Permanent capital revisited

Everyone is going to want one – a listed private equity fund that is, especially if the $1.5 billion structure that KKR is getting ready to float in Amsterdam next month sells well. (See also "Listed Private Equity Funds" in the Features section of this newsletter. )  

KKR’s timing is interesting. Why bother with a quoted vehicle, you might ask, at a time when institutions are falling over themselves to put heaps of money into the new limited partnerships currently being shopped by the leading buyout groups? But of course, if your ambition is to end up with the largest pool of LBO money ever formed, you will want to tap as many sources of capital as you can possibly find. And with the buyout business still in almost laughably rude health, there may never be a better time than now to acquaint investors in the public markets (be they institutional or individual) with quoted private equity products.  

Besides, “permanent capital” in the form of a listed, ever-green structure has long been on the wish-list of many private equity groups. Its obvious appeal lies in the fact that once raised, money can be invested again and again. From the fundraiser’s point of view, that is clearly more efficient than capital being deployed and then distributed back to where it came from after just one go, which is what the rules of the limited partnership require. And because limited partner commitments won’t always be won as easily as in today’s private equity-mad environment, having a permanent pool in place in leaner times should bestow significant advantages.  

Permanent capital would also enable managers to hold assets for longer periods of time than under the 10- to 12-year limited partnership life cycle. To be fair, views differ on whether this really is desirable: many LPs for example like the fact that GPs are required to work towards exits after a certain period. But there is also the argument that some of the great private equity successes of the past could have been greater still had the manager been able to hold them a bit longer. Whatever your personal take on the issue, the fact is that permanent capital has the potential to alter this particular dynamic in the manager-client relationship. Time will tell who stands to gain.   

Listing a private equity fund, by the way, seems eminently more sensible than floating a private equity management company. The latter, often touted as a possible exit mechanism for the founders of the industry’s leading firms at the end of their careers, would in effect securitise a partnership’s future profits. Depending on how the proceeds are distributed, this could do little to excite the younger partners in the firm – and whether the long-term objectives of managers and investors would remain aligned seems questionable, too. By comparison, the IPO of an individual investment vehicle as a means to fund deals rather than life styles appears much more compelling for all concerned.

On a fund basis, more permanent private equity capital is bound to happen. In addition to giving managers greater funding options, it will have the additional advantage of committing some high profile groups to the industry’s transparency agenda. At a time when private equity owners of businesses are coming to accept that they have responsibilities to stakeholders other than just their clients, this is to be welcomed also. Look five years hence and one can imagine a host of listed investment vehicles plying private equity’s key trade of transformational ownership – and no one batting an eyelid at their buying and selling of high profile assets.