Private equity firms thrive on asymmetric rewards. With most funds locked in for 10 years or more, raising a big fund creates a steady stream of income for the fund manager, even if investor returns are less than stellar.
Of course, bad returns will ruin a firm over time. The top private equity firms win with their clients, earning massive, billion-dollar incentive fees for delivering public market-beating returns. With this in mind, here are 3 publicly traded private equity firms which have a record of producing results for their fund investors and shareholders alike.
1. Blackstone (NYSE:BX)
Blackstone is the brainchild of Steven Schwarzman, who launched the firm in 1985 with Peter Peterson, a former U.S. Secretary of Commerce during the Nixon administration. Through a series of smart deals and bolt-on talent acquisitions, Blackstone has become the largest alternative investment manager in the world, and for good reason: It has a record of making excellent investment decisions.
It incubated the world's largest asset management firm (BlackRock) and it now owns one of the leading credit managers in the world -- GSO Capital Partners -- which it purchased in 2008.
Some notable investments for Blackstone include the likes of Hilton Worldwide, a hotel chain purchased near the top of the real estate cycle in 2007. Where others lost big on their hotel bets in the same era -- some of Apollo Global's funds took a beating on real estate bets gone wrong, losing practically everything to their creditors -- Blackstone was able to maintain its ownership through the downturn, exiting for a multibillion dollar profit in 2013.
Its private equity funds have generated a realized average internal rate of return of 22% on investor capital over the firm's history, an impressive achievement.
2. Kohlberg Kravis Roberts (NYSE:KKR)
KKR is the pioneer of the leveraged buyout, a firm with a storied history of participating in some of the largest-ever private equity deals. It got its start in 1976 when Jerome Kohlberg and cousins Henry Kravis and George Roberts left Bear Stearns to stake out opportunities buying whole businesses. One of its landmark deals was the levered buyout of RJR Nabisco, an incredible story documented in the best-selling book, Barbarians at the Gate.
Like Blackstone, KKR thrived through its early history, and beyond the so-called "buyout boom" of the 2004-2008 period. Its funds have some of the best performance records, generating internal rates of return of 19.2% on average, after subtracting management fees and expenses.
KKR is more focused as a private equity giant. Two-thirds of its assets under management can be attributed to private equity funds, whereas private equity makes up less than 25% of Blackstone's AUM. Including KKR's leveraged credit operation -- which takes the position as a lender in a private equity transaction -- 82% of KKR's assets under management are in private equity deals.
3. The Carlyle Group (NASDAQ:CG)
The Carlyle Group started out as a target-by-target acquirer of small businesses in 1987, and didn't raise its first fund until 1990. Today, however, it ranks as one of the largest private equity firms in the world.
The Carlyle Group has a reputation for playing in politically connected industries. Its Washington, D.C. roots and early successes in companies that included Magnavox, GDE Systems (a subsidiary of General Dynamics), and partnerships with Northrop Grumman, round out several of its government-connected investments.
As the firm has grown, it's also moved away from its preference for government contractors. The company participated in many of the largest transactions during the buyout boom of the mid-2000s, buying car-rental company Hertz and participating in a buyout of Nielsen in partnership with KKR and Blackstone.
Its funds, which have spanned the globe from the United States to Europe and Japan, have generated average net internal rates of return of 19% per year, putting Carlyle in the upper echelon of private equity performance over a period spanning four different decades.
Can the kings stay on their throne?
While past performance is no guarantee of future results, it's my belief that the kings of private equity today will likely remain on top for some time to come. Successful private equity firms attract talent -- Schwarzman once said getting a job at Blackstone is six times harder than getting into an Ivy League university -- and good deals.
Most recently, Blackstone showed the power of getting a deal done, inking a transaction to buy $23 billion of real estate from General Electric in a deal that took just three weeks to flesh out. When it comes to one-stop sales of companies, few can move with the speed of cash-rich private equity firms -- an advantage that helps the industry carve out market-beating returns despite sky-high management and performance fees for their investors.