PATON: A taste of private equity at a bad time

By James Paton, Rocky Mountain News (Contact)

Published November 26, 2008 at 12:05 a.m.

Text size

More Business Columns & Blogs

Interesting idea. Awful timing.

That is the story of the Listed Private Equity Fund, a portfolio launched at the end of last year by Red Rocks Capital and Alps Fund Services.

The Denver-based companies sought to give a much broader group of investors access to private equity, a realm that in the past had produced significant returns for large institutions and wealthy individuals. The mutual fund would accomplish that goal by investing in the publicly traded shares of private equity firms.

The portfolio aimed to "democratize private equity by providing investors with access to the best and brightest minds in the business world," Red Rocks Capital's co-founder Adam Goldman said in a late 2007 statement unveiling the product.

But for the investors who sampled the private equity world for the first time, the numbers have been difficult to digest. The portfolio has declined 64 percent so far in 2008 amid all the financial turmoil.

Private equity firms, some of which use investors' money to acquire undervalued public companies and then take them private, have seen the value of their investments decline and have been hurt by a credit crisis that has left banks unable or unwilling to lend.

Conditions may become even worse before they improve, portfolio manager Mark Sunderhuse acknowledged, "but we're extremely optimistic long-term."

Investors seem to agree.

The company's private equity funds and separate accounts have recorded between $75 million and $100 million in net purchases this year and the money has continued to come in at a steady pace, Red Rocks said. Overall assets, however, have slipped to $55 million because of depreciation.

The investors in the fund are mainly "sophisticated" investment advisers working on behalf of high net-worth clients, Sunderhuse said. Although the mutual fund set out to democratize private equity, he said it is not meant for all investors.

Sunderhuse is "baffled" by gaps between the market prices of the fund's holdings and the values of the underlying assets. KKR Private Equity Investors trades at $2.60, for example, but Kohlberg Kravis Roberts & Co.'s publicly traded fund recently valued its assets at $18.85 a unit.

While the value of those assets has likely declined further, the "disconnect" between the share prices and the net asset values remains significant, he said.

"It's not going to make sense until there is restored confidence in the market," he said.

The Listed Private Equity Fund has 37 holdings that own more than 2,000 private companies. Some other recent holdings include 3i Group, Onex and Conversus Capital.

The Denver mutual fund is not the only one that has taken a hit. The Vista Listed Private Equity Plus Fund is also down 64 percent in 2008, according to Lipper.

In another sign of the problems in the private equity sector, Kohlberg Kravis Roberts said it would delay plans to list on the New York Stock Exchange.

The market is afraid about debt, and in some cases "that is credible and factual," Sunderhuse said, but in other cases, the companies they are invested in have the flexibility to refinance. "We don't think the impact will be as dire as people think," he said, "but obviously things can get worse."

James Paton and David Milstead take turns writing Up and Down 17th Street.

Subscribe to the Rocky Mountain News