Still happy in the public eye

Can publicly listed private equity firms justify their existence in the current market environment? Kevin Ley finds some evidence that they can

The recent news that Stephen Schwarzman, co-founder of New York-based alternatives giant Blackstone Group, took a 99 percent pay cut last year represented a far cry from the giddy heights of the firm's public listing in 2007. Blackstone's recent travails, including a fourth-quarter loss of nearly $830 million and a drop in share price of almost 70 percent, are indicative of the problems suffered by publicly listed firms over the past year.

“When Blackstone [went public] everyone thought it was brilliant, and I'm sure they'll come back at some level, but I would guess if they had to do it over again they would rather be private,” one investor in funds and co-investments says.

In fact, Schwarzman said during a recent conference call – following his firm's sixth consecutive quarterly loss – that Blackstone may start buying back shares if the price, which has recently fallen below $5, gets too low. Similar firms have fared no better, with Fortress, the first hedge fund in the country to go public, seeing its share price dip beneath $1 less than two years after its five principals made nearly $10 billion from its IPO.

Meanwhile, several publicly listed North American firms such as American Capital, Onex and Allied Capital have all released dismal earnings statements, while, in the UK, F&C Private Equity Trust and Pantheon International Participations are trading at record discounts to net asset values. Such developments have left many wondering whether the public model can work in private equity.

“Of all the exit opportunities for any portfolio company that we invest in we always look at public offerings as the worst possible scenario, because even if you can get off a really nice valuation, you're locked up on it and the public markets sometimes move in ways that don't make a lot of sense,” one investor says. “Private equity is long-term consistent but individual years are inconsistent, and those attributes don't work well for public markets.”

However, despite such claims, others in the industry say they believe more firms will go public in the future – to resolve succession issues, secure permanent capital, or satisfy increasing investor demand for transparency in the wake of the Madoff scandal. Consequently, the fate will be closely followed of several major listed private equity firms, including Conversus Capital which was spun out from Bank of America Strategic Capital in July 2007 and is traded on the Amsterdam Euronext exchange. The California Public Employees' Retirement System purchased $500 million in public equity and the Harvard University endowment $250 million, during Conversus's IPO.

Conversus president Bob Long says that for LPs, especially those who first entered the asset class in 2005 or later, publicly listed private equity can provide diversification and exposure to 2004 and earlier deals, in addition to transparency, monthly reporting and the convenience of public stock.

“The [current] discounts present an attractive opportunity to access high-quality mature portfolios at a discount to the already depressed secondary market prices,” Long says. He adds that investors considering publicly listed private equity should first determine whether the vehicle has adequate liquidity for the foreseeable future, including liquid assets, capacity of credit lines and the firmness of its NAV based on the rigour of the manager's processes and the lag time between underlying performance and reported value.

In situations where all these criteria are met, publicly listed private equity may yet be able to demonstrate its viability in the face of scepticism.