This Much-Anticipated Stock Isn't for You

For KKR (NYSE: KKR), the LBO firm that was immortalized in Barbarians at the Gate, today marks the culmination of a long and circuitous road to a listing on the New York Stock Exchange. Three years ago, KKR was preparing an IPO when the credit crisis struck, putting those plans on hold. Now that shares are finally trading on the NYSE, should investors consider buying into this buyout firm?

Coming to America
In fact, KKR shares have been trading on Euronext Amsterdam since October 2009; however, today marks their New York debut. KKR went through this back door because it missed the boat back in 2007, while archrival Blackstone (NYSE: BX) timed its IPO perfectly in June of that year, right at the height of the private equity boom.

Here is how the shares of so-called "alternative asset" managers (i.e., leveraged buyout and hedge fund firms) have performed since their initial offerings:

Source: Calculated based on price data from Yahoo! Finance and NYSE Euronext.
*At July 13, 2010.
**Does not include dividends; the current dividend on KKR shares is 0.78%.

As we can see, the performance of those firms that went public prior to 2007 is pretty horrific. Goldman Sachs is the exception, but as I argued here, it's not clear that the return on the shares has been adequate compensation for the risk shareholders have borne. Furthermore, despite being an important player in private equity and hedge funds, Goldman isn't a pure-play alternative asset manager.

A decent performer
Meanwhile, KKR has actually performed decently since its offering, outperforming the S&P 500 by more than 1%. The two-year-plus lag in the public share offering with respect to its peers made all the difference, as investors were no longer willing to pay absurdly inflated prices once private equity firms had fallen from their exalted perch.

Put this one in the 'too hard' pile
That being said, I think KKR's offering is fundamentally unsuitable for most individual investors. The ownership structure is extremely complex, which doesn't make it any easier to value the shares ("common units," technically). When I looked at one of the firms in the above table a few years ago, I found that this complexity had tripped up a well-known financial data provider -- the number of shares outstanding was being misreported, and, thus, so too was the market capitalization.

Finally, if you believe, as I do, that investment banks are essentially run for the benefit of their employees rather than their public shareholders, I think you'll find it is much the same with private equity firms. KKR may be a long-awaited debut on the New York Stock Exchange, but that is no reason for individual investors to spend their time looking at these shares -- in this market, there are other opportunities that are much easier to understand.

Don't bother with private equity firms or their portfolio companies. Jim Royal explains why and offers some much better alternatives.