The Bridgepoint share price explodes on its IPO. Should I buy now?

The Bridgepoint Group (LSE:BPT) share price exploded this week on its first day of trading. The private equity firm saw its IPO exceed expectations as the stock surged more than 25% from its issue price of 350p. As a result, this upward momentum pushed its market capitalisation from around £2.8bn to £3.6bn in the space of 24 hours.

That’s quite an impressive amount of growth in my eyes. And it allowed the business to raise roughly £300m in the process. But what exactly does Bridgepoint do? And should I be adding some shares to my portfolio? Let’s take a look.

The explosive Bridgepoint share price

Like most private equity firms, Bridgepoint is effectively a holding company. In other words, it raises capital and then purchases substantial stakes in various businesses, much like any retail investor does in the stock market. The difference is that, apart from having significantly more money at its disposal, the business doesn’t invest in public companies but private ones.

In total, Bridgepoint has around €27.4bn of assets under management (AUM). The capital is allocated across six different investment strategies that focus on equity (ownership in a company) and credit (lending money to a company). With a 30-year track record of what it describes as “delivering compelling returns with an attractive risk profile”, I think it’s understandable to see the Bridgepoint share price surge as it makes its public debut.

So how does it make money? The majority of AUM are owned by wealthy patrons who let the firm invest on their behalf. Bridgepoint then generates income by charging management fees for providing this service. And since these fees tend to scale with consistent performance, the interests of the firm and its wealthy patrons tend to be closely aligned. That’s a good sign in my experience.

Some risks to consider

By going public, Bridgepoint enables everyday retail investors to gain some exposure to private equity markets. Why does that matter? Well, it’s an alternative investment option that is a non-correlated asset class compared to stocks or bonds. That means shareholders can further diversify their nest eggs and protect them from the current volatile state of the public markets.

But even in the private markets, risks remain high. The management fees are the primary source of income for this business. But if it cannot deliver the returns expected by its patrons, these investors may move their capital to a competing firm. After all, why would they pay substantial management fees if the performance is lacklustre?

To maximise investment returns, Bridgepoint has to employ a strong team of leading financial and business experts. But these experts don’t come cheap. That’s why personnel salaries represent 71% of total operational expenses. Suppose the company is unable to retain a talented workforce, or if their performance begins to wobble? In that case, I wouldn’t be surprised to see the Bridgepoint share price take a significant hit.

The bottom line

I can’t deny that the ability to add a non-correlated asset to my portfolio sounds alluring. But I’m not personally interested. I like to take charge of my own investments. And so, buying shares in a business that invests on behalf of others is not something that tempts me.