Buyout firms’ arrogant behaviour could close IPO exit route

John Hess, chief executive of gate keeper Altius Associates, today cautioned the mega buyout firms not to take public market investors for granted or they could risk losing initial public offerings as an exit.

Speaking at a keynote interview at Private Equity Analyst’s Europe Conference, Hess said one investor had been burned once too often buying back companies at a premium to the price for which they were delisted. He was considering the ultimate sanction.

Hess said: “According to one public market investor, the credit markets, the lending banks, the investment banks, the LPs have done nothing to discipline the buyout firms. He said: ‘It may fall to us to govern the increasingly arrogant behaviour and go on a buyers’ strike’.”

IPOs are central to the investment thesis of most mega buyout deals, where a trade sale could trigger competition concerns and a sale to a rival buyout firm is impossible because of the size of the deal.

A number of deals, including Burger King and Hertz, have given the investor community pause for thought. The investor said buyout-backed deals would need to be marked at a significant discount for it to play.

Hess said: “It is not a question of anyone being right or wrong. But the buyout firms risk making it a much bigger problem, if they don’t find a way to deal with this in a sensible way.”

According to Hess, whose firm has $8.4 billion in advised or managed funds, the investor could think of dozens of VC-backed IPOs that have performed well post-offering, but could barely think of any good LBO deals.

Hess said he was not convinced buyout IPOs were such poor performers, but as well as leaving a little more on the table for public market investors, the firms could also work harder at communicating with long-only fund managers. 

He said at the moment the industry runs the risk of looking arrogant when there is surely a compromise position.

One buyout manager at the conference agreed. He said the investigation by the US Department of Justice was rumoured to have been triggered by a complaint from an angry long-only fund manager, frustrated at the high-handed behaviour of a small group of buyout firms.