Why publicly-traded PE stocks scare me, and other thoughts on the Apollo IPOMarch 29, 2011: 9:41 AM ET
Apollo Global Management (APO) is expected to price its IPO tonight, becoming the first private equity firm to go public since The Blackstone Group in June 2007. While we wait to see if Apollo can hit its upper target of $500 million, a bunch of related notes:
* No, the KKR "IPO" didn't count. It was basically a listing transfer from Europe to New York, without any new capital raised.
* From an investor perspective, these things scare me to death. Not because I don't think Apollo, et. al. aren't strong companies, but because I don't think many public equity investors really understand private equity. Like that guy during KKR's investor day earlier this month, who couldn't understand why KKR didn't just raise its carried interest percentage ("it would be a win-win"). Or how share prices sometimes seem more influenced by new investments than by exits.
Moreover, publicly-traded PE firms often seem to act more like indices than independent companies – based on unrealized, marked-to-market portfolio carrying values. Just look at the yo-yo trading prices of BX and KKR...
It will be very interesting to see who Apollo's major outside shareholders are come reporting time. Blackstone has relatively little big mutual fund money, while KKR's is a vestige of its European offering. I think the smart money is scared of being tied to so much dumb money.
* One major driver for these deals is the creation of "public currency." In other words, stock that can help attract new talent and/or groups of talent. But there also is a flip-side: Internal conflicts between cash and options granted to long-term return investors (private equity) and shorter-term income generators (hedge, advisory work, etc.). Hard to get the right balance…
* Not surprisingly, Apollo still has not adequately explained its troubled ties to California "placement agent" Alfred Villalobos. But its prospectus does say the following:
"Certain affiliates of Apollo have received subpoenas and other requests for information from various government regulatory agencies and investors in Apollo's funds, seeking information regarding the use of placement agents. Apollo is cooperating with all such investigations and other reviews. Any unanticipated developments from these or future investigations or changes in industry practice may adversely affect our business. Even if these investigations or changes in industry practice do not directly affect our business, adverse publicity could harm our reputation, may cause us to lose existing investors or fail to gain new investors, may depress the price of our Class A shares or may have other negative consequences."
* There has been lots of focus on which PE firms plan to follow Apollo into the public markets, assuming it manages to price. The answer is: Large firms which have significantly diversified their asset management activities beyond private equity. Blackstone, for example, has advisory, real estate, placement and hedge businesses. Apollo has credit and real estate, KKR has capital markets, etc.
Firms that fit this diversified model include Carlyle Group, TPG Capital, Silver Lake Partners and Providence Equity Partners. Firms that have stayed pure private equity include Hellman & Friedman, Madison Dearborn, CD&R, THL Capital and Warburg Pincus. Expect the former group to all be out talking to bankers over the next month (many have already begun). Expect the latter group to take a cursory look at Apollo's stock price, and then get back to work.