Private equity IPOs - FT.com There once was a natural order to initial public offerings. Companies made stuff you could comprehend and sought new capital because they needed to expand. It was definitely better being public. But then private equity firms started listing in spite of a business model predicated on the superiority of being private. Adding pain to this riddle, the IPOs of Blackstone, Fortress and Apollo have all been unmitigated disasters for outside shareholders. What then to make of this week's IPO of Oaktree Capital, soon to be followed by Carlyle Group? Investors should consider two big questions. The first is whether it is comforting that - looking at Carlyle's results last year, say - about $2bn of its $2.8bn in revenues comes from management and performance fees related in part to its own estimates of asset values. The pricing of assets is less opaque at Oaktree, which specialises in debt securities, but management fees and "incentive income" are still derived from returns over benchmarks, rather than real cash in the bank. Even so, in both cases employees are paid well before the true return for investors (and shareholders) can be known. Compensation at Carlyle equalled 40 per cent of performance fee income last year. Ultimately, though, all investments are realised and there is nowhere to hide. So private equity firms are as exposed to economic and market fluctuations as anyone else. The second big question, therefore, is what is going to happen to returns from here. Investors should remember that the private equity industry's golden years were during a long period of falling interest rates. This not only reduced borrowing costs (great when deals can be 70 per cent debt-funded), but falling discount rates also boost modelled net asset values. Oaktree and Carlyle are listing with rates near record lows. Their true tests will come when rates rise.