Top trends of 2007: founders monetize their franchises

PERE looks back at the year just passed for the trends that mattered most. Today we look at trend number two - private equity real estate management companies monetized their franchises through partial sales to external investors.

It may have marked the peak of a cycle or the bold beginning of a new era, but whatever the trend indicated, it saw billions of dollars flow from primarily institutional investors to the founders of alternative investment firms. During 2007, one after another, major firms sold stakes in their franchises to the public, to sovereign wealth funds, to external financial institutions.

Most of these firms – Fortress, Blackstone, Apollo, Oaktree, Carlyle, Och-Ziff – have major private equity real estate arms. The founding partners of these firms described the stake sales as strategic solutions for employee retention, continued growth and access to more capital. In other words, the capital created through a partial monetization event makes it easier for the next generation of the firm’s leadership to participate in ownership, gives the firm a greater ability to make acquisitions, and structures a relationship with a large institution that might result in vastly more capital being earmarked for future private equity real estate and other funds.

Fortress IPO: ringing in a year of founder monetizations

Industry skeptics saw the stake sales as little more than founders cashing out. Indisputably, eager supply was being met with rabid demand. 2007’s wave of firm monetizations began with the initial public offering of a minority stake in Fortress Investment Group on the New York Stock Exchange. The IPO was preceded by the purchase of a 15 percent stake in Fortress by Nomura Holdings for $888 million, setting a foreign-investment template for the stake sales to follow. Next came the highly anticipated Blackstone IPO, but not before the People’s Republic of China announced the debut investment from its new sovereign wealth fund – a $3 billion stake in Blackstone. Both Apollo and Oaktree partially listed their management companies on a new Goldman Sachs private securities exchange called GS Tradable Unregistered Equity OTC Market, or GSTrUE. Concomitant with this, Apollo sold a 10 percent stake in itself to the Abu Dhabi Investment Authority for $1.5 billion, as well as a $600 million stake to the California Public Employees’ Retirement System.

The Carlyle Group then announced the sale of a stake in its management company to Mubadala, the Abu Dhabi government’s strategic investment and development company, for $1.35 billion in cash (CalPERS already had a stake). Next up was alternative investment giant Och-Ziff, which announced plans for an IPO as well as the sale of a stake to Dubai International Capital, which acquired a 9.9 percent stake for roughly $1.18 billion. Limited partners have not uniformly been fans of these transactions. Some fear that the monetization events take founders’ money off the table – GP risk capital that had served as a powerful alignment of interests. Others fear a competition for the attention and loyalty of general partners from increasingly powerful sovereign-wealth funds, not to mention public sources of long-term capital. Ultimately, the true effects of private equity real estate’s transformation into a broadly owned asset class will be seen in the performance of the funds, and the verdict on this will not be in for years to come. In the meantime, Fortress’ and Blackstone’s share are trading well below their offering prices, indicating that a good portion of the market believes the outlook for these and similar firms to be well below what was sold.

For the complete Top Trends list, check out the 2007 PERE Yearbook, out now.