Inside private equity’s race to go public
Most of the private equity industry has been enriched during the pandemic — but a select group has had a particularly good time.
Eleven listed private equity firms collectively gained nearly $240bn in market value in 2021. Against that backdrop, a growing number of privately held buyout groups are rushing to join them on the public markets.
London-based Bridgepoint, New York-based Blue Owl and Paris-based Antin Infrastructure Partners all listed last year. One of the largest privately held buyout firms in the US, TPG, is expected to float this month at a valuation exceeding $9bn. European firms CVC Capital Partners and Ardian and US-based L Catterton have all had conversations with advisers about potential initial public offerings, people with knowledge of the talks said.
The largest listed players have used the past decade to become diversified asset managers that control multiple pools of capital worth hundreds of billions of dollars. They now dwarf their smaller, unlisted rivals, many of which are fearful of missing out.
“We decided that we wanted to be one of the global players,” said Christian Sinding, chief executive of Stockholm-based EQT Partners, which listed in September 2019. “We needed capital to grow and there were more benefits to being public than raising capital privately.”
It is easy to forget, though, that the premium valuations are a recent phenomenon. Only a few years ago private equity chiefs such as Blackstone’s Stephen Schwarzman could not hide their frustration with public markets.
“As most of you know, I’ve been racking my brain to make sense of this disconnect,” Schwarzman grumbled to Blackstone stockholders in 2017 after 10 years as a public company, most of that spent with the shares below the IPO price.
Between 2010 and 2014 KKR, Carlyle, Apollo and Ares all listed their shares and recorded lacklustre stock market performance in the early years. The mood changed in 2018 as they began to convert from partnerships into corporations with more shareholder rights, opening their shares to inclusion in stock indices and mutual fund portfolios.
The enthusiastic market reception gave a new generation of private equity firms reason to consider going public.
EQT, founded in 1993 as an investment arm for the Wallenberg banking and industrial dynasty, broke a half-decade lull in such listings in 2019. EQT’s shares have risen 630 per cent from their IPO price. Assets under management have surged from $45bn in September 2019 to $80bn, boosted by a couple of sizeable acquisitions.
“The market is consolidating and the larger platforms are getting larger,” said Michael Arougheti, chief executive of Ares Management, which has struck four large acquisitions since 2020, drawing in over $40bn in assets. “A lot of smaller managers are feeling disadvantaged.”
An executive at a large, privately held buyout firm, said: “Investment bankers have been constantly pitching us to buy something, do an IPO or a debt issuance, or all of the above.”
Bridgepoint’s decision to become the first private equity group in decades to list in the UK was rooted in a recognition that “the whole size and activity of private markets is growing”, said executive chair William Jackson. “As the industry matures, then access to capital to drive that maturity becomes pretty important.”
Going public brings a level of transparency that is not always comfortable for an industry built on operating away from the public glare. But while US-listed firms must tell shareholders how much money their top executives make in salary, bonuses, dividends and carried interest, some in Europe have been able to list without sharing total rewards.
EQT and Antin do not publish how much money their most senior executives individually make in carried interest. Bridgepoint listed in London this year without making the disclosure.
“It’s an industry, particularly in the UK, which is obsessed with secrecy,” said Alain Rauscher, chief executive of Antin Infrastructure. “People don’t want to communicate about their carried interest . . . You have some tabloid press who are going to make a big fuss about it.”
Paris-listed Eurazeo stands out for its relative transparency. It reported that in December 2016, the last time carried interest was disclosed, sums of €17m and €12.7m were handed to top executives Patrick Sayer and Virginie Morgon respectively, on top of their remuneration that year of €3.3m and €3.1m.
Information about shareholdings, however, is more easily available. Insiders at EQT own a combined $30bn in stock, with six named EQT executives, including chief executive Sinding and founder Conni Jonsson owning well over $1bn-worth apiece. Sweden’s financial regulator is investigating EQT over what it describes as “a delayed disclosure of inside information” in relation to executives’ share sales in September. EQT says these were handled correctly.
TPG’s prospectus meanwhile revealed that insiders sit on shares and units worth over $7bn at the high-end of its IPO range and a further $3.5bn in potential performance compensation to be spread among its 912 employees.
The new crop of private equity IPOs is helping executives take their firms public at high valuations while retaining the vast majority of lucrative performance fees for themselves.
Stock analysts and investors are attracted by private equity groups’ management fee income, typically a 2 per cent charge that becomes more lucrative when buyout groups accumulate more assets. They usually place less emphasis on buyout groups’ 20 per cent share of profits, which is less predictable.
EQT gives all management fees to shareholders and about two-thirds of performance fees to insiders, a structure that has given it the richest valuation in the buyout industry globally. The firm trades at more than 50 times management fee revenues over the past 12 months.
TPG said in its prospectus it will restructure its finances to give shareholders a greater claim on net management fees and its own dealmakers a greater share of performance fees, which account for the bulk of its historical earnings.
Shareholders of TPG will have a claim to just 20 per cent of the firm’s performance profits, where it has historically generated the bulk of its earnings, down from 50 per cent. In this new structure, TPG generated $505m in profits available to be distributed to public shareholders over the past 12 months, versus $1.2bn had it not changed its fee ratios.
Orlando Bravo, co-founder of San Francisco-based Thoma Bravo, said investors undervalue buyout firms by not focusing enough on incentive earnings. He has fended off approaches to sell a stake in the firm, something that has been a precursor to stock market listings for other buyout groups.
Asked whether the firm, which one senior banker estimated could be valued at more than $30bn, would list, he said: “To pursue our strategic mission, we don’t need outside capital right now.” But he added that this could change.
Other firms, such as San Francisco-based Hellman & Friedman, New York-based Clayton, Dubilier & Rice and Boston-based Advent International, have so far also preferred to remain private and focus mostly on leveraged buyouts.
The developing consensus, however, is to cash in while valuations are high.
“If there is one thing most people agree that private equity firms are good at, it is knowing when to sell,” said Peter Morris, an associate scholar at the University of Oxford’s Saïd Business School. “Why not themselves?”
Additional reporting by Owen Walker