Oaktree Capital IPO: is it (and others like it) a good buy?

Oaktree Capital is planning its IPO. The firm is an alternative asset manager that specializes in niche opportunities (as opposed to macro trends).

Oaktree is the latest firm in the industry to go public, following the examples of Blackstone (NYSE:BX), Och-Ziff (NYSE:OZM), and Fortress (NYSE:FIG).

Other still-private firms in the industry are also considering it, including William Ackman of Pershing Square Capital Management, reported NYTimes.

Why is there a nascent trend in the alternative asset management industry to go public?

The answer lies in their complaint that institutional investors are an absolute pain to deal with. These people pick up the phone and scream and yell at the slightest sign of losses. They’re also a trigger-happy bunch that won’t hesitate to yank out capital.

They’re infamous for dismissing years of outstanding performance if a manager happens to hit a multi-quarter slump.

Their mercurial nature is incredibly degrading and annoying to asset managers. Their yanking of capital often force managers to sell assets at distressed prices. A lesser problem is that they sometimes interfere with the correct investment call of the managers.

From this perspective, public ownership sure sounds like a better deal for alternative asset managers.

But is it a good deal for the general public? There is a case for it.

Traditional asset managers (i.e. long-only mutual funds) haven’t done well in the last decade, so alternative asset management might make sense for the general public.

Moreover, early movers on legitimate investment theses are often rewarded. In this case, the investment thesis is alternative investment managers looking to tap the capital of saner investors.

There are two things public investors should be careful of, however.

One, they should make sure the management’s interests are aligned with shareholders. The financial industry is notorious for its ability and tendency to chase annual bonuses at the long-term expense of public shareholders.

Two, they should pick good managers. Indeed, it doesn’t make investment sense to speak broadly about “investing in alternative asset managers” because the returns all depend on which managers one invests in. Some, like George Soros and John Paulson, handily reward their investors. Others, like the hedge funds that blew up during the financial crisis, leave their nvestors empty-handed.

But is the general public really sophisticated enough to evaluate the talent of individual alternative asset managers? Parts of the US legislation doesn't think so; that’s why private hedge funds are forbidden to advertise to the general public.

But as the 2008 financial crisis has proven, ‘sophisticated’ institutional investors may not have much of an edge, either.