Friday Letter: Private equity for the masses

The last time this much US effort went into selling private equity to the common man was in 2000, just before the market entered a painful downturn.  

Now, reports that Bank of America and Lehman Brothers are preparing to list private equity funds of funds begs the question: is this history repeating itself? Has private equity reached another cyclical high? The answer is ‘no’, because this time it’s different.

Bank of America could not comment, but here is what has been reported. The bank has teamed with the fund of funds arm of Oak Hill Investment Management on a vehicle that will buy partnership interests in more than 100 private equity funds already owned by BoA. The deal is expected to have a value of roughly $2 billion, and is reportedly being done in conjunction with a major secondary transfer from the bank to other limited partners. The entity will be listed on Amsterdam Euronext.

In similar news, Lehman Brothers is preparing to raise as much as $500 million for a Euronext-listed private equity fund of funds. All proceeds from the IPO, according to a statement, will be invested into private equity assets. According to a source close to the bank, these assets are made up of a partially funded portfolio of direct and indirect private equity investments, diversified across geographies and vintage years.

US financial firms have had a hard time offering quality private equity opportunities to the masses, or even to the “mass affluent”. Prior to the market meltdown at the turn of the last decade, several efforts were launched to sell private equity – primarily venture capital – to the millionaire next door, and even to his less-affluent neighbours.

Mutual fund companies like J&W Seligman and Munder Capital launched closed-end mutual funds offering investors access to pre-IPO tech companies. Some of these collapsed amid lawsuits. Thomas Weisel Partners and Scudder Kemper formed a partnership to offer alternative investment products to high-net-worth individuals. It only took a few months for this plan to come a cropper. At one point during this period, The Carlyle Group held talks with mutual fund giant Fidelity about a private equity product, but nothing materialised.

What’s different now? For one, years of successful structuring work and capital market innovation, primarily in Europe, have furthered the technology for making private equity a tradable asset class. It is not surprising that Bank of America and Lehman Brothers are heading to the Euronext instead of any US markets. Europe’s regulatory environment simply offers a superior way to offer private equity in bite-sized pieces.

We haven’t seen the offering documents yet on either deal (sources close to Lehman say the deal will take months to complete). But whereas the meagre efforts to package private equity for individual investors seven years ago indicated the outermost limit of a bubble, today these two impending IPOs seem like progress – albeit the kind of progress that should worry US investors.