KKR, Apollo IPOs could encourage more

With two major buyout firms in the pipeline to trade publicly in the United States, the way is open for other big fund managers to sell shares in the stock market, some analysts believe.

Should New York-based buyout firms Apollo Management and Kohlberg Kravis Roberts & Co. complete their IPOs later this year, they will join an industry group that includes heavyweights The Blackstone Group and Fortress Investment Group.

Analysts say that this could create a tipping point where more rivals see IPOs as viable next steps in their firms’ evolution. Chris Kotowski, an analyst at Oppenheimer & Co. Inc., says that as a group, the buyout firms provide psychological comfort to stock investors, who have greater ability to evaluate the companies in relationship to their peers—and to the broader market.

The most likely candidates are the largest, most established firms, the ones with the longest track records, Kotowski says.

In a research report in January, Kotowski offered a “primer” on private equity as public companies, offering Oppenheimer’s clients an introduction to the industry, and listing 20 of the largest firms, including Bain Capital, The Carlyle Group, CVC Capital Partners, Oaktree Capital Management and TPG.

Public stock would give firm partners a way to cash out of the businesses they have built, and it could also provide new liquidity to limited partners that have invested in the management companies themselves, rather than in the funds that the general partners raise.

Such investments enjoyed something of a vogue around the turn of the century, with one of the earliest being a reported investment of $150 million by American International Group for a 7% stake in The Blackstone Group. Likewise, the California Public Employees’ Retirement System has made direct investments in Silver Lake, Conversus Capital, Thomas Weisel Partners, Apollo Management and The Carlyle Group. Last November, BNY Mellon Asset Management bought a 20% stake in international private equity firm Siguler Guff & Co.

By offering stakes to limited partners, such firms could demonstrate that they are not averse to bringing on additional investors in the future, says David Chiaverini, a senior research analyst at BMO Capital Markets Corp.

“That they have accepted third party investments shows there’s a willingness to share ownership with outsiders,” Chiaverini says.

Among factors that would give pause to buyout firms contemplating public offerings, the mini-group of public buyout shops has underperformed the market. Since mid-June 2007, about the time Blackstone Group went public, its shares are down more than 60%, compared to a drop of just more than 20% for indexes such as the S&P 500 and the Dow Jones industrial average. Over the same period, Fortress Investment Group’s shares are down more than 80 percent.

“I don’t think you’ll see a lot more this year,” Kotowski says. “You’ll need to see a lot more stable market.”

The newest offerings could provide important clues for other firms, Chiaverini says.

“If investors are receptive and put high valuations on KKR and Apollo, it may encourage more private equity firms to go public.” —Steve Bills