As they grow ever bigger and more diversified, many alternative asset managers want to tap into public markets. There’s a catch: They’d rather not deal with the pressures that come with public ownership.
Goldman, Sachs & Co. believes it has a solution. The firm has launched a private over-the-counter equity market, open only to institutional investors. Goldman Sachs Tradeable Unregistered Equity securities, or GSTrUE, opened on May 21, trading shares of Los Angeles–based Oaktree Capital Management, which specializes in investing in junk bonds and distressed companies. Oaktree sold close to a 15 percent stake to approximately 50 buyers, raising $880 million and valuing the firm at $5.9 billion.
Since leaving Trust Company of the West to set up Oaktree in 1995, chairman Howard Marks and his four co-founders, have grown assets under management to $42.2 billion and given 85 of the firm’s employees a stake in the business. Moreover, three years ago the firm sold a 6.5 percent stake to seven of Oaktree’s longtime clients.
But last August, when word leaked to Wall Street that Fortress Investment Group would sell shares to the public, Marks felt compelled to react. If Oaktree wanted to retain and attract the best people, the chairman reasoned, it would need some form of tradable equity for employees. He did not see an IPO as the answer. “It’s an oxymoron for a private equity manager to produce steady earnings growth,” says Marks, referring to the pressure on public companies to meet quarterly earnings targets. “We think using Goldman’s platform enables us to find investors who’ll understand when we put our clients’ interest first instead.” Oaktree will have to issue quarterly and annual reports, but these will not be available to the public or the press. Nor will the firm have to comply with the Sarbanes-Oxley Act.
Oaktree’s shares traded at $50 late last month, about 24 times 2006 earnings and up from an offering price of $44, according to Goldman. By comparison, Fortress shares were trading at 23 times 2006 earnings.
The Nasdaq Stock Market has also announced plans to launch an electronic, centralized trading system this summer for companies issuing private securities to qualified investors. It’s unclear whether either exchange will be able to develop deep, liquid markets. Still, Marks predicts that CEOs of corporations will embrace private exchanges. “The potential benefits are profound,” he says.
For retail investors, however, the trend is just more bad news. So much for the little guy.
