After some of the largest private equity firms—including Blackstone, Apollo Global Management, KKR, The Carlyle Group and Ares—went public nearly a decade ago, a new wave of US and European PE firms is hitting the public markets.

In this episode of "In Visible Capital," private equity reporter Ryan Prete sits down with Wylie Fernyhough, PitchBook lead PE analyst, to discuss the performance of these publicly traded PE firms, how they have adapted to having public shareholders, the impact of current market volatility and more. Also, PitchBook PE analyst Jinny Choi shares key takeaways from her recent analyst note on the growing prominence of US PE mega-deals and exits.

In the Upwork segment of "Innovations in Private Equity," Tim Sanders is joined by Jon Finger, partner at McGuireWoods, an international law firm with expertise in private equity. Jon covers topics from M&A to ESG goals and which innovations in private equity are standing out right now.

Listen to all of Season 5, presented by Upwork, and subscribe to get future episodes of "In Visible Capital" on Apple Podcasts, Spotify, Google Podcasts or wherever you listen. For inquiries, please contact us at podcast@pitchbook.com. Transcript Ryan Prete: Hey, Wylie, thanks for joining us today.

Wylie Fernyhough: Yes, thanks for having me. Happy to be here.

Ryan: Why don't we go ahead and start with a brief history of PE firms going public. We had a first US wave about a decade ago, we're still in the midst of a European wave. Now, with TPG going public in January, is this a second US wave? I'm curious if you could talk a little bit about the history there.

Wylie: Yes, I'll be happy to. I think, for this wave that we saw during, and a little bit before and after, the financial crisis in the US, we saw a number of the big firms, whether it was Apollo, Carlyle, Blackstone, sell minority stakes—it would be GP stake[s] at that point since they were still privately held—to outside investors. And because it was an easy way to achieve liquidity, because it was able to tap capital markets, multiples were good back then, there were a lot of tailwinds as there still are in the private capital space. We saw Blackstone, Apollo, KKR, Carlyle and Ares, not necessarily in that order, go public.

Then for a number of reasons, they really didn't trade all that highly for a while. After those initial five went public, it was quite a while before we saw this next wave of firms start to go public. To your point, it's the better half of a decade before we now start to see Bridgepoint, EQT, Blue Owl, Antin Infrastructure, and now TPG, which have all gone public, somewhat recently. Then, we expect a number of other firms to potentially tap the public markets depending on volatility and a few other elements that could affect that going forward.

Ryan: Why did a US PE firm not go public for a handful of years?

Wylie: Yes, great question. It certainly was the better part of a decade where we didn't really see a large alts manager list, whether it was in the US or over in Europe. I think that's for a number of reasons, but the main one is that it's a cumbersome and difficult process to be public. It's certainly not as easy as being private, and I think the benefits didn't necessarily outweigh the drawbacks for a decent amount of time.

I think it really took until Blackstone and some of the other firms changed from being partnerships to C-corps, which made them eligible to be held by some of the larger indexes, which really helped boost their share price[s] as well as simplifying and streamlining some of the ways that they're able to record and show shareholders more or less how they're doing. They used to have something called economic net income and they've gone away from that to use fee-related earnings and now distributable earnings, which are maybe not the perfect way to be thinking about profits for these managers, but they're a lot easier for some of these public markets investors to understand.

During that time, we really saw the multiple that these firms traded at go up pretty significantly. Some of these firms are now trading at two to three times higher multiples than they were five or six years ago, not to mention the fact that they've grown revenues pretty substantially during that time. Now all of a sudden, we see Blackstone and Ares, in particular, trading at 30-plus times trailing 12-month DE, and that's a pretty healthy multiple. There's a number of firms that are of the size to where it might make sense to go public, and these other firms have now blazed that trail and are now trading at multiples which make it relatively attractive. If you're able to achieve that type of price, it makes some of those drawbacks of being public worth it.

Ryan: I'm curious if you could talk a little bit about the ways that these public PE firms have adapted to now having public shareholders.

Wylie: Similar to what I said earlier, I think two of the biggest ones have been switching to become C-corps from partnerships and then changing some of the non-GAAP profit metrics that they report in these quarterly earnings. Another one that we're seeing happen right now, and it's pretty interesting to watch it happen more or less live, is actually distributing different amounts of fees—which come from management fees and other monitoring fees—versus carried interest which is typically the bulk of how a lot of these firms actually earn their money.

With the S-1 that we saw with TPG, I believe it was 75%-plus of their total revenue for the first three quarters in 2021 was carried interest, and then they actually went and changed the way that they distribute from a more traditional 50-50 model to keeping a majority of that carried interest in-house, I believe it was somewhere around 80%, and then distributing out the majority of fees. These fees are very recurring in nature and almost software-like. Those get it a much higher multiple from public investors than do carried interest, which tends to be lumpy, which tends to be more sensitive to the economic environment.

So we're seeing some firms [restructuring fees]. KKR made some changes around that as well, and I think Blue Owl, EQT also went under similar restructurings before publicly listing. It's something I would expect to continue to happen for any firm that chooses to go public in today's environment. It's something that will likely happen for some of these other larger firms that have been public for a while.

Ryan: I'm curious if we could pivot a bit to the analyst note that you put out a couple of weeks ago, which really dives deep into tons of data on public US PE firm earnings, highlighting ... performance through 2021. It goes into depth on what is called the big five public PE firms; Blackstone, KKR, Apollo Global Management, The Carlyle Group and Ares Management. One of the top key takeaways in the report is really the record-breaking metrics that we saw in assets under management, fundraising, fee revenue, total profits and more. I'm curious if you could talk a little bit about what made 2021 such an appetizing year for another spree of record-breaking earnings reports from these public PE firms.

Wylie: It's certainly a number of things that went into it. I think going forward, we expect fundraising to continue to be better. I think certain, I will say, geopolitical—a war in Eastern Europe is obviously a big question mark—[factors will be important] in terms of how 2022 is going to shake out. But looking forward, there are a lot of tailwinds in the alts space, so we would expect fundraising more broadly to continue to go up and to the right for a lot of these big firms.

I think a good chunk of it was coming off of the pandemic year in 2020, which, as we've written about in some of our reports, really put the brakes on a lot of the exit environment. So capital was still being raised, capital was still being deployed, but a lot of these portfolio investments were still held. Finally, when multiples and pricing came up in 2021, a lot of these firms were able to exit companies at pretty healthy valuations, which then brought in a significant amount of carried interest, it returned a good chunk of capital to these limited partners, [and] most of that capital gets recycled into new funds. So it really helped with some of the fundraising numbers that we saw.

I think, jumping into some of those numbers, it's pretty staggering. The number for Blackstone, I believe their total inflows for the year was $270.5 billion, which is more than the cumulative AUM of CVC and TPG, one of which is a public manager, and the other one is expected to go public later this year, so it really shines a light on how just massive Blackstone is, and to your point, how great of a year it was for a lot of these big firms.

Ryan: You mentioned the ongoing crisis in Ukraine. Following a really phenomenal year for these public PE firms, what are the other risks out there that could affect their stock prices?

Wylie: I think the number one [thing] that a lot of these firms highlight, and I think is the main one long term, is just the performance of the funds. Alternatives have continued to garner outsized distributor capital from investors, whether it's large limited partners and large institutions or the growing amount of capital going in through the retail channel, but it's because of the promise of outperformance and significant upside, and I think if that starts to go away, and if certain firms start to produce regular third- or fourth-quartile performance figures, that can really undermine the brand and slow fundraising and slow the growth process that we've seen so far.

That's probably the number one thing that I would say is a real risk to them. I think when you get to the size, there's certainly not the same amount of key-man risk where one or two people, if they were to retire tomorrow or something were to happen, that these firms wouldn't be able to function and manage. I think they're just so well built out and institutionalized, there's a lot less risk than you have with smaller firms, but I think performance to me is really the big one that drives the longer-term performance of these stocks.

Ryan: Let's talk a little bit about TPG. Obviously, the firm, as we mentioned before, went public in January. I'm curious about the roadmap to TPG's IPO and how the firm compares in AUM to the other public PE firms.

Wylie: Yes, it's an interesting question. I think TPG, in general, is a very buyout-heavy, private equity-heavy firm. Especially in the last couple of years, we've really seen the growth equity side of that firm start to expand and we've seen them now jump into the secondaries market. I think that's critical for a lot of public investors: They like to see diversification in terms of the assets under management and really being in a couple of different strategies.

These monoline firms, as TPG used to be, are just a little bit riskier and less attractive and there's fewer growth options and potential, so we really saw them try to diversify their revenue and asset mix in the lead up to the IPO and since going public. Similar to what we talked about earlier, they restructured some of the payouts. They'll be keeping a lot more of the carried interest in-house and paying out a significant chunk more of management fees. I think that's a trend that is here to stay.

When we look at their AUM, it compares pretty favorably to a number of the other firms that have recently gone public or are likely to go public. In the 100-ish billion-dollar range, it's somewhat similar to CVC over in Europe or somewhat similar to the overall AUM of Blue Owl. It's going to be significantly behind a number of these other big firms, but they've been public for over a decade, and firms, even Ares or Carlyle which are on the smaller side compared to some of the other bigger names, they still have $200-plus billion in assets under management.

Ryan: Just a couple of months before TPG went public, we saw a GP stakes firm in Petershill testing the public market. You also wrote another analyst note on that which was really great. I'm curious if you could talk a little bit about the difference between a PE firm and a GP stakes firm and why Petershill Partners going public is such a big deal for the GP stakes industry.

Wylie: Happy to talk about that. Always happy to talk about GP stakes. The Petershill one is interesting because it was a combination of two of their funds and then that was publicly listed over on the London Stock Exchange. I think it was really interesting to test the market and see what kind of valuation they would get, and for a number of reasons, we've seen the share price trade down pretty substantially since IPO.

I think there was some selling pressure initially to return some capital to those fund LPs. Again, like we talked about, the war in Ukraine really drive down prices and inflation fears, and there's a number of things that have hampered that. But in general, it's an accumulation of I believe 20-plus minority stakes in mainly private equity, but a significant amount of real estate, some hedge funds, credit funds as well. It's a little bit different than looking at a pure-play firm, such as Blackstone or some of these other ones where you're really able to just dissect and dive into one firm.

The difficult part about these listings is that there's not the same level of transparency. Then there's also not the same upside if you are able to buy into one of these more thematic and high-quality and growing managers—whether it's a Francisco Partners or Clearlake which are in the portfolio, these are great managers, but there's always going to be others that maybe are on the other side of the barbell and not quite driving performance quite as much.

The interesting thing about Petershill is, I agree, it's a big step forward for the GP stakes market. And we've actually seen the largest player in the space, Dyal, it's been reported that they're also looking to list some of their funds over in London as well. It's unclear exactly if it would be Fund III and IV, or how it would be structured, but I think it's clear that despite the early trades, in terms of stock price coming down on the Petershill front, Dyal still thinks it's favorable enough to be pursuing this option.

Ryan: You talked about a couple of risks that are involved with Petershill, notably that their portfolio is quite opaque. As you mentioned in your report, how are they able to keep their ownership levels and deal structures unknown to investors while they're a public company?

Wylie: Yes, there's a lot of things that they don't want to get out and they don't necessarily legally have to report. I think whether it comes down to the structuring or certain terms and whatnot that are involved in how they structure deals versus maybe how Blackstone or Dyal or some of the other mid-market firms do it, a lot of that is some of the secret sauce.

It's things that they will fight tooth and nail to not have to necessarily report. As long as they report the cumulative earnings and revenues from these underlying portfolio companies and how the portfolio looks in general, that's all they really need to report to shareholders. I think that'll be something that Dyal will help with as well. They have a pretty strong marketing arm and [will] be able to really tell that story of what these portfolio of stakes should be trading at. I think it's going to be something that takes a while, just as it took a while for the market to fully understand the story behind, whether it's Ares or Blackstone, and really be able to fairly value these assets. I think it's going to take some time for the market to fairly value and fully understand these GP stakes portfolios as well. That's not to say that there isn't potential for more transparency to come down the line, but I think it's certainly going to take some time.

Ryan: As we look forward—we're in early March now—to the end of this year, there are talks of other firms going public. You've already mentioned CVC Capital. In the US, there's L Catterton, a consumer-focused PE firm. L Catterton seems to be pretty small, smaller than these other firms in terms of valuation. I think I read a report where they're going to be valued at around $3 billion. How do you think a firm is expected to perform coming into the market being essentially the smallest firm out there surrounded by these private equity giants?

Wylie: It's a pretty interesting and unique story that L Catterton has, whether it's the tie-up with LVMH, the consumer focus, their ability to really drive outperformance on some of these interesting deals that they have, whether it's in the pet food category or other consumer-based products. I think the niche element is going to play to their advantage. Over time you might see them grow into other strategies and other areas, but I think in general, there's no reason to think that if they structure something pretty similar to Blue Owl or TPG or what have you, in terms of paying out a majority of the management fees, keeping a lot of that carry in-house, that it couldn't trade up just based on the pure growth potential of this firm. Because, to your point, it's a sizable firm. There's a lot of potential to be raising larger and larger funds focused on that consumer market where they really are a dominant player.

I think they'll do fine. I don't think it will hamper them, in terms of being on the smaller side. We've seen some other firms that are even smaller. P10 is an example, and they have a number of strategies in the smaller mid-market space. I think they've traded pretty well at this point; I think it's closer to $1 billion to $2 billion market cap. I don't think it'll be a problem for L Catterton and that could invite some other similarly sized players to come to market.

Ryan: Obviously, the market has been filled with volatility for the past couple of months and broader volatility the past couple of years. We could talk for a long time about the cons of being in a volatile market, but with these public PE firms, do you think there are, if any, advantages at all to being a public PE firm in a volatile market?

Wylie: I don't know if there's necessarily an advantage over being public in a volatile market versus a calm market. But I think when you get to a certain size, there is an advantage to being a public entity. I think it shows your LPs a certain level of size and maturity and stability. I think it affords that public equity, it's a new type of currency to be able to perform M&A, which we've seen a lot of on the large end of the alt space lately. I think whether it's access to capital or some other reasons, I do think there are a number of advantages to just being a public alts manager once you hit somewhere around that $100 billion mark. To our point earlier, whether L Catterton performs well, and a couple of other firms that have gone public in Europe, which are smaller than the $100 billion range, we could see that kind of shift.

Ryan: I know that we've already talked a little bit about the risks that affect these public firms. There are talks of a couple of interest rate hikes coming from the Fed this year. I'm curious why exactly those directly affect PE firms and how much you think they could in the coming months.

Wylie: Certainly, I think interest rates affect all assets because everything is discounted at a certain rate back to the present day, which is how you come up with a value, whether it's for a stock, bond, option, etc. It is certainly a large deal if and when the Fed starts to raise rates off the zero-level bound. I think there's a lot of unknowns that will be coming certainly in private equity, whether it's the cost of funding to borrow for some of these LBOs or the multiples that these very growth-oriented companies are trading at when they're backed by these growth equity firms, or whether it's the amount of spread you're able to achieve on credit or real estate, infrastructure, what have you, it affects every single element. I think it's very possible that returns will have to come down, that multiples could compress to a certain amount.

I think it doesn't stop the overwhelming tailwind of alternatives flowing from public markets into private markets. So I think net they will continue to be beneficiaries of that trend and still trade healthily. I think you'll still see above-trend revenue growth for a lot of these big firms. They continue to raise larger funds. But certainly it's something that they're all thinking about and talking about.

Ryan: I know often when you and I talk for stories, it's tough to give a prediction down the line. But looking forward to the rest of this year and even into 2023, do you have a prediction on how many other firms we might see do an initial public offering or at least release a plan to go public?

Wylie: I think I'd probably be more comfortable saying that if there weren't a war in Ukraine right now, which I think throws a wrench into everything. ... Everyone is pretty much on pause, I think, waiting to see whether it's sanctions, how bad certain elements get. There's just so much that's unknown right now. It's hard to make that prediction. Last I'd heard, there were at least five to seven large managers, probably a lot more, that are in some sort of consideration mode waiting for maybe '23. I think you're going to see, as we've seen reported, CVC, L Catterton and I think a couple of other names try to go public in 2022 so long as we see a little bit more stability in the back half of the year.

Ryan: Well, Wylie, if when more firms do go public, you and I will have a lot more to add to our US PE public firm dashboard, which debuted right after TPG went public in January. Looking forward to keeping that updated, and thank you so much for joining us today.

Wylie: It was my pleasure. Thanks for having me on.

In this episode