We’ve written recently about the topic of private equity firms and alternative asset managers going public. By our count, at least seven alternatives managers have either listed or been reported to be mulling going public over the past 18 months.
A vocal critic of this trend is Skandia Asset Management’s head of private equity and infrastructure, Daniel Winther. Our upcoming interview with him – out next week in the June issue of Private Equity International, delves into why one of Europe’s largest LPs is bearish on the subject. The argument against managers going public is straightforward: listed GPs will focus on growing assets under management to increase the firm’s share price. This could lead to a too rapid growth in fund sizes or the launch of extraneous strategies.
To be clear, Winther doesn’t see GPs going public as a black and white situation. Yes, a listed manager can deliver outperformance and be just as aligned with their LPs as non-listed ones, but in his view, why take the risk that they aren’t?
Skandia would appear to be an outlier on this subject – listed giants such as Blackstone, KKR or Carlyle Group are not exactly suffering from a lack of LP appetite for their funds. Still, the Swedish insurer is in an enviable position to make this call. Its buyout portfolio delivered an internal rate of return of 72 percent last year without the help of any of the US listed giants – though Winther declined to comment on whether EQT, which the firm was an early backer of and which listed in Stockholm in 2019, is an active part of its portfolio today.
It’s worth noting that the issue of GPs going public is not likely to be an acute issue this year with the IPO window considered by many to be shut. Indeed, Luxembourg-headquartered CVC Capital Partners has been reported to have pushed its planned IPO until the autumn or 2023.
Still, the issue is an important topic that drives at the heart of alignment between LPs and GPs. Any ownership change to the management company has the potential to impact culture or focus, not to mention alignment. One LP has previously voiced frustration to PEI that GP minority stake sales, for example to a GP stakes buyer, are sometimes communicated to LPs almost as an afterthought – a single bullet point in a general email to investors or a footnote in a quarterly update. Such practice does little to encourage good will with LPs.
Of course, not all LPs agree fully with Winther’s line of thinking. Sam Robinson, long-time investor and managing partner at North-East Family Office, admits that while it can be “a bit worrying” as an LP because a listed manager theoretically has less skin in the game and a new distraction to think about, he says he understands why some GPs want to do it.
“As I get older, I start to understand it more,” Robinson tells PEI. PE executives may be rich on paper but only receive the cash when they’re too old to spend it. A 31-year-old might need to re-mortgage their apartment so they can fund their GP commitment and be entitled to a tiny sliver of carry, which they won’t see for at least seven years. In the meantime, says Robinson, the firm could be raising two or three more funds and, as an individual progresses within the firm, they will be expected to commit an even larger percentage of the GP commitment. “The only way to cash out is to stop investing and wait 10 years,” Robinson adds.
In the words of one top executive at a non-listed European buyout firm, LPs continue to back listed GPs because private equity continues to provide superior returns; because there continues to be an imbalance between supply and demand in private markets; and because they know that going public is likely the best way for a GP to ensure it has access to capital and can continue to grow in the long run.
Unless any of those dynamics change, the issue of GPs listing looks set to remain a gripe for a small portion of LPs and the reality of private markets investing for others.
– Alex Lynn contributed to this report.