Business
The private equiteers
by David W Young
The private equity craze is sweeping the world. But there are dangers.
Being the boss of a stockmarket-listed company must be a punishing business. Nosy media and shareholders pick apart your plans, second-guess every decision and gripe about your salary and bonuses. You can’t even clip your toenails without telling the market.
It’s a different world leading a privately owned company. With few disclosure responsibilities and little scrutiny, you have much more flexibility to fly around the world on business trips and meet expensive consultants who tell you to jettison half the workforce.
That freedom is one explanation for the private equity boom sweeping the globe.
Private equiteers are the alpha capitalists of the moment. In the United States, 1010 companies were taken private last year. Australia’s flagship airline, Qantas, looks set to belong to a consortium of private equity houses and Macquarie Bank. And many New Zealand businesses are attractive targets for private equity firms from across the Tasman, flush with funds from Australia’s compulsory superannuation.
On our local market, de-listings outnumbered listings by two-to-one last year. Private equity houses reportedly spent $1.25 billion outbidding Lion Nathan for the Independent Liquor empire, paying so much that many commentators wondered how much value could be left to glean from the company.
The Warehouse was almost privatised last year because founder and 50 percent shareholder Stephen Tindall wanted to expand into hypermarkets. It was a bold strategy that might have caused public shareholders and their brokers to fret. So his $866 million bid for the remaining shares was backed by Australian private equity firm Pacific Equity Partners, which is still in the picture as a possible partner to a Foodstuffs takeover – if Woolworths Australia and its mates don’t get there first.
But it’s not just Australians making the deals. Kiwi billionaire Graeme Hart’s $3.6 billion acquisition of Carter Holt Harvey was New Zealand’s biggest private equity transaction last year. And massive American private equity firm KKR has set up a $US4 billion fund that will target companies in Asia and Australasia.
Aside from flexibility, a more obvious and prosaic reason for the craze is that it’s easier than ever for private equity companies to borrow money. These companies are no long-term investors, typically holding onto companies for just a few years. They target well-known brands like Feltex. Once the private equiteers have a company in their hands, they make the firm more attractive to re-list or sell for a quick profit. Ideally, they snap up a troubled company, tidy up its management and put it back on track.
But one person’s magic is another’s dubious quackery. Union boss Andrew Little has warned that “too many [private equity] deals are about big money, fast turnaround and quick profit with little concern for the long-term future of the company that is taken over or for the welfare of its workers”. And investment guru Warren Buffett has slated private equity firms as “deal flippers” that don’t care about a company’s longer-term value.
Both Little and Buffett have a point. Small shareholders need to be extra-careful about what they’re buying into after private equiteers refloat a firm. A handy trick is to ask: what value is left for me after the private equity firms have hocked off assets and made their tidy profit?
This maxim is as true elsewhere as it is in New Zealand. After high-profile US private equity firms refloated Burger King, its share price plummeted; it has since scarcely risen above its offer price.
Private equity buyouts rely on stocking up target firms with debt. Carpet-maker Feltex collapsed because its owners loaded it with too much debt before selling it back to mum-and-dad shareholders.
It’s an extreme example, but one that will happen again around the globe. In a worst-case scenario, economic conditions will change and debt-laden companies will find it difficult to make repayments, putting stress on lenders who are heavily exposed to private equiteers.
The message some are taking from the private equity craze is that we need to reconsider the light regulation afforded private companies. The risk of forcing them to be more transparent and have greater legal responsibility for disclosure is that turning around troubled companies will become much harder, and more executives will spend their days reporting to the market on their toenail clippings.
