March 2, 2021

DealBook: Warburg Stays in Fray, but Off Public Market

Joseph P. Landy, left, and Charles R. Kaye, co-presidents of Warburg Pincus, which has been careful not to depend too heavily on leveraged buyouts.Richard Perry/The New York TimesJoseph P. Landy, left, and Charles R. Kaye, co-presidents of Warburg, which has been careful not to depend too heavily on leveraged buyouts.

When mega-buyouts were booming several years ago, private equity firms raced to go public. Today, the stock market has punished those firms that succeeded.

Shares of the Blackstone Group, which was first out of the gate, have dropped in value by more than half since their June 2007 initial public offering. Kohlberg Kravis Roberts and Apollo Global Management, which reached the market later, have fallen more than 22 percent this year.

Agonizing over its stock price is not something that Warburg Pincus plans to do.

In an interview in the firm’s Midtown Manhattan offices this summer, Warburg’s co-presidents, Charles R. Kaye and Joseph P. Landy, insist they will stay private.

“We like being investors,” Mr. Kaye said. “We don’t necessarily want to go into the multi-asset class gathering or multi-asset class management path and be public.”

To translate: The world’s largest firms — Blackstone, K.K.R. and Apollo — are now giant, publicly traded money managers overseeing not only multibillion-dollar private equity funds, but also big hedge funds, real estate investment operations and various other businesses. By slapping their brands on an array of products, these firms have diversified their revenue, in part to please analysts and shareholders.

“They’re moving in other directions that were not part of their historical base, or where they created names for themselves,” Mr. Landy said.

Warburg plans to stick to its knitting, investing out of one giant global fund and keeping itself off the stock market. The firm is scheduled to begin raising money for a new $15 billion vehicle in the coming weeks, according to people briefed on the matter.

It is a path that Warburg has followed for four decades, before the term “private equity” even existed. And it is a model that most of the private equity industry, which manages some $2 trillion, still follows.

Yet it is largely Blackstone, K.K.R. and Apollo that define a popular vision of the modern private equity shop. The firms’ top executives have become celebrities, their donations and lavish parties appearing in the gossip pages. The main building of the New York Public Library in Midtown Manhattan is named for Stephen A. Schwarzman, the head of Blackstone. On Wednesday, Duke announced that David M. Rubenstein, a co-founder of the Carlyle Group, whose I.P.O. is expected later this year, plans to donate $13.6 million to the university’s library system.

Mr. Landy and Mr. Kaye are not exactly wallflowers. Mr. Landy serves on the national executive board of the Boy Scouts of America and Mr. Kaye is the former chairman of the Asia Society in New York.

But for Warburg, keeping its firm private is a matter of maintaining business focus. That means investing in companies in a variety of stages, from venture investments like the Canadian oil explorer Canbriam Energy to classic leveraged buyouts like the takeovers of Neiman Marcus and Bausch Lomb.

By contrast, the publicly traded private equity firms are building out new businesses to buttress their steady stream of management fees. Historically, those annual payments — typically 1 percent to 2 percent of assets — were a small portion of these firms’ earnings. Instead, they depended on lumpier performance fees, taking a share of the profits on successful deals.

Some large investors, including the nation’s biggest pension fund managers, have expressed reservations about private equity firms as public companies.

“We don’t really have a problem with private equity funds going into new businesses,” said Donald Pierce, the interim chief investment officer of the San Bernardino County Employees’ Retirement Association, a $6 billion fund. “But the real question is whether moving away from their core focus will affect their returns.”

Though its roots stretch back to the venerable E.M. Warburg Company, Warburg Pincus dates to 1966, when Lionel I. Pincus and John Vogelstein created a partnership aimed at investing in a variety of companies. Today it manages more than $30 billion with offices in nine cities including Shanghai and São Paulo, Brazil.

The firm has only one main investment fund at any given time, unlike competitors who raise specific funds for, say, mezzanine debt or Asian real estate. During the financial crisis, the firm, along with other private equity shops, saw an opportunity in the battered banking sector. It committed $579 million from its fund to large minority stakes across four banks: Webster Financial, Sterling Financial, National Penn and Banco Indusval of Brazil.

By investing from one pool of money, Warburg executives say they are trying to avoid having to invest for investing’s sake — buying a tech company simply because they are sitting on money in a technology-focused fund that needs to be deployed. Warburg also has less of a central focus on leveraged buyouts, the classic private equity transaction in which a firm borrows large amounts of money to take companies private.

“We’ve always had this broad mandate so that when the L.B.O. world falls off a cliff, we don’t need to do L.B.O.’s,” Mr. Landy said, referring to leveraged buyouts. “This whole diversified strategy at the core of what we do allows us the kind of flexibility that many of these firms are trying to get today.”

Executives say that strategy has helped the firm realize some of its biggest hits. This year, Warburg and Blackstone held an I.P.O. for Kosmos Energy, an oil producer focused on fields in West Africa. Beginning in 2004, Warburg led three financing rounds for the company, totaling about $1 billion.

Kosmos’s May I.P.O., in which its owners sold a 10 percent stake, raised more than $594 million. Warburg’s 42 percent stake alone is now worth $1.9 billion on paper.

But the firm has had its misses as well. None has been more prominent than its $815 million investment in MBIA, a publicly traded mortgage bond insurer, made as the housing bubble was rapidly deflating in late 2007.

At the time, Warburg executives felt that they could catch the proverbial falling knife, investing in a troubled company at the moment that its problems were coming to a head, and riding the recovery to a tidy profit. But MBIA’s woes, rooted in its insuring subprime mortgage investments, only worsened as the financial crisis deepened.

“We fully vetted the thesis, but I wish the returns would have been better,” David Coulter, one of Warburg’s lead partners on the MBIA deal, said, adding that Warburg still hopes to eke out a small profit from the investment.

A crucial reason the largest buyout firms have gone public is to address problems with succession. By issuing public stock, the firms’ founders can more easily cash out their holdings, allowing them to step aside for new leaders.

Blackstone, Carlyle and K.K.R. are all run by executives in their 60s and have not announced clear succession plans.

Warburg has already transitioned to a younger generation. In 2000, Mr. Pincus and Mr. Vogelstein handed off the firm’s leadership to Mr. Kaye and Mr. Landy.

With Mr. Kaye now only 47 and Mr. Landy just 50, the two plan to stick around for at least a little while longer.

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