Private Equity 07 Feb 2007 08:49 pm
With names like Blackstone, KKR, Carlyle Group, and Texas Pacific private equity firms are the black bodies of the financial world. Just by looking at their names you don’t know what business they’re in. You don’t know what they do, what makes them powerful and feared. They radiate dark energy while allowing few to know the source or the means of its production. About the only entity more nebulous is the hedge fund, but with Fortress soon to go public they don’t mind as much attention.
Private equity firms would just like to raise billions, buy companies, pay off the debt, and sell the companies without the distractions from newspapers, interest groups, and–yes–weblogs. Unfortunately for them when they amass huge sums of money and buy anything from Australia’s Qantas to the Minneapolis Star Tribune to Burger King you’re going to get noticed. Even more attention will be drawn to the industry if Bain Capital founder Mitt Romney stakes a firm claim to the 2008 GOP Presidential nomination.
Some in the U.K. are in a tizzy (is that a British term?) over three private equity firms buying the J Sainsbury supermarket chain. It’s brought into the open the voracious appetites of these financial powerhouses. In Davos, Switzerland at the recent World Economic Forum Phillip Jennings of the UNI global union wailed, “They are like a global vacuum cleaner hoovering up assets at any price, anywhere, any time and we want to bring them out of the shadows.” Critics complain about the firm’s modus operandi: borrowing lots of money to buy companies, either selling off pieces or using the company’s cashflow to pay off the debt, then selling the company to someone else (like another private equity firm as in the case of Network Solutions) or taking it public. What they ignore is Professor Christoph Zott’s view that “taking a company private can shield it from the short-term pressures of public markets.” A private company missing its quarterly earnings expectations doesn’t risk massive investor panic.
In the U.S. there’s a similar unease with private equity firms:
As private equity moves further into the public spotlight, investors are also starting to express wariness over buyouts.
Shareholders of Clear Channel are set to face off with the company’s board next month over the proposed $26.7 billion buyout of the radio station owner – one of the biggest buyout deals announced last year.
“Shareholders are more aware on a whole range of issues affecting the capital markets today than they have been in the past and the new force of private equity is one of them,” said Eleanor Bloxham, president of the Value Alliance, a group that advises companies on corporate governance.
Private equity players say the industry’s negative reputation isn’t justified and attribute it to a lack of public understanding. They argue that in many cases companies can execute better in private hands, when they don’t have to focus on delivering quarterly results to Wall Street.
In addition, they say that shareholders benefit since they receive a premium on their stock when a deal closes. And unlike in the past – when private equity firms were viewed as corporate raiders intent on stripping firms – now more public companies are welcoming private equity.
“By and large, most of the private equity transactions have been friendly,” said Mitchell Hollin, a partner at private equity firm LLR. “Public boards always have the ability to say ‘no.’ It’s really their decision to say ‘yes’ that has allowed for these successful transactions.”
Some firms are looking at building consolidated online marketing companies. If they do they could give them a little business immediately by improving their industry’s reputation.
One company that turned off from private equity is Morgan Stanley who is trying to raise $6 billion for a new fund. They were tired of Goldman Sachs having all the fun.