MARCH 19, 2007|
Equity Goes Public
Firms like KKR are buying stakes in
public companies and pushing, gently, for change
Can voracious buyout firms
like Kohlberg, Kravis & Roberts earn big returns from simply buying a
stake in a public company? KKR thinks so.
On Jan. 23, KKR, for one of
its publicly traded funds, bought $700 million of Sun Microsystems
Inc.'s convertible debt. Sun was gratified by the deal, hoping it would
send the message to Wall Street that the tech outfit would emerge from
its struggles. Both KKR and Sun should be pleased: Shares in Sun have
risen 7% since the announcement, compared with a 3% drop for the
Standard & Poor's 500-stock index. It's the sort of halo effect usually
reserved for the likes of legendary investor Warren Buffett, and it may
signal there's a new player to mimic in the market. "I think Buffett's
record is unmatched," concedes Bret Schaefer, a vice-president for Sun.
But "KKR offers a range of relationships that brings unique value." KKR
declined to comment.
As private equity giants with bulging war chests race to buy ever-larger
companies, a growing number of players ranging from boutiques to major
buyout firms are acting like hybrids of passive mutual fund managers and
activist hedge funds. In the quest for extraordinary gains, private
equity players like KKR are taking minority stakes in public companies,
often through private placements, and working with management teams to
enact change. But unlike agitating shareholders, they aren't hedging
their positions or launching hostile proxy fights.
At Sun, KKR is a cheerleader, chatting up other major investors on
conference calls about the hidden value in the software maker. With this
new relationship, KKR can play matchmaker, giving Sun a shot at being a
supplier to its 37 portfolio companies, a group with $97 billion in
revenues. Sun will likely also elect a KKR executive to the board, and
the private equity firm will serve as counselor for the tech outfit's
upcoming acquisition spree. "They will give us free advice that we would
have otherwise had to pay investment bankers for," says Schaefer.
In some ways, it's a natural brand extension for private equity. Most
firms look at hundreds of potential buyout targets before taking only a
dozen or so private. But in separating the wheat from the chaff, they
miss out on more traditional stock and bond opportunities. If they
invested in public markets, they would not only expand their horizons
but also avoid paying a fat premium, as they do in a buyout deal. Extra
bonus: If things don't work out as they predict, the funds can pull out
of the investment more easily.
Still, this tack sparks controversy. Some private equity investors
resent paying 1% to 2% management fees and giving up 20% of profits for
what they perceive as mutual-fund-like moves. "Most of our clients on
the pension side say the fees are too much," asserts Mario L. Giannini,
CEO of money management and advisory firm Hamilton Lane.
Private equity outfits, which usually pitch the advantages of making
changes in a private setting over a public one, also have a mixed record
when they stray from their expertise. Blackstone Group bought a 4.5%
stake in Deutsche Telekom (DT) last April, but so far its $3.5 billion
investment is down $315 million. On the other side of the spectrum,
private equity giant Warburg Pincus has made at least $390 million, or
118.45%, on its private placement investments in public companies since
2005, estimates PlacementTracker. Blackstone and Warburg declined to
Some boutique firms, such as Blum Capital Partners and Sageview Capital,
think there are so many opportunities in the markets they don't need to
play in the traditional private equity space. Says N. Colin Lind, a
managing partner at Blum Capital: "We're in the business of influence,
That's the kind of relationship some companies cozy up to. Says Sun's
Schaefer of KKR: "It's almost like having an extra staff member on my
investor relations team."
By Emily Thornton