- 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.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 themanagement fee s andcarried 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 equitylimited partnership to gain exposure to a portfolio of private equity investments.Business Development Companies
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 . [Companies must elect to be treated as a "business development company" under the terms of theInvestment Company Act of 1940 ( [http://www.law.uc.edu/CCL/InvCoAct/sec54.html Investment Company Act of 1940: Section 54 -- Election to Be Regulated as Business Development Company] )]Typically, BDCs are structured similar to
real estate investment trust s (REITs) in that the BDC structure reduces or eliminatescorporate income tax . In return, REITs are required todistribute 90% of theirincome , which may be taxable to itsinvestor s. As of the end of 2007, among the largest BDCs (by market value, excluding Apollo Investment Corp, discussed elsewhere) are:American Capital Strategies (NASDAQ: ACAS), Allied Capital Corp((NASDAQ:ALD), Ares Capital Corporation (NASDAQ:ARCC), Gladstone Investment Corp (NASDAQ:GAIN) and Kohlberg Capital Corp (NASDAQ:KCAP).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
On March 22, 2007, the
Blackstone Group filed with the SEC [ [http://www.sec.gov/Archives/edgar/data/1404912/000104746907005446/a2178646zs-1.htm The Blackstone Group L.P., FORM S-1] , SECURITIES AND EXCHANGE COMMISSION, March 22, 2007] 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. [SORKIN, ANDREW ROSS and DE LA MERCED, MICHAEL J. " [http://www.nytimes.com/2007/03/19/business/19blackstone.html News Analysis Behind the Veil at Blackstone? Probably Another Veil] ."New York Times , March 19, 2007.] [Anderson, Jenny. " [http://www.nytimes.com/2007/06/12/business/12blackstone.html Blackstone Founders Prepare to Count Their Billions] ."New York Times , June 12, 2007.]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 theEuronext exchange inAmsterdam (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. [Timmons, Heather. " [http://www.nytimes.com/2006/05/04/business/worldbusiness/04place.html Opening Private Equity's Door, at Least a Crack, to Public Investors] ."New York Times , May 4, 2006.] However, KPE's first-day performance was lackluster, trading down 1.7% and trading volume was limited. [Timmons, Heather. " [http://www.nytimes.com/2006/11/10/business/10private.html Private Equity Goes Public for $5 Billion. Its Investors Ask, ‘What’s Next?’] ."New York Times , November 10, 2006.] 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. [Anderson, Jenny. " [http://www.nytimes.com/2006/06/23/business/23insider.html Where Private Equity Goes, Hedge Funds May Follow] ."New York Times , June 23, 2006.] KPE disclosed in May 2008 that it had completed approximately $300 million of secondary sales of selected limitedpartnership interests in and undrawn commitments to certain KKR-managed funds in order to generate liquidity and repay borrowings. [Press Release: [http://www.kkrpei.com/pdfs/KKRPEI-PR_05_07_08.pdf KKR Private Equity Investors Reports Results for Quarter Ended March 31, 2008] , May 7, 2008]Less than two weeks after the
Blackstone Group IPO, in2007 Kohlberg Kravis Roberts filed with the SEC [ [http://www.sec.gov/Archives/edgar/data/1404912/000104746907005446/a2178646zs-1.htm KKR & CO. L.P., FORM S-1] , SECURITIES AND EXCHANGE COMMISSION, July 3, 2007] in July 2007 to raise $1.25 billion by selling an ownership interest in its management company. [JENNY ANDERSON and MICHAEL J. de la MERCED. " [http://www.nytimes.com/2007/07/04/business/04kkr.html Kohlberg Kravis Plans to Go Public] ."New York Times , July 4, 2007.] 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 theprivate equity industry overall as media commentators focused on the large payout received by the firm's CEOSteve Schwarzman .Sender, Henny and Langley, Monica. " [http://schwert.ssb.rochester.edu/f423/WSJ070613_Blackstone.pdf 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.] 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 includingBernie Ebbers (WorldCom ) andDennis Kozlowski (Tyco International ).David Rubinstein , the founder ofCarlyle Group 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."Sender, Henny and Langley, Monica. " [http://schwert.ssb.rochester.edu/f423/WSJ070613_Blackstone.pdf 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.]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 theAbu Dhabi Investment Authority (ADIA) for $1.35 billion, which valued Carlyle at approximately $20 billion. [Sorkin, Andrew Ross. " [http://www.nytimes.com/2007/09/21/business/worldbusiness/21carlyle.html Carlyle to Sell Stake to a Mideast Government] ."New York Times , September 21, 2007.] Similarly, in January 2008,Silver Lake Partners sold a 9.9% stake in its management company toCalPERS for $275 million. [Sorkin, Andrew Ross. " [http://www.nytimes.com/2008/01/09/business/09deal.html California Pension Fund Expected to Take Big Stake in Silver Lake, at $275 Million] ."New York Times , January 9, 2008]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. [SORKIN, ANDREW ROSS and de la MERCED, MICHAEL J. " [http://www.nytimes.com/2007/07/18/business/18place.html Buyout Firm Said to Seek a Private Market Offering] ."New York Times , July 18, 2007.] [SORKIN, ANDREW ROSS. " [http://www.nytimes.com/2007/04/05/business/05deal.html Equity Firm Is Seen Ready to Sell a Stake to Investors ] ."New York Times , April 5, 2007.] In April 2008, Apollo filed with the SEC [ [http://www.sec.gov/Archives/edgar/data/1411494/000119312508077312/ds1.htm APOLLO GLOBAL MANAGEMENT, LLC, FORM S-1] , SECURITIES AND EXCHANGE COMMISSION, April 8, 2008] to permit some holders of its privately traded stock to sell their shares on theNew York Stock Exchange . [de la MERCED, MICHAEL J. " [http://www.nytimes.com/2008/04/14/business/14apollo.html Apollo Struggles to Keep Debt From Sinking Linens ’n Things] ."New York Times , April 14, 2008.] In April 2004, Apollo raised $930 million for a listedbusiness development company , Apollo Investment Corporation (NASDAQ: AINV), to invest primarily in middle-market companies in the form ofmezzanine debt and senior secured loans, as well as by making direct equity investments incompanies. The Company also invests in the securities of public companies. [FABRIKANT, GERALDINE. " [http://query.nytimes.com/gst/fullpage.html?res=9C03E4DD133BF934A25757C0A9629C8B63 Private Firms Use Closed-End Funds To Tap the Market] ."New York Times , April 17, 2004.]ee also
*
Private equity
*Private equity secondary market
*History of private equity and venture capital
*Business Development Company References
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