Market volatility hits US-listed buyout firms

Recent difficulties emphasize how private equity firms have underperformed since listing, The Wall Street Journal reported. Blackstone has fallen 61% since its June 2007 debut, Fortress is down 82% since February 2007 and Apollo, which began trading this year, has lost 23%. KKR is the only one in positive territory, up 6.6%.

A weak stock market makes it harder for private equity firms to exit companies via IPOs, one of their principal profit generators. Toys ‘R' Us, owned by KKR and others, and Nationstar Mortgage, which is controlled by Fortress, were both slated for IPOs but plans have now been put on hold. Private equity firms would also suffer from declines in companies that they have taken public but in which they retain a financial interest.

According to analysts, buyout firms trend to trade at a 15-20% discount to other money managers because profits are more volatile - they partly rely on large but infrequent portfolio company exits - and operations can be less transparent.

The need for more consistent revenue streams suited to quarterly earnings reports explains why some buyout firms have sought to diversify their businesses. Carlyle, which is tipped to list late this year or early next year, bought a majority stake in asset manager Emerging Sovereign Group in June. It has also acquired credit hedge fund Claren Road Asset Management and fund-of-funds AlpInvest Partners.

However, the flip side to market volatility and a drop in valuations across the board is that it creates buying opportunities for private equity firms.

It is unclear how public markets uncertainty might affect fundraising. Prequin estimates that global fundraising could reach $300 billion in 2011, with 341 vehicles having secured $160.7 billion as of mid-August. A host of leading US and European buyout firms are expected to launch their latest round of mega-funds in the second half of 2011 - the first time many have tapped the market for large sums of money since before the global financial crisis.

Market sources tell AVCJ that the buyout firms could target well in excess of $100 billion - Warburg Pincus alone is said to be preparing a $12 billion fund now that the $15 billion it raised for its last buyout vehicle in 2008 is nearly exhausted.

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• Topics
• North America
• Buyout
• The Blackstone Group
• The Carlyle Group
• KKR
• Apollo Global Management