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TPG ushers in a new kind of private equity listing

Imagine winning a $26bn deal for hotel empire Hilton Worldwide, then unearthing life-saving cash to salvage it after the 2008 crisis and pulling off one of the greatest corporate turnrounds ever . . . 

. . . but then you have to hand back billions in profits to shareholders who didn’t do anything and don’t reward you for the windfall with a higher valuation.

This, in essence, was the conundrum of Hilton-owner Blackstone Group’s first decade on public stock markets, which frustrated billionaire co-founder Stephen Schwarzman to no end.

The solution, the private equity industry has figured out, is to simply keep more of the profits and give less to shareholders.

On Thursday, TPG went public in a manoeuvre that cements a new era in private equity in which firms list their shares but sell only a small sliver of their performance fees to the public, DD’s Antoine Gara reports.

Jon Winkelried, TPG chief executive,
Jon Winkelried, TPG chief executive, said the listing would help the firm to grow if buoyant markets deteriorate, saying: ‘We sleep with one eye open’ © Bloomberg

Instead, firms are selling their less lucrative management fees to the public. These fees are a smaller portion of industry profits, but are valued at far higher multiples on stock markets than the episodic (but potentially massive) windfalls that can come from deals such as Hilton.

“It is the new standard,” Saul Goodman, head of alternative asset management banking at Evercore, told the FT. “Almost every banker in the space that’s advising private equity firms on IPOs currently is advising to not contribute a large percentage of performance fees into the public company.”

Just as Blackstone’s 2007 IPO helped it capitalise on the following financial crisis, TPG believes its new stock currency will be useful if markets turn. “We sleep with one eye open,” TPG chief executive Jon Winkelried told the FT. “You’ve got to set yourself up in a way where you can take advantage of opportunities when they come along and markets turn.”

The first wave of private equity IPOs such as Blackstone, KKR, Carlyle and Apollo Global sold a claim on about half of their performance fees when going public in the years around the financial crisis.

However, they’re also making changes to match the market’s appetite for the “2” part of private equity’s “2 and 20” fees.

In the past, KKR paid about 40 per cent of overall management and performance-based fee earnings to employees, but in February 2021 it began to weight the pay towards performance fees.

Now, just 25 per cent of its management fee-based earnings go to employees, but they get up to 70 per cent of performance-fee-based earnings. Blackstone and Apollo followed suit with similar moves last year.

TPG co-founder David Bonderman speaks at a conference
TPG, co-founded by David Bonderman, listed on the Nasdaq exchange on Thursday © REUTERS

Still, it’s TPG that may come out as the biggest winner. The buyout group closed at $34 a share on Thursday, up more than 15 per cent, and lifting its market capitalisation above $10bn. Its dealmakers will keep the vast majority of profits the group has earned in a roaring bull market.

On a pro forma basis, it would have delivered $505m in distributable earnings to shareholders. However, as of the third quarter, insiders sat on nearly $3.5bn in potential performance-based pay.

“TPG should have gone public a decade ago,” one industry insider tells DD. “Clearly, they did well by waiting and getting a much better valuation.”

Mishcon de Reya makes its case to go public

In the list of things a company doesn’t need in the run-up to an IPO roadshow, one has to be a sizeable penalty for money-laundering failures.

City law firm Mishcon de Reya found itself contending with exactly that last week, just as it was gearing up for a charm offensive to tout its much-heralded public listing, the FT’s Kate Beioley reports.

The elite London law firm agreed to a record £232,500 sanction last week covering historic money-laundering breaches, which the firm reported to the legal regulator for England and Wales.

Kevin Gold, Mishcon executive chair
Kevin Gold, Mishcon executive chair © Mishcon de Reya

It’s not the first time Mishcon has been accused of mishandling funds. In October, the firm was fined £25,000 for letting football agent clients channel commission payments through its client bank account. It’s also caught up in a £2.9m lawsuit from a property investment company claiming it accepted “tainted” money for legal fees.

Mishcon is hoping investors can look past such details when it heads out on the road in the coming weeks.

The firm is finally preparing for a flotation that would make it by far the largest legal business on the UK market. Insiders say it’s aiming for a market value of £750m, putting it at almost double the size of its closest rival — a target one broker described as “really ambitious”.

The firm must sell investors on its profitability not only as a traditional law firm, but as a broader professional services group. Mishcon’s executive chair Kevin Gold wants to turbocharge the firm’s growth using outside capital, enabling it to invest more heavily in technology — both for the firm and in early-stage ventures it funds — and build its growing consultancy businesses.

Mishcon lawyer Anthony Julius at the time of Diana, Princess of Wales’ divorce from Prince Charles, speaks to media
Mishcon lawyer Anthony Julius at the time of Diana, Princess of Wales’ divorce from Prince Charles © John Stillwell/PA

Making the structural shift won’t be easy. “When you’re a [private law firm] it’s all very simple . . . But when you become a listed company you have to produce profits not just for partners but outside investors . . . It’s a more complex model,” said Tony Williams, founder of consultancy Jomati.

Mishcon shelved its initial IPO plans last year after partners revolted, and more than a dozen have walked. While the listing may be lucrative for senior executives such as Gold and managing partner James Libson, who will own potentially valuable equity stakes, the firm’s lower ranks could be disadvantaged by having to compete for profits with outside shareholders.

Investors are not yet fully sold on the idea, either. “The issue for law firms is they’re still somewhat untested on the stock market,” said Anthony Cross, a manager at Liontrust Asset Management.

Mishcon is not like other law firms, though. Founded in a one-room office in Brixton in 1937, it has a pugnacious reputation for taking on legal challenges such as Gina Miller’s Brexit fight and acting for Diana, Princess of Wales during her 1996 divorce.

But this time it will be Mishcon, not its clients, standing before the court of public opinion.

The football billionaire playing a losing game

When Italian-American cable billionaire Rocco Commisso bought ACF Fiorentina from Italy’s Della Valle retail dynasty, he called it the “quickest closing in soccer history”.

But a fellow Serie A club owner likened it more to “running into a fire . . . [He] did not do the diligence.”

A fan takes a selfie photograph with Rocco Commisso
A fan takes a selfie photograph with Rocco Commisso © Bloomberg

Over plates of spaghetti with the FT’s Murad Ahmed, the hot-tempered New Yorker made clear he has money to burn.

Commisso says he’s not a “stupid American” that will endlessly sink his fortune into the pandemic-ravaged club. By his own calculations, however, costs are rising fast — “Now we’re at €340m, capiche?”

As much as the numbers fail to add up, it makes perfect sense in Commisso’s world. Don’t miss Murad’s full interview in all its unfiltered glory here.

Job moves

Dr Sandie Okoro
Dr Sandie Okoro © University of Birmingham
  • Standard Chartered has appointed Dr. Sandie Okoro as general counsel. She was previously senior vice-president and general counsel for the World Bank, and replaces David Fein, who has joined Paul, Weiss as special counsel.

  • Nordea has nominated former RBS chief and current easyJet chair Stephen Hester as its next chair.

  • Hakluyt has appointed Jeff Greenberg and Mark Wiseman to its advisory board. Greenberg has been chair and chief executive of Marsh & McLennan and Wiseman previously served as a senior managing director at BlackRock and head of the Canada Pension Plan Investment Board.

  • ArcLight Capital Partners has hired Angelo Acconcia, one of Blackstone’s most senior oil and gas dealmakers, per Reuters.

  • Barclays Investment Bank has appointed Citigroup’s German investment banking head Sven Baumann as head of investment banking for Germany, Austria and Switzerland.

Smart reads

Black market breadwinners A shadow economy of female entrepreneurs in North Korea is under threat from strict lockdowns and a crackdown on illicit business by Kim Jong Un’s patriarchal regime. The results could be financially devastating. (FT)

Buy now, pay later Private debt is beginning to make other alternative asset classes look like chump change. But the sector is lightly regulated and rife with potential conflicts of interest. (Wall Street Journal)

Decentralised paradise For the crypto community lining Puerto Rico’s shores, the sunny weather and lush golf courses are just added bonuses next to the ultra-low tax rates. (Bloomberg)

News round-up

German prosecutors file first charges in Wirecard fraud (FT)

Shell climate case winner targets dozens more companies (FT)

London start-ups attract record venture capital funding (FT)

A major failure’: Fed under fire for handling of trading scandal (FT)

Checkout.com hits $40bn valuation after funding round (FT)

Goldman Sachs postpones its return to office again to wait out the Covid surge (BBG)

Singapore poised to beat rival Hong Kong in listing first Spacs (Nikkei Asia)

Satellite group wins legal fight to seize Air India revenues (FT)

Asset manager Pimco joins song copyright investment frenzy (FT)

Do the sums behind Musk’s space colony mission add up? (Alphaville)

Due Diligence is written by Arash Massoudi, Kaye Wiggins and Robert Smith in London, Javier Espinoza in Brussels, James Fontanella-Khan, Ortenca Aliaj, Sujeet Indap, Eric Platt, Mark Vandevelde, Francesca Friday and Antoine Gara in New York and Miles Kruppa in San Francisco. Please send feedback to due.diligence@ft.com

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