Is Warren Buffett the Future?

At a recent conference, TPG founder David Bonderman told an unsurprised audience that his firm was “contemplating” going public, and added: “At the end of the day, everybody will go public.”

If Bonderman is right, what will the model for large private equity firms look like at the end of the day? A lot like Berkshire Hathaway, the publicly traded investment behemoth whose value is made up primarily by privately held companies.

As the titans of private equity look for further growth, they are naturally moving toward the public markets, which offer access to permanent capital, huge pools of retail money and the prospect of someday being free from the tyranny of fundraising and exits.

Berkshire Hathaway as an alternative model for private equity has been commented on before by big-name GPs. In a 2009 BusinessWeek article, Henry Kravis was quoted as saying that Warren Buffett “can make any kind of investment he wants. . . and he never has to raise money.” Berkshire Hathaway is “the perfect private equity model,” Kravis added.

The admiration is not mutual. For his part, Buffet regularly scoffs at private equity firms, and once described them as being analogous to “porn shops” that, ahem, buy paintings and “make the boobs a little bigger” and then sell them to “some other guy. . . in a raincoat.” (Warren, that’s called a sponsor-to-sponsor transaction).

And yet, last year Berkshire Hathaway partnered with a Brazilian porn shop to sex up food giant Heinz. Buffett has taken pains to point out that while 3G Capital, the private equity firm led by Jorge Lemann, may eventually exit its stake in Heinz, Berkshire Hathaway is a forever owner of the company.

The teaming of Berkshire’s balance sheet with 3G’s operational prowess offers an interesting view on the future of private equity, as well as highlights the structural differences between the Berkshire balance-sheet approach and the exit-driven private equity approach.

Private equity’s history makes it difficult, but not impossible, to embrace a Buffett future. As Pantheon Ventures’ Kevin Albert points out in a related Privcap panel discussion, one must remember that private equity should be defined by its core activity, not by the mechanism used to accomplish that activity. The core activity of private equity is to invest in private companies and, hopefully, benefit as the value of those companies grow. The process by which that activity takes place has long been dominated by limited partnerships, fundraising, capital calls, exits, distributions. But the mechanisms of the LP are certainly not the only way for investors to participate in the growth of private companies. If you want to enjoy the growth of, say, the Burlington Northern Santa Fe railroad company, you may simply buy shares in its owner, Berkshire Hathaway. If you want liquidity, you don’t need to wait for Buffett to sell Burlington and distribute your share of the proceeds. You only need to sell shares in Berkshire Hathaway.

The fact that Berkshire almost never sells assets is its most important difference from a private equity firm, which must eventually exit the collection of portfolio companies it has acquired. The way an investor gets liquidity from a limited partnership is by waiting some 15 years to get all the principal and profit back, or by entering into a complicated and time-consuming sale on the secondary market. Surely more and better options will be developed.

The growth of publicly-traded private equity will have to be accompanied by greater systemization in the valuation of private companies, including daily valuations. As you will learn from the experts presented in this special report, market pioneers are feverishly experimenting with new ways of cracking this toughest nut. The payoff for all this work will be better liquidity mechanisms, which will in turn open a spigot of new capital for the asset class.

Although Buffett would disagree, private equity’s need to eventually exit isn’t necessarily a bad thing. If forces GPs to attempt to own companies during the “best years of their lives” and to work assiduously at improving the value during a defined period of ownership. Each new fundraise forces a GP team to prove its capabilities and allow investors to dig deeply into the track record and operations of the firm.

Blending the value-creation mandate and regular manager assessment of private equity with the permanent capital and liquidity of a Berkshire Hathaway could be a winning combination if structured correctly. Whatever Buffett, Lemann and Kravis have in mind for the futures of their respective firms, I’ll bet they’re all imagining remarkably similar models.

Warren’s Forever Portfolio

Estimated value of Berkshire Hathaway’s ownership stakes in public and private companies, in billions of dollars.

The bulk of Berkshire Hathaway’s value comes from majority ownership stakes in companies like Burlington Santa Fe, Heinz and MidAmerican.