Better the devil you know?

A new report suggests that senior management may prove the greatest bar to future public-to-private deals in the UK. The majority of senior executives at the UK’s biggest listed companies have no wish to go private – even though they accept their businesses would face fewer constraints away from the public markets.

UK public company executives recognise many of the key benefits of private equity ownership – yet the majority are unwilling to give up the kudos and autonomy of life in the public markets, according to a new report.

Only 39 percent of senior FTSE 350 executives would take their company private “given the right opportunity and price”

Close Brothers report

The research, by Close Brothers Corporate Finance, surveyed chief executives and chief financial officers at companies in the FTSE 350, an index of the biggest listed companies in the UK. It found that no fewer than 61 percent of all respondents would refuse to take their firm private even “given the right opportunity and price”. Indeed, given an equal choice, 27 percent would prefer a bid from another listed company.

It is not that these executives have a rose-tinted view of life in the public markets. Ninety percent felt that regulation and red tape in the public markets had worsened in the last few years, while 64 percent believed that public scrutiny over issues like remuneration and corporate governance had also increased in recent years. Responses also suggested that executives felt they would be better remunerated under private ownership.

Grainger

Richard Grainger, chief executive of Close Brothers Corporate Finance, said many senior executives simply enjoy the prestige of running big public companies: “There’s undoubtedly a lot of kudos associated with running a public company and senior management are motivated by this recognition.”

Self-preservation may be another motivating factor behind the distrust of private equity – for some executives, it could be a case of “better the devil you know”. Grainger said: “The world of private equity is unchartered water for them, and who’s to say there wouldn’t be even more third party interference under private ownership?”

He believes that despite the constraints of the public markets, FTSE 350 executives still believe they are capable of running their companies without external help. “Despite many respondents feeling they can’t achieve what they need to in the public markets, they’re still happy to stay public. They think they have the expertise and tenacity to do so.”

I think public companies are in denial if they believe their business strategies remain longer-term than those of their private equity counterparts.

Grainger

The report also revealed that private equity is not doing enough to solve its image problem – or else that senior executives are not listening.

More than a third of respondents thought publicly owned companies were better equipped to take a long-term view, a perception that Grainger believes is incorrect. “For private equity groups, lack of public scrutiny means they can adopt longer-term strategies.  For FTSE 350 directors to think otherwise means they’re either in denial or that private equity isn’t clearly spelling out the advantages of private ownership.”

We’ve seen a surge of interest from listed companies looking to take on more debt.

Grainger

At the same time, almost two thirds thought public companies had an advantage when it came to fundraising – despite the fact that big public companies have so little gearing. According to Close, the FTSE 100 companies have total net debt of £195 billion (€287 billion; $386 billion), on earnings of £204 billion. However, this is slowly changing, according to Grainger. “We’ve seen a surge of interest from listed companies looking to take on more debt. With valuations up, listed companies are back in the acquisition game and this time they’re tailoring their approach to get the job done.”

Grainger said the increase in public-to-private deals was being driven by the decline in secondary deals. “Secondaries were the big thing a year to eighteen months ago, but the volume of churn in portfolios was so significant that the average portfolio company is now too young to sell.  Give them another year to mature a bit and I expect secondaries to start coming back in.”

One thing seems beyond question, however. Respondents had no doubt that the recent glut of public-to-private deals would continue, with 95 percent suggesting the current volume will continue or even escalate.

So whether these chief executives like it or not, they are bound to find themselves in the firing line before too long – particularly if they do not take steps to protect their companies against this private equity interest by increasing their gearing.