Private equity firms planning to go public may have a harder time getting investors on board than planned, judging by Oaktree Capital Management’s recent listing experience.
Oaktree listed its management company the second week in April, valuing the firm at $6.5 billion. It raised approximately $380 million by selling about 20 percent fewer shares than planned at $43 each, the bottom of its range. The stock has since traded down. (At press time, shares were trading at just under $40 each.).
That the firm got its listing away during a week in which markets were down generally was no mean feat, as The Blackstone Group president Tony James pointed out on a recent earnings call. “It’s not an ebullient market,” James said, lamenting the subdued stock performance public firms have displayed over the years. Blackstone’s own stock has traded down significantly since its $31 per share issue price; at press time it was trading at $13.20.
Oaktree’s S-1 filing revealed some impressive stats: the firm has generated an aggregate gross IRR of 22.9 percent across its 15 distressed debt funds, and has raised more than $65 billion in the last five years. And yet it still priced at the bottom of its range, selling just 8.8 million shares rather than the intended 11.3 million.
Part of the problem is that these are not straightforward issues. “There could be some carry over as it relates to other publicly traded names,” says one analyst. “These are complicated structures [and] they’re units as opposed to common stock. It takes a bit of time to get comfortable with the structure.”
What’s more, some investors will have had their fingers burned by the poor performance of other private equity groups, such as the aforementioned Blackstone, which has lost approximately half its value since listing (it’s now at about $16.5 billion), or Apollo Global Management, whose shares have lost about a quarter of their value since the firm floated last March.
There may also have been some issues specific to Oaktree (though by no means confined to Oaktree). In setting out the strategy behind the IPO last June, the firm explained it would allow co-founders Howard Marks and Bruce Karsh to sell down their stakes in the business they founded in 1995. Sources say the firm’s employees had already been given a little more than one-third of the company’s stock over the years.
“We believe that at some point Oaktree must be independent of its founders,” the firm said in a regulatory filing. “We want to continue the transfer of ownership in the firm to key employees, but we also want a mechanism that will enable the founders to realise value from their remaining stakes over time.”
As the press gleefully reported, if the issue had gone as planned, both men would have taken home up to $117.2 million each. And this may have persuaded some investors that there was no particular rationale for the IPO other than enriching the founders.
How will this transfer of ownership work, in practice? Oaktree has remained tight-lipped, citing regulatory constraints. Judging by the S-1, the founders have no intention of scaling down their workload in the short-term – but Marks is now 66 years old, so it’s not unreasonable for him to be thinking about reducing his involvement and succession planning.
Succession planning is among the good reasons for private equity firms to go public. Blackstone’s James reminded analysts on the firm’s recent earnings calls that IPOs provide capital for acquisitions and act as a way to retain and motivate employees. Nonetheless, investors clearly remain unconvinced. A hefty IR challenge awaits…