On Tuesday night, Fortress Investment Group, the first private equity firm to list its shares in an initial public offering, said it would be gobbled up by a Japanese company and leaving the public markets for good.
Back in 2007 when Fortress listed its shares on the New York Stock Exchange for $18.50 apiece, everyone who worked at the company that ran private equity and hedge funds thought they were going to get super rich. Most of all, Wes Edens and the four other guys who ran the company. As Fortress’ stock surged on the first day of trading to $35, the shares owned by Edens and his four deputies were worth a combined $10.7 billion at the end of the first day of trading, leaving the rest of Wall Street drooling with envy.
Ten years later, Fortress is being bought for $3.3 billion in total, or $8.08 a share. Fortress has already shut its hedge fund business amid big losses and figured its remaining private equity businesses would be better off away from the scrutiny and demands of stock market investors.
On Wedensday, the biggest U.S. hedge fund firm to go public, billionaire Dan Och’s Och-Ziff Capital Management, reported that investors had pulled $13 billion out of its hedge funds in the last 13 months. Och-Ziff, which had managed some $46 billion in assets not so long ago, now manages $33.6 billion.
Shares of Och-Ziff Capital Management fell to $3.33 on Wednesday. When Och rushed to follow Fortress onto the public markets in 2007, he managed to raise $1.15 billion and list the hedge fund firm’s shares at $32 each.
Och had pitched investors on the idea of strong risk-adjusted returns and money rushed into Och-Ziff’s funds in the years following the financial crisis and the Bernard Madoff Ponzi scheme. Investors seemed comforted that a big publicly-traded hedge fund with strong controls would be a safe and responsible place to park money.
But Och-Ziff’s controls have been anything but robust. The company has been embroiled in a massive bribery scandal in Africa, forced to pay $412 million to resolve charges from U.S. prosecutors and regulators, and one of its units has pleaded guilty to conspiring to bribe officials in Africa. Och himself was sanctioned by the Securities & Exchange Commission. In addition, the returns of Och-Ziff’s funds in recent years have not inspired.
It’s true that Fortress and Och-Ziff represent extreme cases, but the experience of most of the publicly-traded private equity and hedge fund firms has been pretty miserable overall. Stock market investors have slapped deep discounts on the valuations of the firms and are suspicious about the ability of these firms to deliver steady earnings. In their effort to grow to appease the stock market, many of these firms have experienced setbacks and complications.
Take Carlyle Group, the private equity firm of billionaires David Rubenstein, William Conway and Daniel D’Aniello. Carlyle worked hard to build a $15 billion hedge fund business, but the effort has been abandoned after disappointing returns. In 2012, Carlyle priced its shares at $22 in its IPO; today those shares change hands for $16.38.
Billionaires Leon Black, Marc Rowan and Josh Harris took their Apollo Global Management public in 2011 at $19 a share. The stock is up to $23.40 today, but it has been clobbered by the return of the stock market in the same period.
Even Stephen Schwarzman, the richest private equity billionaire, has been unable to push his Blackstone Group’s stock beyond its richly valued IPO price of $31. Blackstone is by far the world’s most successful private equity firm and Schwarzman still throws the most lavish parties on Wall Street, but you can bet he is frustrated by the way Blackstone gets treated by stock investors.
The Masters of The Universe are still very rich, own professional basketball teams and run sprawling businesses, but they have yet to conquer the stock market.
