Thursday, May 03, 2012

Carlyle Group and Other Private Equity Firm IPOs

News reports indicate that the Carlyle Group, a large and successful private equity firm, has priced its IPO at slightly below the initially expected range.   Apparently, the firm met with some skepticism from investors about their offering, and more generally, the prospect of investing in publicly traded private equity firms. 

Dan Primack of Fortune has written an article about investing in these IPOs.  To start his article, he writes:

Shortly after the Blackstone Group went public in mid-2007, I advised friends not to buy the stock. Investors didn't seem to understand how private equity firms like Blackstone should be valued, as illustrated by a 6% share price bump in the days after Blackstone agreed to acquire Hilton Hotels. Private equity firms recognize value when they sell assets, not when they acquire assets, I argued. They aren't conglomerates that generate margin via economies of scale.

I'm quite confused by the comment.  How precisely is a private equity firm different than a conglomerate?  Both own a variety of unrelated businesses. Conglomerates don't achieve economies of scale.  In a developed market such as the United States or Western Europe, how can one achieve scale economies by acquiring unrelated businesses?    You simply cannot!

Let's get to the heart of the matter then. Private equity firms do create value in society, and they do differ from publicly traded conglomerates.  How?  In many ways, when private equity firms gained prominence, they offered a better governance model than publicly traded corporations.  Many publicly traded firms suffer from high agency costs that come with the separation of ownership and control.   Private equity ownership of a business reduces agency costs and reduces the clash of interests that often exists between CEOs and shareholders of publicly traded corporations.   If' that's a major advantage of a private equity firm, then what do we make of taking these private equity firms public?  Well, I would argue that such public offerings counteract one of the key benefits that private equity firms bring to the table.  They would seem to interest a layer of agency problems at the top, offsetting some of the very governance benefits that private equity firms bring to the companies in their portfolio.

1 comment:

james said...

Boy oh boy lets give warren a pat on the back for calling private equity for what it really is. Private equity is nothing more than a blood sucking way to drain the life and vitality out of a company in order to make a fast buck. Buy a company using lots of leverage. Along with some dirty little tricks like buying quietly a majority stake in a company behind everyones back without making a tender offer along with and including buying the shares at a big discount to what they are actually worth without declaring your intentions' to deceive investors. Than declare that your taking the company private and offer as little as possible for the remaining shares which are worth twice as much money as your offering for them and than say your saving the company what a bad bad bad joke. These private equity firms will do anything to come out ahead on the bottom line. Like sell all the real estate a company owns' sell or loan out patients and copyrights' tradmarks' pit one state against another threatening to move a division of their company to another state if they do not receive a subsidy or some generous tax breaks. Sell off divisions of the company that are undervalued. Fire as many workers as you possibly can' along with cutting the wages and benifits of the remaining employees to increase the bottom line. Squeeze price concessions from loyal vendors that are heavely dependent on a large part of their sales to your company. Tell your unions its take drastic cuts in wages and benifits or else risk having your plant shut down. And finally when you bring your company public again hire that so ethical investment banking firm goldman sachs to overhype the value of your public offering to increase the amount of money you will receive when the company becomes a public company again and at that point you bail out of the stock leaving a company torn into pieces from what it originally was.