Opinion: Of prurient interest

One of the many things alternative investment firms can get criticised for is taking themselves public. 

Different people get hot under the collar about private equity IPOs for different reasons. LPs worry about the likely conflict of interest in their GP becoming answerable to a new set of shareholders. They also point to the apparent contradiction of the proponents of a business model built on a notion that private ownership brings great benefits to companies suddenly choosing to forego these benefits themselves.  

These reservations aren’t trivial. But neither are they insurmountable. The onus is on the newly public general partner to effectively align interests between themselves, their new shareholders and their investing clients. This is a challenge. Impossible it is not. 

Another, altogether larger constituency likely to take an interest whenever the bell is rung for a private capital provider is the public at large. What attracts their interest – and creates eye-catching headlines – is that listing the management company of a billion-dollar enterprise creates a liquidity event for its owners. This can be vastly lucrative depending on the firm in question, the make-up of its ownership structure, and how many shares the owners choose to sell. At a time when questions of fairness and income inequality are highly sensitive issues, this is bound to cause controversy. 

Oaktree’s offering in April priced at the bottom end of its range. Even more disappointingly, the shares have since traded downwards. Clearly volatile public markets played a part. But the widespread coverage of the huge sums the firm’s co-founders Howard Marks and Bruce Karsh stood to make from the IPO – over $100 million each – can’t have helped either. Some potential investors may have wondered whether there was a rationale for this IPO other than allowing the founders to take some money off the table; others may have worried that they might not be motivated in the same way after picking up such huge sums.

For its part, Oaktree insists that in order to endure it must become independent of its founders, and that the “most widely accepted” way for an entrepreneur-led business to achieve this is to become publicly owned. Despite the above difficulties, this is hard to argue with. Oaktree says the management structure will continue as normal after the IPO – but the two founders are at a point in their careers when the question of succession cannot be ignored. 

And if they take some money off the table, so what? They’ve spent their working lives building up a hugely successful franchise. Why shouldn’t they be entitled to reap the rewards now? Why is it any different to Mark Zuckerberg crystallising an enormous fortune by floating Facebook? If investors can be persuaded that listed private equity is a good proposition, and that conflicts of interests can be circumnavigated – and there is clearly still a lot of work to do on both of those fronts – surely that is the most important thing. Focusing on the wealth that accrues to the founders may be of prurient interest, but it’s just an irrelevant distraction.