(Reuters) - The chief executive of Partners Group Holding AG, a publicly listed private equity manager with $32.6 billion in assets, said the founders of Carlyle Group LP should be simple and conservative in the marketing of their IPO.
William Conway, Daniel D’Aniello and David Rubenstein, who founded Carlyle in 1987, have registered their private equity firm for an IPO that is expected as early as April and have recruited 21 banks to help them sell it to investors.
“Be very transparent with potential shareholders, talk them down when there is a feeling that the market is exaggerating and people overestimate the future fees potential and vice versa,” Steffen Meister, Partners Group CEO, said in an interview on Friday.
“This can help take out some of the volatility in the share price.”
The advice could be golden as investors who have backed recent IPOs of private equity firms have been burnt: Blackstone Group LP shares are trading at about a third of their 2007 IPO price and Apollo Global Management LLC stock is down a quarter from its 2011 IPO.
KKR & Co LP shares are up by about a third since the private equity firm’s 2010 New York floatation, however, this was just a transfer of the listing from Amsterdam.
Zug, Switzerland-based Partners Group, which started off in 1996 as a fund-of-funds manager investing in other private equity funds and has since diversified into direct investments, has seen its shares more than double since its 2006 IPO.
“(The valuation disparity) has to do with complexity. When Blackstone was doing their IPO, I asked one of my analysts to give me their prospectus. I’m an average smart person, a knowledgeable private equity person, and it was very difficult for me to understand what they were trying to tell me in that prospectus,” Meister said.
Partners Group currently trades at 15.6 times 12-month analyst consensus forward earnings compared to 8.8 times for Blackstone, 6.8 times for KKR and 6.4 times for Apollo, according to Thomson Reuters Starmine.
Much of the valuation woes of publicly-listed private equity firms can be attributed to the complexity of their balance sheet but also the way they have to value their assets to market under Generally Accepted Accounting Principles (GAAP).
“People always tend to be cynical in a more difficult environment and underrate balance sheet investments and the performance outlook simply because they can hardly understand it,” Meister said.
“In a bull market you have the opposite reaction, ignorance translates into excitement so people will tend to overrate things. Private equity firms in the U.S. are also the victims of the volatility that is imposed on them by GAAP,” he added.
Private equity firms tend to have two main sources of income; management fees charged on investor commitments, and carried interest, their cut of the investment profits that provide an incentive for managers to perform.
Private equity funds have a lifespan of up to 10 years which means carried interest may take years to pay out until an investment is realized or may not even pay at all if the fund manager fails to meet a hurdle rate for returns.
In the interim, carried interest is reported under GAAP based on the mark-to-market valuation of the assets of the funds. Such paper profits and losses do not necessarily reflect the actual cash that will come in through carried interest.
“Some reasonable way of accounting for the performance fees ... I think that would be more helpful to them ultimately at least in the long term,” said Meister, whose firm reports earnings under International Financial Reporting Standards (IFRS).
Just over 50 percent of Partners Group’s assets generate carried interest but the firm has managed to be seen in the eyes of investors as a major money manager, such as Fidelity Investments and Schroders PLC, because of its simplicity and diversification, Meister said.
“I suspect that when people look at Carlyle, they might again come to the conclusion that their North American buyout fund business is still a very large driver of revenues, bigger than one or another initiative in Asia for example,” Meister said.
Reporting by Greg Roumeliotis in New York; Editing by Bernard Orr