Blackstone IPO: Private Equity 101

With Blackstone going public, many people are asking some basic questions about private equity funds. Here's a quick FAQ for the average investor thinking about buying a few shares (or shorting them):

What is a private equity firm? Private equity typically refers to firms that take money from pensions, institutions and wealthy individuals and then invests in any number of different ways. At the roots, they are investment clubs for big money.

Private equity firms come in a variety of flavors, including hedge funds (investing in high-risk, high-return alternative vehicles on the public markets), venture capital outfits (putting money in growing, nonpublic companies) and buyout shops (buying undervalued companies on the public or private markets). Some private equity firms do it all.

Blackstone is a great example of this diversity, with four main operating groups, including a corporate private equity group that buys companies, a real estate group, a hedge fund group and a group that deals with advising other companies on mergers, asset sales and joint ventures.

Who invests in private equity firms? You might be surprised to find out that you might, in fact, be a private equity firm investor.

Blackstone's roster of clients had to be made public as a part of its IPO and showed that public and corporate pension funds were its biggest investors, representing more than half of the funds invested with the firm.

There are, of course, rich individuals and families who put their money into these firms, but generally they represent less than 15 percent of the money at play. Banks, foundations and insurance companies also put money into private equity firms.

How are these firms different from publicly traded companies? At the end of the day, the key difference in private equity is obvious: It's private.

When a company or investment firm is public it enjoys the benefits of being able to get money from anyone who has money to invest. In exchange, these public companies are forced to disclose a lot about their businesses in regular, easily accessible filings with the government.

Private equity can be a lot stealthier, because it isn't forced to disclose where its money is being used and does not have to answer to the public markets for the decisions they make about the companies they own. That affords them more wiggle room in squeezing profits out of the assets they control.

Who are some of the other large players? Some of the names are familiar, others not so much. The Carlyle Group, Kohlberg Kravis Roberts and Goldman Sachs PIA probably all ring a bell and rank among the world's biggest private equity firms. Some of firms that round out the Top 10 list for private equity -- such as TPG, Permira, Apax Partners and CVC Capital -- are less likely to attract a lot of public interest.

What are some of the companies that private equity has bought in the past? The most recent big name company to be gobbled up by a private equity firm was Chrysler. The vaunted American car brand was taken off the public markets May 14 when Cerberus offered $7.4 billion to Daimler to take the struggling automaker off its hands. The list of other familiar brands that have been bought out by private equity firms continues to get longer. Among the members of this growing group: cup of Dunkin' Donuts, Burger King, J. Crew, Toys "R" Us, Neiman Marcus, Hertz, Loews cinema, Harrah's and Fairmont Hotels, just to name a few.

Join the Discussion
blog comments powered by Disqus
 
You Might Also Like...