Publicly traded private equity (also referred to as publicly quoted private equity or publicly listed private equity) refers to an
investment firm
An investment company is a financial institution principally engaged in holding, managing and investing securities. These companies in the United States are regulated by the U.S. Securities and Exchange Commission and must be registered under t ...
or
investment vehicle
An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages inc ...
, which makes investments conforming to one of the various
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a ty ...
strategies, and is
listed
Listed may refer to:
* Listed, Bornholm, a fishing village on the Danish island of Bornholm
* Listed (MMM program), a television show on MuchMoreMusic
* Endangered species in biology
* Listed building, in architecture, designation of a historicall ...
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
A private equity firm is an investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including leve ...
'' (the management company), which provides shareholders an opportunity to gain exposure to the
management fee In the investment advisory industry, a management fee is a periodic payment that is paid by an investment fund to the fund's investment adviser for investment and portfolio management services. Often, the fee covers not only investment advisory serv ...
s and
carried interest
Carried interest, or carry, in finance, is a share of the profits of an investment paid to the investment manager specifically in alternative investments (private equity and hedge funds). It is a performance fee, rewarding the manager for enhanc ...
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
Blackstone Inc. is an American alternative investment management company based in New York City. Blackstone's private equity business has been one of the largest investors in leveraged buyouts in the last three decades, while its real estate bu ...
in 2007
*A ''
private equity fund
A private equity fund (abbreviated as PE fund) is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) 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 partnership
A limited partnership (LP) is a form of partnership similar to a general partnership except that while a general partnership must have at least two general partners (GPs), a limited partnership must have at least one GP and at least one limited ...
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.
Typically, BDCs are structured similar to
real estate investment trust
A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping cente ...
s (REITs) in that the BDC structure reduces or eliminates
corporate income tax
A corporate tax, also called corporation tax or company tax, is a direct tax imposed on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at ...
. In return, REITs are required to
distribute 95% of their
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
, which may be taxable to its
investor
An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some specie ...
s.
As of the end of 2008, among the largest BDCs (by market value, excluding
Apollo Investment Corp, discussed elsewhere) are: American Capital Strategies
(),
Ares Capital Corp.
Ares Management Corporation is an American global alternative investment manager operating in the credit, private equity and real estate markets. The company was founded in 1997 and is headquartered in Los Angeles, California, with additional of ...
(), BlackRock Kelso Capital Corp, Gladstone Investment Corp
() and
Kohlberg Capital Corp ().
Venture capital trusts
A
venture capital trust 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
London Stock Exchange (LSE) is a stock exchange in the City of London, England, United Kingdom. , the total market value of all companies trading on LSE was £3.9 trillion. Its current premises are situated in Paternoster Square close to St Pau ...
, which invest in other companies which are not themselves listed.
First introduced by the
Conservative
Conservatism is a cultural, social, and political philosophy that seeks to promote and to preserve traditional institutions, practices, and values. The central tenets of conservatism may vary in relation to the culture and civilization i ...
government in the
Finance Act
A Finance Act is the headline fiscal (budgetary) legislation enacted by the UK Parliament, containing multiple provisions as to taxes, duties, exemptions and reliefs at least once per year, and in particular setting out the principal tax rates f ...
, 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 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
Blackstone Inc. is an American alternative investment management company based in New York City. Blackstone's private equity business has been one of the largest investors in leveraged buyouts in the last three decades, while its real estate b ...
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
KKR & Co. Inc., also known as Kohlberg Kravis Roberts & Co., is an American global investment company that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate, credit, and, through its strate ...
raised $5 billion in an initial public offering for a new permanent investment vehicle (KKR Private Equity Investors or KPE) listing it on the
Euronext
Euronext N.V. (short for European New Exchange Technology) is a pan-European bourse that offers various trading and post-trade services.
Traded assets include regulated equities, exchange-traded funds (ETF), warrants and certificates, bonds, de ...
exchange in
Amsterdam
Amsterdam ( , , , lit. ''The Dam on the River Amstel'') is the Capital of the Netherlands, capital and Municipalities of the Netherlands, most populous city of the Netherlands, with The Hague being the seat of government. It has a 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 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 Inc. is an American alternative investment management company based in New York City. Blackstone's private equity business has been one of the largest investors in leveraged buyouts in the last three decades, while its real estate b ...
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 offering
An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
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.
[Sender, Henny and Langley, Monica. ]
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 including
Bernie Ebbers
Bernard John Ebbers (August 27, 1941 – February 2, 2020) was a Canadian businessman, the co-founder and CEO of WorldCom and a convicted fraudster. Under his management, WorldCom grew rapidly but collapsed in 2002 amid revelations of accounting ...
(
WorldCom
MCI, Inc. (subsequently Worldcom and MCI WorldCom) was a telecommunications company. For a time, it was the second largest long-distance telephone company in the United States, after AT&T. Worldcom grew largely by acquiring other telecommunic ...
) and
Dennis Kozlowski
Leo Dennis Kozlowski (born November 16, 1946) is a former CEO of Tyco International, convicted in 2005 of crimes related to his receipt of $81 million in unauthorized bonuses, the purchase of art for $14.725 million and the payment by Tyco of a $ ...
(
Tyco International
Tyco International plc was a security systems company incorporated in the Republic of Ireland, with operational headquarters in Princeton, New Jersey, United States (Tyco International (US) Inc.). Tyco International was composed of two major b ...
).
David Bonderman, a co-founder of the private equity firm
TPG Capital
TPG Inc., previously known as Texas Pacific Group and TPG Capital, is an American investment company based in Fort Worth, Texas. The private equity firm is focused on leveraged buyouts and growth capital. TPG manages investment funds in growth c ...
, 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
The Carlyle Group is a multinational private equity, alternative asset management and financial services corporation based in the United States with $376 billion of assets under management. It specializes in private equity, real assets, and pri ...
sold a 7.5% interest in its management company to Mubadala Development Company, which is owned by the
Abu Dhabi Investment Authority
The Abu Dhabi Investment Authority ( ar, جهاز أبوظبي للاستثمار, ADIA) is a sovereign wealth fund owned by the Emirate of Abu Dhabi (in the United Arab Emirates) founded for the purpose of investing funds on behalf of the Gover ...
(ADIA) for $1.35 billion, which valued Carlyle at approximately $20 billion. Similarly, in January 2008,
Silver Lake Partners
Silver Lake is an American global private equity firm focused on investments in technology, technology-enabled and related industries. Founded in 1999, the firm is one of the largest technology investors in the world. Its investment holdings have ...
sold a 9.9% stake in its management company to
CalPERS
The California Public Employees' Retirement System (CalPERS) is an agency in the California executive branch that "manages pension and health benefits for more than 1.5 million California public employees, retirees, and their families".CalPERSFac ...
for $275 million.
Additionally,
Apollo Management
Apollo Global Management, Inc. is an American global private-equity firm. It provides investment management and invests in credit, private equity, and real assets. As of March 31, 2022, the company had $512 billion of assets under 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
The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its listed c ...
. In April 2004, Apollo raised $930 million for a listed
business development company
A Business Development Company ("BDC") is a form of unregistered closed-end investment company in the United States that invests in small and mid-sized businesses. This form of company was created by the US Congress in 1980 in the amendments to th ...
, 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.
[FABRIKANT, GERALDINE.]
Private Firms Use Closed-End Funds To Tap the Market
" New York Times
''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid d ...
, April 17, 2004.
See also
*
Private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a ty ...
*
Private equity secondary market
In finance, the private-equity secondary market (also often called private-equity secondaries or secondaries) refers to the buying and selling of pre-existing investor commitments to private-equity and other alternative investment funds. Given t ...
*
History of private equity and venture capital
The 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-i ...
*
Business Development Company
A Business Development Company ("BDC") is a form of unregistered closed-end investment company in the United States that invests in small and mid-sized businesses. This form of company was created by the US Congress in 1980 in the amendments to th ...
References
{{Corporate finance and investment banking , state=collapsed
Private equity
Venture capital
Equity securities
Traded private equity