Private equity funds are now rapidly pursuing public equity funds

Q: In mid-May, Alliance Data Systems joined the club of public companies going private, accepting Blackstone Group’s $6.4 billion bid. Around that time, Chrysler’s major stakeholders, including the United Auto Workers leadership, decided that the automaker’s best chance to turn around its business lies in working out its problems under private ownership. So why are the leaders in private equity moving in the opposite direction, tapping the public equity markets themselves? A: The answer, in one word, is differentiation. Money, after all, is rapidly becoming a commodity, and leading Private Equity (PE) funds are looking for ways to stand out even further from the crowd. Top funds want to do deals of almost any size on their own so they can apply their particular approach to improving company performance without dilution by a consortium of investors. Access to public equity also means that funds can be more nimble when pursuing deals in different parts of the world with different types of assets. In Japan, for instance, PE firms often need to structure deals with more debt products to secure capital. In India, minority equity stakes are the key to entry. In China and Brazil, the current focus is on infrastructure investments. Pursuing those opportunities involves a range of risk and return that reaches beyond the typical limited-partner agreements that private equity firms strike with institutional investors. For certain types of Initial Public Offerings (IPOs), going public gives PE firms evergreen sources of capital. They don’t need to waste time and precious human capital on fundraising, a time-consuming process that takes some of the vital players in a PE firm off the field every few years for months at a time. Finally, the leading funds have clearly developed their own brands. Taking a page from their own playbooks, they see ways to use their brands to raise more capital, extend their range and pursue more opportunities.

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Source : IIPM Editorial, 2008

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative