The rise of individual investors: publicly traded GPs

It appears to be as good a time as any to invest in listed private equity firms. Recent C-corp conversions have caught the eye, but a closer look suggests other reasons to be optimistic.

US-listed general partners were, until recently, complex for investors. Firms were required to file K-1 reports with the Securities and Exchange Commission disclosing the owners’ and shareholders’ earnings, losses and deductions, which cannot be logged until regular company filings are complete, thereby deferring tax returns.

C-corp conversion does away with some of this red tape, making fund manager ownership a more appealing prospect for the retail market. Since KKR’s announcement in May that it would convert, the private equity giant’s shares have risen 22 percent. Others may follow suit, with Blackstone president Jon Gray “impressed” by KKR’s stock growth as a result of the change.

For some GPs, however, the rise in share price can be short-lived. While Ares Management’s stock rose from $22.70 on 14 February to $24.45 the following day when it announced it would shift to C-corp, the shares returned to pre-announcement levels in under a month.

Short-term gain aside, GP ownership could be an attractive proposition for those looking to diversify through a variety of asset classes and geographies. Firms such as Blackstone, Carlyle and KKR all provide indirect exposure to a range of asset classes, including real estate, private debt and infrastructure, with dividends bolstered by management fees and carry across all of these offerings.

As it stands only a handful of GPs have floated, limiting the options for retail investors.

One solution is to incorporate these stakes into a broader offering. Swiss investment firm Partners Group – itself listed – manages a standard mutual fund named Partners Group Listed Investments SICAV – Listed Private Equity, of which approximately 35 percent is invested in listed GPs, while the remainder comprises shares in listed business development companies and PE trusts globally. The minimum buy-in is one share, around €245 as of early August.

“For several years we’ve had a significant overweight to listed GPs because we believe they have been undervalued,” Reto Munz, head of liquid private markets at Partners Group, told Private Equity International. “They have caught up substantially in valuation now but we believe there’s still a bit of upside in the US ones.”

A C-corp conversion means GPs can be included in stock indices, making them more accessible for retail investors, Munz added.

As listed firms continue their march towards all-purpose asset management and as fee revenues look set to comprise a larger portion of revenues, investing in such GPs makes for an appealing prospect.

Stay tuned for more on how retail investors can access private equity this week.

Click here for the previous reports in this series, collateralised fund obligations and listed private equity.