Why some PE firms have turned to public markets

The term ‘private equity firm’ is becoming a misnomer as fund managers branch out into other asset classes. This is especially true of those that have turned their attention to public equities.

EQT is among the latest to do so. The Scandinavian private equity giant – which jumped 24 places to seventh in this year’s PEI 300 – registered its debut public equity fund in June, after launching a specialist division in April.

Why would a manager that specialises in majority buyouts turn to the public markets? Buyouts give private equity firms the power to generate value as they see fit, through buy-and-build acquisitions, governance changes or cost-cutting measures. In minority public equity positions, managers have to consider a host of additional shareholders when trying to implement similar operational improvements.

A shift in an investment firm’s strategy could be something to be wary of, according to Holger Rossbach, senior investment director at Cambridge Associates, which advises limited partners.

“The fund managers we really like on the PE side are heavily involved and really always go for the majority in terms of ownerships in the existing portfolio companies,” Rossbach told Private Equity International. “Public equity has a different set of rules in terms of picking successfully and making smart investment decisions – the learning from the PE world and how much you can transfer it to the public equity segment is limiting. We are rather happy if a private equity firm sticks to what they know well.”

London-headquartered Triton is one private equity firm active in public markets. It is understood to have completed approximately €200 million of public equity investments from its 2009-vintage €2.4 billion Fund III and 2013-vintage €3.5 billion Fund IV before launching its dedicated Triton Value Fund last year. The vehicle has gathered around €110 million from Triton’s partners, friends and family, and will now push to attract more third-party capital, according to a source with knowledge of the firm.

Triton and EQT declined to comment for this piece.

Triton Value Fund has nine companies in its portfolio and has already made two exits, the source said. It aims to hold companies for three to five years, which can vary if the share price rises quickly in a short period of time.

It is unclear how the fund has performed so far.

Triton and EQT will target Northern European stock markets – a strategy that could prove key. Nordic public companies typically have a board of directors nominated on one-year terms by a committee of their largest shareholders. A private equity firm with a position on that committee would have greater opportunity to shape and interact with the company’s board than other shareholders. It’s a strategy successfully used by one of Europe’s largest activist investors, Cevian Capital.

Triton’s investments range from small stakes to ownership positions of up to 30 percent,  according to its website. Deal sizes typically range from €5 million to €100 million.

“You could beat a very clearly established public market benchmark, which helps in a downturn because all you have to do is lose a little less than the others.”

Oliver Gottschalg

Public funds also use less leverage than traditional private equity vehicles, ticking down potential returns. Triton Value Fund is expected to generate 15 to 20 percent on all capital in the vehicle this year, the source said. Public equity funds are generally open-ended as they are more liquid and charge around 0.2 percent in annual management fees, compared with the 2 percent typical of private equity.

With lower return prospects and fees, why launch such a strategy? One consideration is the business cycle, given the potential for private equity operation experts to reinforce public companies against macroeconomic headwinds.

“You could beat a very clearly established public market benchmark, which helps in a downturn because all you have to do is lose a little less than the others,” said Oliver Gottschalg, associate professor of strategy at HEC Paris and co-founder of its private equity observatory research centre. “It’s whatever strategy they pursue that’s better than an ETF-type play.”

But will LPs back these strategies? One European family office PEI spoke to said it shows GPs “will take any opportunity to raise any funds even if their strategy does not fall in its expertise.”

LPs are more likely to stick with a given managers’ private markets offerings such as credit, Rossbach added.

“The private element is rather [more] prevailing than the equity element.”