Private Equity's Foggy Forebears

Wall Street is abuzz with talk of private equity shops going public, but some investors are saying been there, done that.

Talk is that big private-equity offerings will give mom and pop investors an opportunity to piggyback on the outsize gains that private equity firms have rung up over the past several decades. Last month, Blackstone Group filed for a $4 billion initial public offering. This week, chatter emerged that another titan of the private equity business, Leon Black's Apollo management, is considering an IPO.

But Malon Wilkus, CEO of alternative asset management firm American Capital Strategies (ACAS Quote), says there's nothing novel about investment companies tapping the public markets for the purpose of taking over or investing in other companies.

"The public markets provide a fabulous source of capital to fund buyout transactions," Wilkus says, though he adds, "It's a lot of work to be a public company."

It can also be a lot of work being an investor in these companies, what with all their complex transactions and arcane strategies. Taking a look at American Capital offers some interesting insights into what might lie ahead with the private equity IPOs.

So-called business development companies like American Capital invest in hundreds of small to midsize companies, at times taking controlling stakes. These entities operate as regulated investment companies and, similar to real estate investment trusts, must distribute at least 90% of their taxable income to shareholders every year. The company's debt must not exceed its equity, but the trade-off is that income generally isn't taxed.