Public Private Equity?

When does a company go public? The simple answer is whenever its private owners feel that they can get the most for their shares. Elaborating a little further, you might also time it such that it precedes a decline in the value of those shares. Well, private equity firms are no different.

Coming off of a great run starting shortly after the dot-com bubble burst earlier this decade, private equity firms are lining-up at the SEC to file their registrations for public offering. The Blackstone Group already went public and now KKR and Apollo are set to go next. There is no doubt that the partners behind these firms know exactly what they're doing, but there is a something to be said for the dilution of those firms' mission statements that follows their IPOs.

Harvard Business School professor Josh Lerner said it well in a Fortune magazine article this month. Going public necessarily means that the firm's management must now begin to focus on what it never had to consider in the past: the quarterly reports. While benign unto themselves, the implications are profound.

Quarterly reports, as we all know, are scrutinzed to no end. Markets rise and fall with the slightest deviation from expectations. Consequently, management does all that it can to meet or exceed those expecations. However, it must do so in consideration of the fact that it must repeat that same feat only 3-months later all over again. The result, as you might expect, is a steadying of the earnings to ensure consistent returns and profits. While this is, of course, a sound business practice, this does seem to go against the general reasons for which people seek venture capital as part of their investment portfolios in the first place. If we wanted steady returns and lower-risk, then wouldn't we go elsewhere?

In the end, this is likely just an example of the life cycle of any company. While it may leave us private equity fans just a little saddened, it's probably only fair to not suggest that these firms should behave any differently than any other. It's just that private equity firms are our heroes. They do the deals that make headlines and form the basis of great books, magazine articles and sometimes movies. When is the last time you watched a movie about a bank lending some money? Exactly.