Wide investor audience awaits KKR
NEW YORK/BOSTON (Reuters) - Kohlberg Kravis Roberts & Co's KKR.AS long-awaited listing on the Big Board brings a wide investor audience to the iconic private equity firm and could be a bellwether for rivals looking to follow suit.
The buyout firm will switch from Amsterdam-based Euronext on July 15 to the New York Stock Exchange, joining rival Blackstone Group (BX.N), which went public in 2007.
Some expect the move to result in a rise in KKR's shares. A NYSE-listing exposes the company to a highly liquid U.S. stock marketplace in which investing is generally cheaper and easier than in any other jurisdiction.
"I think there's likely to be a fair amount of pent-up demand for the shares once they relist," said Michael Kim, analyst at Sandler O'Neill. "We've seen examples of this type of relisting in the past -- where now that the stock is available to a much broader, deeper pool of potential investors, you typically see a boost."
But some see the listing as a yawn, arguing that investors wanting exposure to private equity could have bought Blackstone's stock.
"I don't think people are lining up to buy KKR at this time; the bloom is off the rose," said Francis Gaskins, president of IPODesktop.com, an IPO research firm.
The move will be closely watched by others who are planning on going public. Apollo Global Management APOLO.UL has also announced plans to list on the NYSE.
David Rubenstein, co-founder of Washington, D.C.-based giant private equity firm Carlyle Group CYL.UL, has in the past forecast that other private equity firms would follow the public route and issue shares with which to attract and retain employees and to use as currency to make acquisitions.
Carlyle said last year -- in response to speculation it was planning to list -- that if it ever went public, such a move would be a long way off.
VALUING THE STOCK
Blackstone was the trailblazer in private equity firms going public, launching an initial public offering in 2007 at $31 a share, just before the credit crisis hit. Its shares are now trading at about a third of the original value.
KKR, which went public last October on Euronext, is taking a different tactic in listing without selling new shares, although it has plans to sell $500 million of new units at some point after it relists, subject to market conditions.
"If they'd done the equity offering at the same time that they relisted, I think the new shares would have sopped up the pent-up demand," said Kim, who has a 12-month price target on the stock of $14 and views it as undervalued.
Rabobank International analysts also view KKR as cheap, estimating the total value at $9.2 billion, according to a research note dated July 6.
KKR's stock is little changed since it started trading as a combined company on Euronext at the beginning of October at around $9. The stock last traded at $10, valuing the company at around $6.8 billion.
Blackstone is currently valued as a whole about $11.5 billion. According to Thomson Reuters I/B/E/S, Blackstone is trading at 8.31 times expected 2010 earnings. KKR is trading at 4.33 times 2010 earnings, according to I/B/E/S.
TIMING IS EVERYTHING
Investors expressed some caution about private equity firms in a fragile economic environment.
"Timing is everything," said Anton Schutz, manager of the Burnham Financial Industries Fund. "If we felt a lot better about the strength of the recovery, I'd be more interested."
"The last thing you want to own in a slow economy, even one that's recovering, is a leveraged portfolio," Schutz said.
Buyout firms raise funds in order to use leverage to buy companies, which they aim to sell later at a profit. Those firms following a public route have tried to diversify to other areas such as capital markets and hedge funds, so they are less dependent on pure private equity profits.
Schutz, who didn't invest in the 2007 Blackstone IPO, said he will look into the KKR offering before it is priced. "I'll look at anything that fits in the financial bucket," he said.
David Ellison, who runs the FBR Large and Small Cap Financial Services Funds, said now is a better time to consider buying private equity stocks than a few years back.
"This is the time to look at these companies because valuations have come down so much," said Ellison. "They're going to come public at a much better valuation."
Still, Ellison said he is not planning to buy KKR shares, seeing better opportunities for his funds in beaten down bank shares trading at or below book value.
A key consideration for public shareholders in private equity is that they might get less information than the investors in the individual funds.
Fund investors, known as "limited partners," are typically provided with frequent updates on the particular funds they are invested in, data not made publicly available.
Still, public shareholders are fairly well aligned with principals at the firms, said Steven Kaplan, a finance professor at the University of Chicago.
"The fact (they) are not disclosing everything at every point in time is maybe not so great, but ... at the end of the day, the only way the principals get paid is by selling companies or distributing shares," Kaplan said.