Precarious - Times for listed players

"Listing a fund is a re-packaging of the asset class to access new capital by creating an entry point for different types of investors," summarises Nathalie Duguay of law firm SJ Berwin. The aim is to attract family offices, wealthy individuals and institutional investors which do not have a dedicated private equity investment team. Beyond simply raising new cash, this has the added benefit of diversifying a private equity firm's investor base, limiting exposure to cycles in LP appetite. Tapping into new sources of investment, including retail investors, the so-called democratisation of private equity, is undoubtedly on of the key drivers for listing.

Other benefits of a public quotation include the transition to a more transparent model. "We are making the choice of getting ahead and conforming with transparency standards which are likely to affect all private equity firms eventually," explains Olivier Millet, of OFI Private Equity. Another side-effect of a listing is that it raises the profile of the private equity firm. Whether this is an advantage or a disadvantage is a moot point. According to a French large-cap investor, one reason to go public could be to facilitate take-privates. "Non-listed funds, through the drawing of commitments from their LPs, diffuse sensitive information about their intentions to a significant number of people. The more people know about your plans to delist a company, the more its share price increases, the less likely you are to succeed in taking it private. Being publicly-listed limits the number of people 'in the know' about your intentions."

So far, most of those taking the IPO plunge are funds-of-funds and secondaries players. HarbourVest, Lehman Brothers, Conversus Capital and Partners Group are but a few noteworthy examples. Across the Continent, a selection of small- to mid-cap GPs have opted to list on their domestic markets, such as OFI Private Equity and Turenne Capital (France), Cape Live, Mid Industry Capital and Management & Capitali (Italy) and BBVA Capital Privado (Spain).

Preparation is everything

Both for direct investors and funds-of-funds, several lessons can be learned from recent attempts to list a fund. "A clear strategy is paramount. Investors want to know where, when and how their money will be used," said a German investment director. Millet confirms this and adds that the proposition has to be stable and provide regular remuneration. He says: "Hybrid equity/mezzanine players are very well suited to public listings, as the mezzanine means recurrent cash generation, which feeds a regular flux of dividends. This is very attractive to investors. Turnaround or venture funds, on the other hand, are too unpredictable." Alberto Franzone, managing director of Management & Capitali, however, defends his listed firm's turnaround and special situations strategy: "Our investors are very aware of our longer investment horizons and simply expect higher multiples on their returns over a longer period. They are not so interested in a regular flow of dividends, especially in the first years of existence."

A variety of investment angles has already emerged for listed private equity funds. Co-investment is the most common model, with firms like Apax Partners SA trailblazing in France with its listed co-investment entity Altamir Amboise. Publicly listed since 1995, Altamir has recently been merged with twin vehicle Amboise. The fund, which originally provided 20% of equity investments in Apax Partners SA's buyouts, now contributes 40%. "After making adjustments over the past few years, we believe we have found the right balance, both in terms of investor diversification and optimal fundraising," explains Monique Cohen, a partner at the firm.

Others have created publicly-listed investment companies which act as a single investor in other non-listed vehicles. This strategy, an alternative type of fund-of-funds, was adopted by LSE-listed SVG Capital in 1995 (investing in Permira's LP fund), and this month by HarbourVest (investing in its own funds-of-funds). Another approach, suggested by a French GP but not adopted by anyone yet, would be to create a listed fund specifically aimed at making public investments of private equity (PIPEs) in preparation for subsequent delisting attempts. 3i and SVG Capital both have similar models focusing on PIPEs.

With a defined strategy in place, private equity firms considering a listing need to think who its shareholders will be. Ensuring most of your investors understand the true value of your portfolio naturally minimises the net asset value (NAV) to share price discount. Cornerstone investors also have an important role to play. French insurer MACIF owns more than 50% of OFI Private Equity Capital's shares, following its EUR53.7m share capital increase in July 2007. "Investors are always more likely to invest if they are reassured by the presence of significant institutional in the vehicle's shareholding," explains Millet.

This is also true for funds-of-funds, such as Guernsey-based Conversus Capital, which raised $1.835bn on Euronext Amsterdam in July 2007, making it the largest publicly-traded portfolio of third-party private equity funds. Only $460m of this was sold offered to the public, with the remainder going to strategic and private investors (including CalPERS and Harvard Management Company) whose shares will float over time. "Our offer to the public investors was 3x oversubscribed and the green-shoe fully exercised," says Conversus' CEO Bob Long.

Selecting value-added investors can also be a key to success. This was foremost in Cape Live's mind when it raised EUR51m on the MTF segment of the Italian stock exchange in July 2007. EUR20m was allocated to a group of private individuals which had been bringing dealflow to the firm since 1999. The small-cap private equity firm closed its first deal 10 days after the IPO and has completed two more since then, validating this approach.

The dreaded J-curve

Investors welcome any technique that can help defy the J-curve. In the context of a listed fund, this can be done by ensuring that a portion of the assets are close to realisation at the time of the IPO. "The capital raised by Conversus Capital was used to purchase a mature, diversified and high-quality portfolio of private equity funds from Bank of America. This ensured we were 100%-invested at IPO in a cash-flowing portfolio with little to no cash drag," says Long.

In contrast, Lehman Brothers leveraged its listed fund-of-funds by more than 50% at IPO. Long also believes Conversus has an innovative governance structure, with an independent CFO who reports only to the public company board, providing an important layer of protection for investors.

Slow take-off

Listed funds have grown in popularity, but have yet to prove themselves as a definitive model for private equity. Following a flurry of IPOs in July, several listed private equity funds investors are now staring bleakly at disappointing quarterly results. Lehman Brothers' fund-of-funds saw its share price gain just 2.9%, despite NAV jumping from 47% to 58%. Cape Live shares lost around 10% of their value since the IPO in mid-July, while Management & Capitali dropped almost 15% over the same period. In addition, Frankfurt-listed turnaround fund Arques Industries saw its shares lose almost half their value. While KKR's shares have since stabilised, they too lost 10% of their value in the summer.

These funds would no doubt point out that shareholder confidence is not helped by the current macroeconomic climate.

This is the price to be paid for going public. Increased exposure to fluctuating investor confidence and to a generally less sophisticated investor-base is part of the deal. There is widespread exasperation at the current NAV/share price discounts from listed private equity players, especially on the Continent and educating investors about the asset class remains an unavoidable chore. Many GPs are therefore likely to wait until private equity gains more of a foothold in the public markets before committing. KKR, the ultimate large-cap guinea pig according to one non-listed GP, has not yet inspired a series of public listings, but interest in listed private equity may yet be catalysed by the launch of specially tailored markets, such as LSE's Specialist Fund Market (SFM).

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