Monetization mania

The past few months have seen a wave of GP management company monetization activity, notably not only for the high profile of the firms involved but the incredible diversity of approaches.

The Blackstone Group, Oaktree Capital Management, Apollo Management and TPG all are unlocking the franchise values of their firms, but in different ways.

Blackstone's listing is a larger version of that executed by Fortress Investment, which sold a stake in itself to Nomura Holdings shortly before listing 10 percent of its management company on the New York Stock Exchange. Blackstone is itself seeking a listing that at press time was to be valued at roughly $8 billion. Even more surprising was the identity of a direct equity investor in the firm ?the People's Republic of China. A soon to be established direct investment arm of the Chinese government, drawing on the more than $1 trillion in foreign exchange reserves the country holds, will make its debut investment in Blackstone, buying a stake of less than 10 percent for $3 billion. The deal demonstrates how attractive alternative investment firms are now to investors, as well as the possibilities presented by untapped pools of capital around the world.

Oaktree, based in Los Angeles, gets the prize for most creative stake sale. The private investment firm is the first listing on a new exchange run by Goldman Sachs called GS TrUE, or GS Tradable Unregistered Equity OTC Market. The market is a private exchange for institutional investors where unregistered securities may be traded. At press time Oaktree was to sell 13 percent of its management company for roughly $700 million.

Apollo Management and TPG are also exploring similar stake sales, although reports have varied. A source said that, contrary to a Wall Street Journal report, TPG is only in the very early stages of discussing a sale in its management company with some major limited partners. Any sale would probably only involve a ?single-digit? stake in the Fort Worth, Texas-based private equity giant.

Apollo is reportedly looking to sell a 10 percent stake in itself in a private placement.

All of this activity shouldn't be raising any eyebrows. At the recent Milken Institute conference in Los Angeles, The Carlyle Group cofounder David Rubenstein said: ?I wouldn't be surprised if all the major firms were public four or five years from now.?

Fed, Bank of England warn of risks
US Federal Reserve chairman Ben Bernanke is the latest prominent public figure to express concerns about the private equity industry. He cautioned banks on the risks they take during the financing of private equity deals, specifically, ?There are some significant risks associated with the financing of private equity including bridge loans?We are looking at that.? Meanwhile, the Bank of England's monthly financial stability report has warned that the recent meltdown in the US subprime mortgage sector could be repeated in the UK, as leveraged lenders exploit the benign economic conditions to increase their risk-taking, particularly in the area of leveraged corporate lending.

Union pressure on private equity intensifies
Pressure from labor unions on both sides of the Atlantic continues to present political challenges for private equity. The AFL-CIO, the largest federation of unions in the US, wrote a letter to the Securities and Exchange Commission in an attempt to halt the IPO of The Blackstone Group. The union argued that Blackstone's IPO is an attempt to tap the public markets without being regulated by the SEC. The AFL-CIO represents some 10 million unionized workers and 54 unions. The news comes as the US House Financial Services Committee is preparing to hold hearings titled ?Private Equity's Effects on Workers and Firms.? A member of the Service Employees International Union will testify before the committee. In the UK, Trades Union Congress general secretary Brendan Barber has demanded the UK government act before a ?speculative bubble? bursts.

Expanding ?fraud? parameters ensnare PE players as well
The SEC's upgraded anti-fraud protections, while viewed primarily as a crackdown on hedge fund managers, spells stiffer regulation of private equity firms as well, according to a recent client memo from the law firm Fish & Richardson. Proposed Rule 206 (4)-8 prohibits false or misleading statements made to, or other fraud on prospective investors in pooled investment vehicles. The law would prohibit any such statements in private placement memoranda, offering circulars, as well as responses ?to requests for proposals.? Existing investors are covered as well, with law applicable to account statements, including statements on the valuation or performance of the pool. The fraud need not be intentional and doesn't require the buying or selling of securities. These expanded parameters are widely viewed as part of the SEC's response to the court's ruling that the regulatory body exceeded its authority in compelling hedge fund managers to register as investment advisers. The author of the Fish & Richardson memo doesn't predict exactly what this means in terms of enforcement, but believes all documents produced by hedge fund managers and private equity GPs will face greater scrutiny to avoid violating the proposed rule.

Super-sized buyouts court insider trading
Recent analysis of call option trades by the business magazine Financial Week suggests greater insider trading before buyouts than corporateonly merger activity. According to the study, in the three days prior to the announcement of the ten largest buyout deals in the last 18 months, trading of the target companies' stock surged 183 percent, on average, compared to their 20 day trading averages. In contrast, analysis of the ten largest corporate-only mergers of the same period showed trading actually declined in the days leading to the announcement. While noting that corporate only mergers will have surges as well, most notably seen in the days before Rupert Murdoch's bid for Dow Jones, the magazine cited the rise of the mega-deal and club deal as principal causes for the rise of pre-buyout trading surges.