Friday Letter Selling the sizzle

Last month, a group of reporters gathered at the New York City headquarters of a large investment bank for an off-the-record discussion on the growth in the alternative asset industry. Journalists from The New York Times, The Wall Street Journal and The Financial Times were in attendance, as were members of slightly less august publications. And given the relevance of the topic—two weeks earlier, The Blackstone Group had announced its intentions to go public—the bankers addressed an audience hungry for information. 

One of the key topics discussed, and the one most relevant to scoop-hungry journalists, was who else would follow in Fortress’ footsteps. After all, ever since the alternative investment giant filed a prospectus with the SEC last November, many of the people seated in that room had been trying to answer that very question. So the answer delivered by the investment bankers was perhaps a bit disheartening, and not just for the journalists at hand, but also for those fund managers dreaming of billion-dollar windfalls: In their estimation, only six to eight alternative investment managers would go public. Most companies, they argued, simply do not have the stature, the size or, most importantly, the psychology to be a listed entity.

But they do have a valuable business. And increasingly, those firms that cannot go public—or simply do not want to—are exploring ways to monetize that value. Over the past several months, the bankers noted, a growing number of alternative asset firms have been talking about selling a minority stake in their company. “The volume and intensity of that dialogue is staggering,” said one banker.

The rationale of such a strategy is straightforward: It allows a firm to reap many of the same benefits of going public without the headache of actually doing so. And for those firms worried about migration of talent—a key consideration, particularly given the wealth creation generated by their public cohorts—a substantial cash infusion is one way to address the problem.

There are certainly plenty of recent examples to go around. After newspaper reports initially speculated that Apollo Management was going public, it now looks like the private equity firm will instead sell a 10 percent stake in its management company. Just last month, hedge fund manager Old Lane Partners sold its entire business to Citigroup. And last year, Morgan Stanley acquired approximately 20 percent of New York-based hedge fund Avenue Capital.

These types of transactions are not new, of course. Over the years, private equity and private equity real estate firms including Blackstone, The Carlyle Group and Warburg Pincus have all sold ownership positions to AIG, CalPERS and Credit Suisse, respectively. And a number of smaller institutions such as New York-based opportunity fund manager The Praedium Group have forged similar partnerships. What may be different these days is both the number of firms considering such a move and, most critically, the valuation they are likely to receive given public comparables and the hunger for alternative asset exposure. (AIG’s stake in Blackstone, which it acquired for $150 million (€115 million) in 1998, could be worth almost 20 times that in an IPO).

During the panel discussion, there was a lot of debate about whether or not the Fortress and Blackstone filings represented the peak of the private equity market. And though the investment bankers did their level best to argue otherwise, it was unclear whether the journalists were convinced. After one banker said nobody can predict when markets go up or down, a reporter quipped: “Isn’t that what these guys are paid to do?”

Actually, they are paid to make money for their investors. And over the years, many of them have done very well in that regard. But in pursuit of that goal, most alternative asset managers have spent their time focusing on the inner workings of almost every company except their own. Both the sheer number of firms exploring potentially transformative transactions and the types of transactions under consideration—IPOs, minority stake sales, bond offerings, even credit ratings—suggests that private equity firms, hedge funds and opportunistic real estate investors are thinking about the types of things most serious minded companies think about: long-term growth and stability, succession and employee retention.

Is the market at a peak? Perhaps. But a more likely explanation is simply that the market is finally growing up.