November 10, 2006
Private Equity Going Public
Fortress Investment Group will be the first hedge fund doing an IPO on the NYSE. Several private equity funds are trading on the Euronext Amsterdam Stock Exchange. [KKR's is the best known.]More will come. Several comments. First, good to see one in New York. The Amsterdam rules make such listings easier. Second, the IPOs make such funds available to small traders who are not wealthy enough to invest in private equity funds directly (it takes usually $1m in cash to step up). The SEC will not like this much. Look for more fussing on the issue at the SEC. Of course, this will encourage funds to go to Amsterdam and exclude United States investors.
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Fortress is a different beast than the KKR Amsterdam offering. That was an opportunity to invest in a fund investing in KKR private equity funds. Fortress is simply selling a piece of itself (i.e., you're buying the asset management company and getting part of the presumed 2 and 20 not investing in the fund itself and getting the hopefully higher returns).
As such, it preliminarily values the
management company at $7.5 billion (they're selling 10% for $750 million). The usual metric for valuing asset management companies is between 10-15% of their AUM but it certainly doesn't seem to apply here since Fortress' valuation is closer to 30% of their $26 bn of AUM. Notably, use of proceeds in their S-1 says that they will repay $250 million of bank debt with the remainder being used for "general corporate purposes", although in the back pages they also talk about 2006 distributions to management of just under $300 million and they leave a placeholder for a cash
distribution of $____ immediately prior to the offering. Without knowing what they made
pre-IPO, it seems like a bit of a cash-grab by management. By the way, post-ipo Fortress management still owns 90% and holds all of the voting rights through a dual class stock.
Fortress management is considered some of the smartest money on the street, but still, in light of all this, I view this offering as more a sign of the hedge fund bubble than giving U.S. investors a (needed) shot at alternative investments.
Posted by: Steven M. Davidoff | Nov 13, 2006 2:14:52 AM