BREAKINGVIEWS-Goldman's public-private trial ends with a whimper

By Aimee Donnellan

DUBLIN, Sept 25 (Reuters Breakingviews) - Meshing the private and public markets was always going to be tricky. Goldman Sachs-backed GS.N Petershill Partners PHLL.L, which buys stakes in alternative asset managers like buyout shops, floated on the London Stock Exchange in 2021 with grand hopes. But a downturn in private equity, and a persistent valuation discount, created a vicious cycle. A new plan to delist by buying out minority investors raises questions about how and when key shareholder Goldman Sachs Asset Management will be able to exit.

Petershill priced its float at 350 pence per share in 2021 but the shares quickly sank. Over the course of the next two years, its stock fell by over 60%. The "partner fee-related earnings margin", basically the proportion of management fees its investee firms keep after deducting expenses, fell from 69% to 58% over the same period. This decline made it harder for the shares to recover and thus for Goldman's asset management arm to sell out.

On Thursday, with the stock trading one-third below the IPO price and at just 70% of book value, the company announced it was delisting and buying out minority shareholders at a $4.5 billion valuation. The terms effectively cash out the non-Goldman investors, who hold a fifth of the stock, at 90% of book value, which compares with an average trading valuation closer to 60% of book value since the start of 2024.

For minority shareholders, the outcome looks okay. Petershill says that its shares have delivered a 16% return since the IPO, after factoring in all dividends and the new cash offer, compared with 4% for the mid-cap FTSE 250 Index. And an exit at just a 10% discount to book value looks relatively attractive given the risks facing mid-market private-capital managers, in which Petershill owns stakes.

According to consultancy Bain & Co., 2024 marked the third year in a row in which private-capital fundraising fell. And while Petershill touts the recent success of its managers like Clearlake Capital, a prolonged funk is likely to hit mid-sized players hard. They often lack the diversified grab-bag of strategies that allow megarivals like Blackstone BX.N to always pivot to what's hot.

Goldman and its clients will now own these risks in full, and have no obvious path to an exit. Part of the purpose of any IPO is to offer owners a chance to sell down. But as the share-price performance of Petershill suffered, Goldman struggled to do so. Buybacks actually increased its holding from 75% to about 80%. If the delisting goes ahead, the now-100% owners of Petershill will effectively be locked into a private entity for the foreseeable future. It looks like a tough ending to an unusual experiment.

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CONTEXT NEWS

British investment group Petershill Partners said on September 25 that it would delist from the London Stock Exchange and return money to shareholders, citing dissatisfaction with its share price performance and valuation.

Majority owned by Goldman Sachs's asset management arm, and known for buying stakes in private-capital managers, Petershill launched in 2007 and made its London market debut in September 2021.

Under the proposal, Petershill's minority shareholders would get $4.15 per share in cash and an interim dividend of $0.052 per share, totaling $4.202 apiece and representing a premium of about 35% to the stock's last closing price. The deal values the company's equity at $4.5 billion.

The transaction requires approval from free-float shareholders representing at least 75% of votes cast at court and general meetings expected in November. Free-float shareholders make up just over 20% of the total, according to LSEG data, with Goldman Sachs Asset Management holding the rest.

Shares in Petershill were up 33% by 0827 GMT on September 25.