raised $5bn from listing a fund publicly on the Euronext exchange. And Apollo Management raised $1.5bn from listing shares of AP Alternative Assets LP fund, also in Amsterdam. Both are trading below their listing prices and at a price below their net asset value because the new style has no track record.