Friday Letter Public Health

Public-to-private deals are never an easy proposition at the best of times. And this is certainly not the best of times. Following the recent criticism of the industry from trade unions and the political left, the general sentiment towards private equity in the world at large is probably at an all-time low.  

So in the circumstances, it would not have been surprising if the industry’ biggest firms had taken the decision to steer clear of high-profile public-to-private deals, at least until the current furore has subsided. After all, there are times when discretion is the better part of valour.

But instead, almost the opposite seems to be happening. The scale of the industry’s take-private ambitions seems only to be increasing, even as its opponents’ hostility mounts.

Not even the high-profile failure of some recent take-private attempts seems to have dampened the enthusiasm for public-to-private deals. For example, the UK market has bounced back effortlessly from CVC’s abortive bid for Sainsbury’s: this week KKR and Terra Firma both launched bids for chemist Alliance Boots, while 3i is apparently lining up a bid for property services group Erinaceous. Indeed, every day seems to bring news of another public company under the private equity microscope.

And it’s not as though these deals have escaped criticism – KKR’s relationship with Boots’ deputy chairman Stefano Pessina has already dredged up the well-rehearsed ‘conflict of interest’ argument inherent in any management buyout.

If nothing else, the continued interest is at least good news for shareholders. Terra Firma’s indicative bid for Alliance Boots is 38 percent higher than the company’s share price before the buyout talks leaked, for example.

But this begs another question: can private equity really see so much more value in a company than the public markets? And if so, how can the public ownership model hope to survive over time? Some doomsayers have already predicted that private equity will ultimately sound the death knell for the public markets, which seems a little melodramatic. But this apparent gap between the value placed on a company by the two ownership models surely needs to be addressed.

An interesting perspective was provided this week by Alan Murray, chief executive of Hanson, at a debate organised by accountancy body CIMA. Hanson, of course, built itself into a multinational conglomerate through a string of acquisitions, only to then break up again into its four constituent parts – an interesting test case for the mega-funds of the present day.

Murray argued that private equity’s key advantages were not permanent. In terms of financing, he believes debt providers are currently under-pricing the risk inherent in buyout deals, which will eventually adjust, while the increasing size of funds will lead to firms having to pay more for a thinner list of targets. Both factors will diminish returns, he argued. He also suggested that private equity’s favourite argument, the improved alignment of interests between owners and managers, is really just a question of communication. If public companies can get better at telling shareholders why they should endure short-term pain for the sake of long-term gain, shareholders would back them, he said.

But Philip Yea, chief executive of listed group 3i, provided an interesting counterpoint. Private equity firms have been characterised as short-term investors – but on average, they hold stocks longer than a public company shareholders. So it’s always easier for private equity to take faster, longer-term decisions, he argued.

Perhaps the obvious end-point – an argument advanced by Yea in the debate – is some kind of hybrid model, or at least greater convergence between the two. Yea believes that by investing in listed private equity, investors can combine the accessibility and liquidity of the public markets with the ownership benefits of private equity.

A public market full of private equity firms? Stranger things have happened. It might at least help the industry to dispel its reputation for secrecy and improve its image.