Blackstone envy is spreading like wildfire. The private equity firm’s IPO looks set to make its founder Steve Schwarzman a billionaire eight times over. But before rivals follow suit, they should brush up on a little history. The tribulations of Narragansett Capital, a formerly listed LBO firm run by financier Arthur Little, provide an instructive tale about the challenges private equity firms face in the fishbowl of the public marketplace.
Narragansett Capital first listed shares in the 1960s. But in the early 1980s, Narragansett’s management team, some of whom later founded Providence Equity, became frustrated with the niggling hassles that accompany public ownership.
Chief among them was the need to manage earnings, an especially difficult task when, like Blackstone, your business model is predicated on producing long-term, above-market returns.
Narragansett was governed by the Investment Advisers Act of 1940, which required Narragansett to go through strict compliance rigmarole when acquiring companies. Little was quoted at the time saying these regulations were “a noose which gets tighter and tighter.” So Narragansett’s principals launched a deal to take the firm private. Though they were thwarted in these efforts by, eek, a dissident shareholder, they eventually sold the firm to Monarch Capital and its assets were liquidated. Jonathan Nelson, one of its leading lights, is now Providence’s chief.
Now, there are important differences between Narragansett and today’s LBO funds. Blackstone, for example, isn’t structured as a “40 Act” company. But the irony shouldn’t be lost on those considering whether to list shares in their buyout funds. Little’s frustrations of 20 years ago sound eerily familiar to those voiced by chief executives today about the Sarbanes-Oxley act.
Indeed, the motivations for taking Narragansett private in the 1980s mirror the ones Blackstone’s founder Steve Schwarzman cites when pitching his services to public company bosses. He says the regulations of public ownership can be burdensome and executives become slaves to quarterly earnings pressures. Amazing how quickly such sympathies can melt away at the prospect of becoming a mega billionaire.