Private Equity Management Firms, Evolution from Private to Public: Why list? Who decides and who benefits?

Rebekka Olafsdottir & Reynir Arnason

Student thesis: Master thesis


Organizations defining themselves as private, becoming publicly owned, with all the regulations and transparency such a status calls for, is viewed as an oxymoron by many. Some investors believe that private equity (“PE”) management firms are merely a necessary vehicle to distribute carry earned and therefore oppose their industrialization process. They feel their constant growth represents empire building, destroying their alignment of interests with the LPs, especially when performance-­‐based compensation starts to matter less to GPs, and ultimately decreasing the benefits PE holds over public assets. Further analysis of the PE giants process revealed that not many of the usual benefits from listing actually benefit the firm much or their stakeholders ex-­‐post, at least not evenly. It also revealed that the individuals that seem to benefit the most from listing are the ones taking the decision. When somebody creates value, ultimately they want to liquefy and get the benefits. Thus many feared this was the GPs way of crystallizing future value, by selling full-­‐price tickets to a ball game in the ninth inning and our results next to confirm that suspicion. The management firms did not lack capital for a specific project, and in some cases, did not even raise much capital. The PE giants did not lack brand recognition nor did they heavily use their units as acquisition currency as they intended. Even though few of the PE giants’ largest owners have exploited the exit opportunity at large, the option remains hugely beneficial, meanwhile they were heavily cashing in on dividends and their share in the carry. But how were other stakeholders affected? Post-­‐ IPO the PE giants constant need to grow revenue and the dependence of the investment professional’s compensation on the uncertain unit price, possibly created a distraction from fund returns, especially when realizations were low. When Blackstone listed, investors lacked knowledge and trust in the persistence of the long-­‐term orientated, down-­‐side protected carry, leading them to grossly underestimate their future revenue and therefore value, at least compared to other more traditional asset managers. With time, PE giants emerged with their model better validated due to strong investment performances and smoothing of realizations. Consequently, according to our results, their general unit volatility decreased, moving closer to the market’s and hence their unit prices increased. Our results also indicate that some learning had taken place, thus PE giants that listed after Blackstone were less discounted from the start, or their prices at least less volatile, but whether it is permanent or not remains to be seen. The annualized excess return for a buy-­‐and-­‐hold initial investment in Blackstone is today around 3%, indicating that despite a long downturn in the beginning, their long-­‐ term investors have done pretty well. Our results indicated that the concerns ex-­‐ante might have been exaggerated, but there are definitely stakeholders that are worse off in some situations, especially LPs and some more junior mangers. Regardless, none of the stakeholders are suffering, at least not after the realizations picked up, and the LPs that were skeptical were just replaced by others.

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
Publication date2015
Number of pages127