Home Value Investing Horizon Kinetics On Public Private Equity Firms

Horizon Kinetics On Public Private Equity Firms

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Kinetic Horizon presents a market commentary on publicly-traded private equity firms.

With tax season fast approaching, K?1?generating securities come up frequently in client discussions. You might find some of the reasons surprising.

Varieties of publicly-traded private equity firms

In the world of asset allocation, there are three varieties of publicly-traded private equity firms. The first are those that manage private equity funds and collect management and performance fees. The second class consists of firms that simply invest their own capital in private companies. The third class is comprised of firms that make debt and equity investments in private equity deals.

Examples of the first class of publicly?traded private equity firms include KKR & Co. L.P. (NYSE:KKR), The Blackstone Group L.P. (NYSE:BX), and Oaktree Capital Group LLC (NYSE:OAK). Examples of the second class are Wendel SA (EPA:MF), EXOR SpA (BIT:EXO) and, to some extent, Reinet Investments (OTCMKTS:REVNF). Examples of the third class are American Capital Ltd. (NASDAQ:ACAS), Main Street Capital Corporation (NYSE:MAIN), Gladstone Capital Corporation (NASDAQ:GLAD), and Prospect Capital Corporation (NASDAQ:PSEC).

The shareholders of companies in the first group (KKR, Blackstone, et al.) will receive the return on the private equity company’s participation in various private equity deals, plus that portion of management and incentive fees that is not paid to the employees, which is to say gross of fees. In contradistinction, an investor in the private equity deals themselves—i.e., the direct client of, say, KKR, who invests as a limited partner in one of the KKR private equity pools—receives the return on the very same investments net of a management and incentive fee. In no case do the investors in the pools of the private equity deals themselves share in the incentive and management fees on the deals.

The shareholders of the first group of firms (KKR, Blackstone, et al.) have daily liquidity, while the investors in the private equity partnerships have, at a minimum, 10?year lockups, side pocket provisions, extensions at the behest of the manager, and other restrictions. Also, a management fee is paid on any capital that is uncommitted. It seems unlikely that the shareholders of a publicly?traded private equity firm could possibly underperform the actual deals. For that to happen, the manager would have to charge negative fees to its clientele.

Collectively, eight publicly-traded private equity firms represent a great portion of the industry. They include KKR & Co. L.P. (NYSE:KKR), The Blackstone Group L.P. (NYSE:BX), Oaktree Capital Group LLC (NYSE:OAK), Apollo Global Management LLC (NYSE:APO), Brookfield Asset Management Inc.(NYSE:BAM) (TSE:BAM.A), The Carlyle Group LP (NASDAQ:CG), Fortress Investment Group LLC (NYSE:FIG), and ONEX Corporation (TSE:OCX). It seems there is no scenario in which the equity of publicly?traded private equity managers does not do better than the individual deals, or partnerships, except if one is fortunate enough to buy into an extraordinarily good partnership. However, there is no way to make the proper assessment in advance, since one must commit the capital before the deals are executed.

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