* Buyouts overtaken by other asset classes
* Private equity firms going public relying on fees
* Investment banks' woes offer private equity opportunity
By Greg Roumeliotis and Simon Meads
BERLIN, Feb 28 Bosses of some of the
world's largest private equity groups told the industry's annual
get-together that their growth into alternative asset managers,
investing in everything from credit to real estate, was
necessary for their investors to beat the economic cycle.
Private equity, one of the alternative asset classes
offering diversification from stocks and bonds, has
traditionally been about leveraged buyouts - where the buyer
funds the purchase price through borrowing, using the target
company's assets as collateral.
But tighter financing conditions have restrained this kind
of financial engineering and investors accustomed to
double-digit percent returns in private equity have had to
settle for outperforming public markets by only a few hundred
Financial industry titans, who have amassed vast fortunes by
buying and selling companies, said the best opportunities now
lay in cherry picking the offerings of major asset managers.
"Buyouts, which is what people normally think of when they
think of private equity, are going to be an increasingly small
part of a more specialized product base available to the limited
partner community," James Coulter, co-founder of TPG Capital LP,
told the annual SuperReturn International conference in Berlin
Many major buyout firms have developed funds for investing
in other alternative assets.
These include corporate debt, real estate, infrastructure,
hedge funds and venture capital. They have grown to such an
extent that in many of the major firms they have collectively
overtaken private equity in assets under management.
Coulter likened the evolution of the private equity industry
to the mutual fund industry, where Fidelity Investments used to
be known for its flagship Magellan fund before it
diversified into other investment products.
"This is going to continue to grow and if anything
accelerate. [There'll be] more and more specialized products as
people begin to take more and more control of the choices in
their own portfolio".
Multi-platform offerings have allowed private equity firms
to capture major mandates from investors seeking economies of
scale, such as the Teacher Retirement System of Texas giving KKR
& Co LP and Apollo Global Management LLC $3
billion each to invest on their behalf across their funds.
"You have got 4,000 to 5,000 private equity funds in the
world. There will be about 6 or 7 that will be managing a wide
array of assets and be asset managers as you might call them,"
David Rubenstein, co-founder of Carlyle Group LP, told Reuters
on the sidelines of the conference.
"It's a relatively small percentage but there is no doubt
these firms are going to have wide array of things to offer
Many investors do not have the resources to decide which
firms to invest in for every discipline, said Rubenstein, whose
firm boasts 89 active funds spanning various alternative asset
This could tempt many to invest with large firms like
Blackstone Group LP, KKR and Carlyle, that can offer
exposure to a myriad of subsectors.
In the case of Blackstone, for example, private equity made
just over a quarter of the firm's $166 billion assets under
management as of Dec. 31. It was not its top performer in terms
of investor returns either.
Blackstone said earlier this month that its private equity
portfolio was up 5 percent in 2011, its real estate portfolio
was up 17 percent and credit-oriented hedge funds were up 9
percent. The S&P 500 U.S. stocks index was flat in 2011.
"Large (private-equity) firms are diversifying their assets
and strategy in order to get a diversified fee string. That
makes a lot of sense," said Joseph Landy, co-president of
Warburg Pincus LLC, a buyout-focused private equity firm.
Firms that grow into diverse asset managers tend to generate
more of their profits from management fees rather than carried
interest, as fees are charged based on assets under management
rather than performance. This has led to concern that publicly
listed asset managers will become distracted by relying on fees
to pay dividends to their shareholders.
"Analysts are often putting much higher multiples on
management fees than performance fees. As we have a lot of the
leaders in the industry going public, and if they get much
higher values, for management fees than performance fees, will
that affect how they approach the market? We have not seen
evidence of that yet," TPG's Coulter said.
Many private equity firms have adopted a wait-and-see
approach in response to the flotation of their rivals,
acknowledging that the capital raised in IPOs can help their
peers seed new funds and give them a competitive advantage.
"It is an area we have watched carefully over time," said
Rob Lucas, managing partner at CVC Capital Partners, on the
sidelines of the conference. "We have to remain competitive and
if we felt there was a significant benefit being achieved by
that model we would look at it."
However, he said the listed model was not right for CVC and
its investors at this point in time.
THE NEW INVESTMENT BANKS?
The capital requirements forced on banks across the world
following the financial crisis of 2008, including the U.S.
Volcker rule designed to curb banks' trading for their own
profit, have left a void which private equity firms want to
Rubenstein said that it was too early to assess the impact
of the Volcker rule: it may offer opportunities for private
equity to buy business lines divested by banks but it may also
weigh on the funding capacity of banks for leveraged buyouts.
With a huge pool of capital provided by institutional
investors such as pension funds and endowments, private equity
firms have the funds to buy assets from retrenching investment
banks and other financial institutions at knockdown prices.
But regardless of the diversification that the major private
equity firms engage in, even leaders of the major asset managers
acknowledge they will never squeeze out the niche players.
"There is always going to be room for a specialized player,
someone who just does one thing," Rubenstein said.