INTELLECTUAL PROPERTY: The public private proposition

There are many arguments as to why private equity firms shouldn’t go public. First, public private equity is an oxymoron in its own right, going against the very essence of the private nature of private equity firms. In addition, private equity fund managers who go public are likely to be torn between the short-term focus on share price and the longer-term, illiquid needs of their investors. And of course, the killer thesis of them all is that public private equity is merely a game about building assets under management rather than value creation.

Zoe Hughes

In the run-up to and in the wake of the initial public offerings of both Fortress Investment Group and The Blackstone Group in 2007, these arguments were rolled out by critics small and large as commentators sought to establish why these titans of private equity should turn to their traditional nemesis for capital after years of operating behind closed doors.

For the firms themselves, the IPOs were about raising capital to build their franchises and creating institutions that could survive beyond their founders. The fact that senior managers monetised their investments in what proved to be the peak of the market was par for the course of an IPO and just great timing on their part.

Four years later, a new wave of private equity and real estate fund managers are eyeing the public markets as they too seek to build their platforms into leading investment management and asset management machines. Kohlberg Kravis Roberts (KKR) was one of the first buyout shops to go public in the post-Lehman Brothers era, last year re-listing its shares from Euronext to the New York Stock Exchange (NYSE). KKR currently is in the very early stages of growing its private equity real estate operations, hiring former Goldman Sachs veteran Ralph Rosenberg in March to lead its new real estate investing programme.

It is Apollo Global Management’s public offering, though, and the implications it has for the firm’s burgeoning real estate platform that industry professionals are more closely watching. Even before Leon Black’s private equity firm raised $565 million through its IPO on the NYSE in March, the growth of Apollo Global Real Estate (AGRE) has been impressive to say the least.

Since hiring the former president and chief executive officer of Citi Property Investors (CPI), Joseph Azrack, in the summer of 2008 to lead its property investment arm, Apollo Global has increased its real estate assets under management from almost nothing to $6.5 billion as of the end of 2010. As well as raising a variety of private and public funds, AGRE also closed on the acquisition of CPI itself in November, which brought with it $3.6 billion in AUM and helped boost the firm’s real estate team to 38 investment professionals.

Such growth has always been part of Black’s ambition for the asset class, people familiar with the matter previously have told PERE. Establishing Apollo Real Estate Advisors (now AREA Property Partners) in 1993 with William Mack, Black had visions of rivalling the likes of Morgan Stanley Real Estate Investing and Blackstone. That vision never materialised and the affiliation between the two firms ended in 2000, with Apollo Global managing partners continuing to have just “minority interests” in AREA. In going public, Black’s hunger to be the next Blackstone has a better chance of success than staying private.

Indeed, in the wake of its IPO, Blackstone grew its assets under management not only by building out its traditional private equity, real estate, hedge funds, corporate debt and corporate finance lines but also by acquiring hedge fund manager GSO Capital Partners, in the process adding $10 billion in leveraged loans and distressed debt investments to its balance sheet. In September last year, the firm added a 40 percent stake in Brazilian alternative asset manager Patria Investimentos.

Reporting its first quarter 2011 numbers, Blackstone revealed its total AUM had risen to $150 billion, up 43 percent over the same period in 2010 and up from $102.4 billion as of the end of 2007, the year it went public. Real estate was no different, increasing from $26.1 billion in 2007 to $33.2 billion in 2010. Fortress also saw similar AUM increases, with its total AUM rising from $33.2 billion in 2007 to $44.6 billion in 2010.

Of course, you don’t need to be public to witness such growth, but having a permanent source of capital on hand to expand your franchise really does help. Take for instance, this year’s PERE 30 (see coverage, beginning on p. 36). Of the top 10 firms, just four hail from publicly-listed organisations but they account for 50 percent of the equity raised in value-added and opportunistic funds over the past five years. And if PERE sources are anything to go by, that figure could rise to 56 percent if The Carlyle Group pushes ahead with plans to list sometime in 2011.

For all of this, however, there is an inherent danger of playing the public card: investors may see your growth as an AUM game, where your focus is on building fee-earning assets rather than extracting value from opportunistic situations. It was a fierce criticism levelled by LPs at the bank-sponsored real estate managers during the height of the financial crisis, but it can just as easily be directed at private equity real estate GPs.