Listed Private Equity
Private equity consists of investors and funds that make investments directly into private and public holdings or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet. The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company.*
Listed private equity (LPE) companies are publicly traded vehicles that generally invest capital in privately held businesses. They may also take positions of significant influence and/or control in publicly traded businesses. The model and structure can be similar to those of traditional private equity funds, except that LPE companies are publicly traded in the open market. Simply stated, LPE is a different approach to accessing the same asset class.
Red Rocks Capital has identified a global investment universe of over 500 private equity companies and funds with an aggregate market capitalization of over $500 billion which represents over 10% of the total global private equity universe of $3.8 trillion.**
**Preqin, January 2015
Some common characteristics of Listed Private Equity (LPE) include:
- LPE is an ownership interest in a set of investments that are traded in the open market on recognized financial exchanges every day. These ownership interests are no different than what an investor in a traditional private equity partnership might hold; investments in a set of businesses with the objective of maximizing total return at the end of an investment period.
- LPE vehicles are structured as common equity (or shares), units in investment trusts or units in publicly traded limited partnership interests.
- LPE vehicles typically take the form of direct private equity investments, fund of fund private equity investments (both primary and secondary fund interests, along with their future funding commitments) or an interest in the management company that oversees various investment funds/business units. Listed private equity vehicles can also be some combination of the above, or a hybrid.
- LPE is a permanent pool of capital. Once raised, the capital of a listed private equity vehicle is recycled from one deal to the next. This represents a significant difference in the business model for a private equity manager and offers options not available through traditional limited partnerships.
- An LPE company may also offer traditional limited partnership-based funds that they manage alongside the LPE vehicle. In this instance, the private equity company is investing both the LPE vehicle’s capital along with the limited partnership-based fund’s capital in the same deals or businesses, at the same time, on the same terms, thereby leveraging the deal flow, due diligence and ongoing work of the private equity managers for the benefit of both vehicles.
- LPE vehicles can be structured to focus on senior loans, mezzanine debt or secured/unsecured debt investments. In some cases, a private equity manager may have an LPE equity vehicle that focuses on the debt side of the capital structure along with a traditional limited partnership-based fund(s) that invests in the equity side of a deal. The LPE vehicle may invest in the senior loan, mezzanine debt or secured/unsecured debt in a deal while the traditional limited partnership-based fund(s) invests in the equity side of the same deal.
Potential benefits of the listed private equity (LPE) market include:
Access to Private Equity
Opportunities to invest in private equity funds have traditionally been available to well connected, very large institutions. LPE companies are available to retail investors and institutions of all sizes with low minimum investment amounts required.
Access to many of the best managers
As a result of the investment banking and initial public offering process, it is typical to see only the best private equity companies able to become public.
A traditional private equity fund may invest in less than ten companies and are often concentrated by industry, stage of investment and subject to vintage year risk. By owning a basket of LPE stocks, investors can have exposure to hundreds of companies across various industries, countries, stage of investment (early, mid, late) and reduce exposure to the ‘J curve’ effect (the point where traditional private equity funds reach breakeven).
Private investment funds or partnerships typically have a fixed life of 8-12 years. LPE companies are perpetual investment vehicles with no set life. Therefore, investments and liquidity decisions are based on the goal of maximizing long term return for shareholders.
LPE companies are traded on public markets and offer a high level of liquidity whereas private equity funds are typically purchased at the beginning of the fund's life. Investors in traditional private equity funds are usually paid back through distributions over the life of that fund. Additionally, the structure of traditional private equity funds makes withdrawing an investment prior to the end of the fund's life difficult.
Unlike private funds which have a pre-determined life span that often requires them to distribute proceeds at set points in time, LPE companies choose to re-invest or distribute proceeds from liquidated investments based on current market opportunities.
Private equity funds and partnerships are typically priced quarterly and usually take 3 months for valuations/prices to be determined. Pricing of investments within private funds are generally not scrutinized to the same degree or held to the same standards as publicly traded private equity companies. Within private funds there is great resistance to quickly mark investment values upward or downward.
Managers of private equity funds typically charge fees based on total committed capital or fund size regardless of whether investments are made and are not as impacted by performance of investments. Listed private equity companies typically have tiered fee schedules based on success of the holding company, performance of portfolio investments, and/or the amount invested.
Public companies are required to disclose financial conditions and their investments. Activities of listed public companies and estimated values of investments can be observed on a timely basis.
Many of these public companies return investment income, dividends and interest to investors while retaining proceeds from liquidated investments.
Asset managers are companies listed on a regulated markets which derive their income from managing private equity or private debt portfolios and from balance sheet investments in funds they manage.
Business development companies
Business development companies are companies listed on a regulated US market and generate returns through direct investments (equity) in and loan capital (debt) to private companies at all stages of development.
Buyout typically refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business asset is acquired from the current shareholders typically with the use of financial leverage.
The cut private equity firms take when the funds they manage make a profit. This serves as an incentive for fund managers with the remaining profits distributed to investors.
When private equity firms team up to go after large targets. Private equity firms often say these deals help spread out risk and leverage firm-level expertise.
The bonds of firms that have filed for, or are on the verge of, bankruptcy.
Funds-of-funds are listed on a regulated market and produce returns through investments in several private equity funds.
The manager of a private equity fund. This can refer to the private equity firm itself, or the senior partners of a private equity firm. Some of the biggest private equity firms include Blackstone Group, Kohlberg Kravis Roberts, Carlyle Group, TPG (formerly Texas Pacific Group) and Bain Capital.
Growth capital refers to minority investments in mature companies. It is a type of investment suited to a diverse range of growth opportunities, including acquisitions, increasing production capacity, market or product development, turnaround opportunities, shareholder succession and change of ownership situations.
Holding companies are companies listed on a regulated market which generate returns through investments in unlisted or listed firms with a private equity approach (significant participation, active involvement, focus on exits and maintaining board seats).
When a company is bought with mostly borrowed money. The loan is frequently secured by the assets of the target firm.
The investors in a private equity fund. These are usually institutional investors like pension funds and endowments looking for better returns and diversification than those generated in public markets.
Listed private equity (LPE)
LPE is made up of listed vehicles that invest in private equity companies or vehicles. Such vehicles may take the form of corporations, unit trusts, publicly traded partnerships, or other structures, and may focus on mezzanine, buyout or venture capital investments.
An annual fee investors pay to general partners to manage a private equity fund.
Private placements of unsecured, subordinated debt. Due to higher risk relative to senior debt, investors receive higher interest payments and in many cases ‘equity kickers’ in the form of equity warrants.
Other than operational improvements, these are tactics that increase the value of a portfolio company between buying and selling it, such as: buying several related companies and combining them into a single entity, merging a private company with a public entity, or repositioning a company to compete in markets and industries with more potential.
Changes that improve the operating margins of a company, such as: supply chain optimization, product/SKU profitability and rationalization, product enhancements or new product introductions, pursuit of new geographic or market segments, IT investments/rationalization, sales team/sales process optimization, marketing enhancements, and real estate/facilities rationalization.
Seeks to provide cash financing to promising start-ups and companies in early stages of growth in return for an equity stake. It is often the riskiest private equity subclass and tends to focus on the technology and life sciences industries.
The legal inception date as stated in a private equity fund's financial statement.