Tuesday, March 29, 2011

Private Equity IPO: Après Apollo, Le Déluge! (APO)

The much delayed Apollo IPO is now said to be oversubscribed with the bookrunners adjusting the price toward the high end of the range.

I'm afraid this will just encourage Carlyle whose forthcoming IPO (along with Glencore's) I am viewing as a sign of the Apocalypse, or at minimum the end of the now two-year-old bull run.

Oaktree Capital Management is also said to think this is a good time to offload some shares on a willing public.

Here's Fortune's Term Sheet blog:

Why publicly-traded PE stocks scare me, and other thoughts on the Apollo IPO
Apollo Global Management is expected to price its IPO tonight, becoming the first private equity firm to go public since The Blackstone Group in June 2007. While we wait to see if Apollo can hit its upper target of $500 million, a bunch of related notes:

* No, the KKR "IPO" didn't count. It was basically a listing transfer from Europe to New York, without any new capital raised.

* From an investor perspective, these things scare me to death. Not because I don't think Apollo, et. al. aren't strong companies, but because I don't think many public equity investors really understand private equity. Like that guy during KKR's investor day earlier this month, who couldn't understand why KKR didn't just raise its carried interest percentage ("it would be a win-win"). Or how share prices sometimes seem more influenced by new investments than by exits.

Moreover, publicly-traded PE firms often seem to act more like indices than independent companies – based on unrealized, marked-to-market portfolio carrying values. Just look at the yo-yo trading prices of BX and KKR...

It will be very interesting to see who Apollo's major outside shareholders are come reporting time. Blackstone has relatively little big mutual fund money, while KKR's is a vestige of its European offering. I think the smart money is scared of being tied to so much dumb money.

* One major driver for these deals is the creation of "public currency." In other words, stock that can help attract new talent and/or groups of talent. But there also is a flip-side: Internal conflicts between cash and options granted to long-term return investors (private equity) and shorter-term income generators (hedge, advisory work, etc.). Hard to get the right balance…MORE