A tale of two publics

When creatures from deep within the ocean emerge on dry land, they are often noted for their exceedingly strange appearance. Ditto for traditionally secretive private investment firms that surface with publicly traded vehicles.

And yet, there they are, the public vehicles of Apollo Management and Kohlberg Kravis Roberts, respectively, in all their transparent glory. Apollo Investment and KKR Financial are similar in that they are each affiliated with a major private equity firm, and each are focused primarily on producing dividends. But the similarities stop there, as illustrated by recent, respective milestones.

Apollo Investment is the business development company that launched scores of imitators in 2004, but ended among the only, and by far the largest, effort to actually make it to the public market. The corporation, led by Apollo partner Michael Gross, raised $930 million in 2004 and, coupled with the ability to use 1-to-1 leverage, has to date invested roughly $1.7 billion, mostly in the form of debt securities in middlemarket, financial sponsor-backed transactions.

Through its BDC, Apollo, better known for deals in the private equity megafund market, has been a provider of senior and subordinated debt to more than 40 middle market buyout firms, including Audax Group, Brockway Moran and Odyssey Investment Partners.

Since going public at $15 per share, Apollo Investment’s shares have increased to a recent $19.50 per share. The firm has recorded a 20 percent IRR on its investments to date. Similarly impressive has been the stock’s yield, which, thanks to a requirement that the BDC pay out the bulk of its interest income to shareholders, currently stands at more than 9 percent.

In a recent interview, Gross said Apollo Investment has no plans to expand much beyond debt investments and into control equity deals, as has been the case with longer-standing BDCs American Capital Strategies and Allied Capital. But he noted that he is determined to grow the scale of Apollo Investment’s activities. ?We’d like to grow to $3 billion to $4 billion in assets,? said Gross.

KKR’s co-investments
KKR launched its real estate investment trust last year after an initial attempt to launch a BDC proved unsuccessful. Already, the stock is paying a 7 percent dividend thanks to a portfolio that is heavy with real-estate linked debt securities and structured products like collateralized loan obligations.

A look through recent filings for KKR Financial reveals an interesting component of its investment program – a small initiative listed as ?private equity co-investments.? Shareholders in KKR Financial, it turns out, gain indirect equity exposure to the deals done by KKR, the private equity giant. KKR Financial will now make pari passu investments alongside KKR, starting with an initial $42.5 million set of investments across several private equity deals. Among the KKR portfolio companies that will be allocated equity from KKR Financial are Avago Technologies, Masonite International, and Toys ?R? Us.

One of the appeals of publicly traded vehicles, from the perspective of private equity GPs, is that they represent ?permanent capital? – a capital base that replenishes itself (through successful deployment) and does not require constant fundraising. In involving KKR Financial in its private equity deals, is KKR testing the mechanisms by which a public vehicle might conduct private transactions? Stay tuned.

Japonica is GIPS compliant
Rhode Island-based private investment firm Japonica Partners announced it has been independently verified as compliant with the CFA Institute’s Global Investment Performance Standards (GIPS). In a press release, the firm’s founder and managing director, Paul Kazarian, claimed to be the ?first firm with a composite over $1 billion in assets verified as compliant with GIPS? Japonica co-investors will recognize the value of having Japonica’s entrepreneurial returns audited in accordance with GIPS.? The compliance verification was performed by Beacon Verification Services. Japonica makes concentrated investments in underperforming global large cap companies, according to the company. GIPSwas developed as a standard for performance measurement and presentation. The CFA Institute was formerly known as the Association for Investment Management and Research (AIMR).

Fear over UK directors’ duties rule
The UK government’s announcement that it plans to introduce a statutory statement of directors’ duties may present new liabilities for corporate directors, according to a client memo from law firm SJ Berwin. The proposed statutory statement would further define the responsibilities and rules governing the behavior of corporate directors. The SJ Berwin memo argues that it is reasonable to have directors ?consider the interests of employees and other key stakeholders? in conducting the affairs of the corporation, as well as to disclose conflicts of interest. But the way the law is currently phrased may ?lead to lots of unnecessary and costly litigation? the memo states, including suits brought by employees who feel their interests have been ignored. It may also lead to directors turning down appointments if they feel a conflict may arise in the future. Going forward with the law as worded could ?have profound effects for the private equity industry and its portfolio companies? the memo stated.

FSA to issue new antimoney laundering rules
The UK’s Financial Services Authority recently announced it will soon replace its current Money Laundering Sourcebook with an entirely new set of rules, according to a client memo from law firm SJ Berwin. The new rules will place a ?high-level obligation on firms to ensure that they have adequate systems and controls for identifying, assessing, monitoring and managing money laundering risk,? according to the memo. The new guidance will be based on notes produced by the Joint Money Laundering Steering Group, which included the British Venture Capital Association. Fresh guidance notes were published on January 31, 2006. The memo notes that going forward ?the onus is firmly on private equity houses to make a case by case assessment of actual money laundering risk.?

EU alternatives body names UK experts
In its efforts to better understand the European alternative investment market, the European Commission has formed two panels to study the matter. Recently, the EU named nine industry insiders from the UK as members of the two panels. On the private equity side, Anne Glover of Amadeus Capital Partners has been named, as has Josyane Gold of law firm SJ Berwin, Carol Kennedy of Pantheon Groupand Vince O’Brien of Montagu Private Equity. The EU has named to its hedge fund panel Segun Aganga of Goldman Sachs, Huey Evans of Citigroup, Neil Warrander of RAB Capital and Rupert Rossender of Man Investments. The European Commission will eventually issue a white paper on Europe’s alternative investment industry, reportedly to be issued this coming October. An EU spokesperson was reported as saying: ?The group on alternative investments will give us the chance to hear from this fastgrowing business on their ambitions in the European context.?