Listed private equity: Winning hearts and minds

Backing the listed stock of private equity firms themselves offers retail investors who may not be eligible to commit to private equity funds the opportunity to share in some of the spoils of the industry.

However, these listed firms face a number of challenges, not least that the asset class is not always familiar to the average investor.

Major firms such as Blackstone, KKR and The Carlyle Group have all been listed for less than a decade, and they don't operate quite like other publically listed asset managers. For example, rather than managing products marked at daily or quarterly intervals, private equity managers invest vehicles typically meant to last 10 years. The short-term approach of looking at near-term cash distributions has contributed to volatility in firms' stock prices, some industry insiders say.

Revenue generation does not follow the patterns established by other asset management businesses. The inclusion of fee-related earnings, such as management fees; book value of their balance sheet investments; and carried interest earned from performance all complicate matters for investors.

Private equity firms' status as partnerships also makes investing more complex for the public markets. It means they are required to make K-1 filings, in the US, to disclose the owners' and shareholders' earnings, losses and deductions, which cannot be logged until regular company filings are complete, thereby deferring tax returns.

“That complicates your investments,” Fitch Ratings senior director Meghan Neenan says. “That deters some investors [from buying private equity stocks].”

The Carlyle Group only went public in May 2012, listing on the Nasdaq at $22 per share. Hitting a high of $37 per share on 21 February 2014, its shares plummeted by more than 68 percent to $11.69 on 9 February 2016. As this issue went to press they sat at $16.85.

In an interview with Private Equity International in October, Carlyle co-founder David Rubenstein said he regretted that he had “been unable to convince people that our shares are worth a lot more than they value them at”.

“We produce a lot of dividends for investors in our funds and for investors in our stock,” Rubenstein said, referring to Carlyle alongside other large listed peers. “We are all raising an enormous amount of money, all much bigger than we were when we listed and virtually every fund we raise is oversubscribed, but we still haven't yet convinced people it's a good buy.”

The stock prices of Oaktree Capital Group, KKR, Och-Ziff Capital Management and Apollo Global Management also reached their peaks in the first two months of 2014, before dropping until early 2016.

Though they have rallied slightly, it's clear private equity firms need to do plenty more “convincing people” of the benefits of the asset class before share prices really take off.