Publicly traded private equity
Encyclopedia
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:
.
Typically, BDCs are structured similar to real estate investment trust
s (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 investor
s.
As of the end of 2008, among the largest BDCs (by market value, excluding Apollo Investment Corp, discussed elsewhere) are: American Capital Strategies
, Allied Capital , Ares Capital Corp. , Gladstone Investment Corp and Kohlberg Capital Corp
.
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.
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.
On March 22, 2007, the Blackstone Group
filed with the SEC 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.
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.
However, KPE's first-day performance was lackluster, trading down 1.7% and trading volume was limited. 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. 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.
Less than two weeks after the Blackstone Group
IPO, in 2007 Kohlberg Kravis Roberts filed with the SEC in July 2007 to raise $1.25 billion by selling an ownership interest in its management company. 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.
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. 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 Rubinstein
, the founder of Carlyle 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."
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. Similarly, in January 2008, Silver Lake Partners
sold a 9.9% stake in its management company to CalPERS
for $275 million.
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.
In April 2008, Apollo filed with the SEC to permit some holders of its privately traded stock to sell their shares on the New York Stock Exchange
. In April 2004, Apollo raised $930 million for a listed business development company
, Apollo Investment Corporation , 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.
Private equity firm
A private equity firm is an investment manager that makes investments in the private equity of operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital...
or investment vehicle
Private equity fund
A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity....
, which makes investments conforming to one of the various private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
strategies, and is listed
Public company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
on a public stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
.
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 firmPrivate equity firmA private equity firm is an investment manager that makes investments in the private equity of operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital...
(the management company), which provides shareholders an opportunity to gain exposure to the management feeManagement feeIn the investment advisory industry, a management fee is a periodic payment that is paid by investors in a pooled investment fund to the fund's investment adviser for investment and portfolio management services.-Mutual funds:...
s and carried interestCarried interestCarried interest or carry, in finance, specifically in alternative investment management, is a share of the profits of a successful investment partnership that is paid to the investment manager of the partnership as a form of compensation that is designed as an incentive to the manager to maximize...
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 GroupBlackstone GroupThe Blackstone Group L.P. is an American-based alternative asset management and financial services company that specializes in private equity, real estate, and credit and marketable alternative investment strategies, as well as financial advisory services, such as mergers and acquisitions ,...
in 2007
- A private equity fundPrivate equity fundA private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity....
or similar investment vehicle, which allows investors that would otherwise be unable to invest in a traditional private equity limited partnershipLimited partnershipA limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners , there are one or more limited partners . It is a partnership in which only one partner is required to be a general partner.The GPs are, in all major respects,...
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 1940Investment Company Act of 1940
The Investment Company Act of 1940 is an act of Congress. It was passed as a United States Public Law on August 22, 1940, and is codified at through . Along with the Securities Exchange Act of 1934 and Investment Advisers Act of 1940, and extensive rules issued by the Securities and Exchange...
.
Typically, BDCs are structured similar to real estate investment trust
Real estate investment trust
A real estate investment trust or REIT is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors...
s (REITs) in that the BDC structure reduces or eliminates corporate income tax. In return, REITs are required to distribute
Distribution (economics)
Distribution in economics refers to the way total output, income, or wealth is distributed among individuals or among the factors of production .. In general theory and the national income and product accounts, each unit of output corresponds to a unit of income...
95% of their income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
, which may be taxable to its investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s.
As of the end of 2008, among the largest BDCs (by market value, excluding Apollo Investment Corp, discussed elsewhere) are: American Capital Strategies
American Capital Strategies
American Capital is an alternative asset management company based in Bethesda, Maryland. Founded in 1986 and publicly traded since 1997, American Capital is the largest U.S. publicly traded private equity fund and one of the largest publicly traded alternative asset managers...
, Allied Capital , Ares Capital Corp. , Gladstone Investment Corp and Kohlberg Capital Corp
Kohlberg & Company
Kohlberg & Company is a private equity firm that focuses on leveraged buyout transactions founded by industry pioneer Jerome Kohlberg, Jr.Today, the firm invests in a variety of transactions including leveraged carveouts , take private transactions and acquisitions of privately held companies...
.
Venture Capital Trusts
A Venture Capital TrustVenture Capital Trust
A venture capital trust or VCT is a highly tax efficient UK closed-end collective investment scheme designed to provide private equity capital for small expanding companies and capital gains for investors...
or VCT is a highly tax efficient UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
closed-end
Closed-end fund
A closed-end fund is a collective investment scheme with a limited number of shares. It is called a closed-end fund because new shares are rarely issued once the fund has launched, and because shares are not normally redeemable for cash or securities until the fund liquidates.Typically an...
collective investment scheme
Collective investment scheme
A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...
designed to provide capital finance for small expanding companies and capital gains for investors. VCTs are companies listed on the London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
, which invest in other companies which are not themselves listed.
First introduced by the Conservative
Conservative Party (UK)
The Conservative Party, formally the Conservative and Unionist Party, is a centre-right political party in the United Kingdom that adheres to the philosophies of conservatism and British unionism. It is the largest political party in the UK, and is currently the largest single party in the House...
government in the Finance Act
Finance Act
In the UK, the Chancellor of the Exchequer delivers an annual Budget speech on Budget Day, outlining changes in spending, as well as tax and duty. The changes to tax and duty are passed as law, and each year form the respective 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 marketsStock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
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
Blackstone Group
The Blackstone Group L.P. is an American-based alternative asset management and financial services company that specializes in private equity, real estate, and credit and marketable alternative investment strategies, as well as financial advisory services, such as mergers and acquisitions ,...
filed with the SEC 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.
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 EuronextEuronext
Euronext N.V. is a pan-European stock exchange based in Amsterdam and with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom. In addition to equities and derivatives markets, the Euronext group provides clearing and information services...
exchange in Amsterdam
Amsterdam
Amsterdam is the largest city and the capital of the Netherlands. The current position of Amsterdam as capital city of the Kingdom of the Netherlands is governed by the constitution of August 24, 1815 and its successors. Amsterdam has a population of 783,364 within city limits, an urban population...
(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.
However, KPE's first-day performance was lackluster, trading down 1.7% and trading volume was limited. 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. KPE disclosed in May 2008 that it had completed approximately $300 million of secondary sales
Private equity secondary market
In finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds....
of selected limited
partnership interests in and undrawn commitments to certain KKR-managed funds in order to generate liquidity and repay borrowings.
Less than two weeks after the Blackstone Group
Blackstone Group
The Blackstone Group L.P. is an American-based alternative asset management and financial services company that specializes in private equity, real estate, and credit and marketable alternative investment strategies, as well as financial advisory services, such as mergers and acquisitions ,...
IPO, in 2007 Kohlberg Kravis Roberts filed with the SEC in July 2007 to raise $1.25 billion by selling an ownership interest in its management company. 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 offeringInitial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
completed by Blackstone
Blackstone Group
The Blackstone Group L.P. is an American-based alternative asset management and financial services company that specializes in private equity, real estate, and credit and marketable alternative investment strategies, as well as financial advisory services, such as mergers and acquisitions ,...
intensified the level of attention directed toward the private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
industry overall as media commentators focused on the large payout received by the firm's CEO Steve Schwarzman. 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
Dennis Kozlowski
Leonard Dennis Kozlowski is a former CEO of Tyco International, convicted in 2005 of crimes related to his receipt of $81 million in purportedly unauthorized bonuses, the purchase of art for $14.725 million and the payment by Tyco of a $20 million investment banking fee to Frank Walsh, a former...
(Tyco International
Tyco International
Tyco International Ltd. is a highly diversified global manufacturing company incorporated in Switzerland, with United States operational headquarters in Princeton, New Jersey...
). David Rubinstein
David Rubinstein
David Rubinstein is a pianist. He has given concerts featuring the works of American composers such as Charles Griffes and Aaron Copland at the American Landmark Festivals, as well as performing his own works...
, the founder of Carlyle Group
Carlyle Group
The Carlyle Group is an American-based global asset management firm, specializing in private equity, based in Washington, D.C. The Carlyle Group operates in four business areas: corporate private equity, real assets, market strategies and fund-of-funds, through its AlpInvest subsidiary...
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."
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
Carlyle Group
The Carlyle Group is an American-based global asset management firm, specializing in private equity, based in Washington, D.C. The Carlyle Group operates in four business areas: corporate private equity, real assets, market strategies and fund-of-funds, through its AlpInvest subsidiary...
sold a 7.5% interest in its management company to Mubadala Development Company, which is owned by the Abu Dhabi Investment Authority
Abu Dhabi Investment Authority
The Abu Dhabi Investment Authority is a sovereign wealth fund owned by Abu Dhabi, United Arab Emirates founded for the purpose of investing funds on behalf of the Government of Abu Dhabi....
(ADIA) for $1.35 billion, which valued Carlyle at approximately $20 billion. Similarly, in January 2008, Silver Lake Partners
Silver Lake Partners
Silver Lake is a US-based private equity firm focused on leveraged buyout and growth capital investments in technology, technology-enabled and related industries...
sold a 9.9% stake in its management company to CalPERS
CalPERS
The California Public Employees' Retirement System or CalPERS is an agency in the California executive branch that "manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families"...
for $275 million.
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.
In April 2008, Apollo filed with the SEC to permit some holders of its privately traded stock to sell their shares on the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
. In April 2004, Apollo raised $930 million for a listed business development company
Business Development Company
A Business Development Company is a form of publicly traded private equity in the United States created by Congress in 1980 as amendments to the Investment Company Act of 1940...
, Apollo Investment Corporation , to invest primarily in middle-market companies in the form of mezzanine debt and senior secured loans
Secured loan
A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan...
, as well as by making direct equity investments in
companies. The Company also invests in the securities of public companies.
See also
- Private equityPrivate equityPrivate equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
- Private equity secondary marketPrivate equity secondary marketIn finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds....
- History of private equity and venture capitalHistory of private equity and venture capitalThe history of private equity and venture capital and the development of these asset classes has occurred through a series of boom and bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital...
- Business Development CompanyBusiness Development CompanyA Business Development Company is a form of publicly traded private equity in the United States created by Congress in 1980 as amendments to the Investment Company Act of 1940...