Wednesday, January 28, 2009

Oxymoron of the Day: A Public, Private Equity Shop


A figure of speech that combines two usually contradictory terms in a compressed paradox.
When Fortress Investment Group became the first hedge-fund/private-equity group to list in the US back in February of 2007, it stormed out of the gate:
In the most widely anticipated public offering of the young year, Fortress Investment Group (FIG), the first U.S.-based hedge fund to go public, stormed the ramparts. The shares opened trading at $35. At that level the company had a market capitalization of more than $12 billion. A group of five company insiders hold more than three quarters of the company's shares.
In a recent article, the Wall Street Journal detailed just how much Fortress' five principals were able to extract from the firm prior to the IPO:
The firm's five principals -- led by founder Wesley Edens -- cashed out just prior to the IPO, selling 15% of the company to Nomura Securities for $888 million. On top of the Nomura proceeds, the principals received an additional $409.2 million in distributions from the company just before listing.
That adds up to almost $1.3 billion... and it was just in time. Less than two years later, the market valuation of Fortress has since crashed 95%.

That leaves the current valuation of the entire firm at about half of the $1.3 billion the principals were able monetize for a mere ~15% stake just two years ago. The performance (or lack there of) was not a complete surprise to those that thought strategically about what this all meant. Dealbook reported just prior to the IPO:
A hedge fund manager interviewed by The Los Angeles Times sounded even more skeptical about the Fortress offering before it began trading: “These are very smart guys,” he said. “If they’re selling, I probably don’t want to be buying.”

And a finance professor had this observation for MarketWatch’s David Weidner: “When the smart money is pulling out, it’s time to start selling to the dumb money.”
Maybe only in hindsight it was obvious, but why would anyone believe that a company (known for taking publicly traded companies private), was going public for the benefit of anyone except themselves?

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