Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Initial public offerings by alternative asset-management firms -- many of which are best known for their private equity businesses -- may be history.

The most recent one dates all the way back to May 2014. Although it created liquidity for Ares Management LP's early shareholders, including the Abu Dhabi Investment Authority and co-founder Tony Ressler, as well as an additional form of currency to attract new hires, it hasn't exactly been a winner for them or for new shareholders. The stock's total return including dividend reinvestments is just 13.7 percent, which pales against the S&P 500 Index's more than 40 percent total return over the same period. 

How They've Fared
The performance of alternative asset managers since their initial public offerings has differed, in part because of equity market fluctuations
Source: Bloomberg

By treading the path to public markets, Ares and the five firms that came before it -- Apollo Global Management LLC, Blackstone Group LP, Carlyle Group LP, KKR & Co. and Oaktree Capital Group LLC -- have provided a cautionary tale for their smaller peers. Because of outsize earnings volatility and the fact they are structured as partnerships, these firms trade at discounted price-to-earnings multiples compared with the valuations commanded by their traditional asset-management peers such as Franklin Resources Inc. and T. Rowe Price Group Inc. 

On the Outside, Always Looking In
The price-to-earnings multiples of alternative asset managers are, as a whole, lower than those of traditional asset managers, in part because of earnings volatility
Source: Bloomberg

Instead of pursuing the IPO path, a bevy of their smaller rivals are fetching similar or better valuations by selling nonvoting, passive stakes in what has become a thriving corner of the industry. Proceeds can be used to expand by adding, for instance, a credit arm, or simply to invest in future funds. A key advantage of this route is that it enables longtime shareholders, often founders, to partially cash out while continuing to avoid the glare of quarterly earnings and pesky activist shareholders. So why go public when you can simply sell a piece of yourself?

For the firms selling stakes, it helps that competition is increasing. One of the most prolific investors in these minority interests is Neuberger Berman's Dyal Capital, which owns stakes in private equity firms like Vista Equity Partners, Silver Lake and Providence Equity. Other players include Goldman Sachs Group Inc.'s asset-management arm (which owns minority stakes in Accel-KKR, Riverstone Holdings, Littlejohn & Co.), Blackstone (which owns a minority stake in Leonard Green & Partners) and Wafra Investment Advisory Group Inc., an affiliate of the Public Institution for Social Security of Kuwait (which owns stakes in TSG Consumer Partners and TowerBrook Capital Partners).

And while details are often scarce, some of these minority stake transactions value firms at eyebrow-raising numbers. Tech specialist Vista, with its roughly $30 billion under management, is reportedly valued at some $7 billion -- a figure that's only a fraction below the enterprise value of Ares, whose assets under management are almost triple Vista's. Valuations may inch higher yet, if only because firms that are raising or have raised capital purely to invest in such stakes will be vying for the same deals.

Eventually, though, these funds will need an exit strategy, and the endgame is becoming a little clearer, with a touch of irony. First, a so-called secondary market, in which investors sell these stakes to one another, will almost certainly develop. The other most likely option has already been trumpeted by GP Interests, a fund that rolls up minority stakes in private equity firms: It reportedly intends to take the fund public. 

Investors are likely to be more receptive to IPOs of companies that simply manage a collection of such stakes than the firms individually, in part because the diversity of the earnings stream should lead to enhanced stability. And Affiliated Managers Group Inc., which has already been public for two decades, has proved the model works -- the only difference is that its stakes are in investment management firms that specialize in strategies from equities to fixed income rather than private equity. 

Above and Beyond
Initial public offerings of portfolios of private equity firm stakes may be well received, in part because of the success of Affiliated Managers Group, which owns stakes in investment firms
Source: Bloomberg

Nobody needs to fret about how equity capital markets bankers, who specialize in IPOs, will keep the lights on. Private equity firms will continue to take the companies they invest in public. As for themselves? Their days of IPOs are probably over. They may be traded -- but as a bundle of slices. 

Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director at Blackstone.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. One idea is that this move is a hedge against any changes in how carried interest is taxed because profits from direct investments in funds can be treated as long-term capital gains. 

  2. Other investors include Carlyle's AlpInvest, Hycroft Capital and Tunbridge Partners LLC

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net