At last week's annual Australian Private Equity & Venture Capital Association (AVCAL) conference, chairman Andrew Rothery described the upcoming IPO of department store chain Myer Group as a “showcase” for the industry. It was, he said, “a poster child as far as private equity is concerned in terms of what it can do”.
Nonetheless, as he hastened to add in his keynote address, the IPO of such a household name in Australia not only highlights the “best bits” of the industry, but also the job of education that still needs to be done around the asset class and its reputation in the country.
As Rothery put it, the “tom-tom drums are beginning to beat around Myer”, and indeed they are: several recent local media reports have fixated on the “over-priced” share offer price of A$3.90 to A$4.90, which is likely to give the company an enterprise value of around A$3 billion. They have also scrutinised the A$1.9 billion expected to be made by private equity firms TPG Group and Blum Capital, which currently hold 81.4 percent of the company's equity between them, when the IPO goes live in November.
As always in private equity, this is the sort of noise that can’t be ignored. “No other industry sees such sharp focus on the profits made. It engenders jealousy and paints targets on people's faces,” Rothery told the audience of GPs and LPs at last week's conference. He also stressed that the task facing the industry is to improve its image, through greater accountability and disclosure.
Needless to say there are those who resent the call for more openness. “Private equity is 'private' for a reason,” one industry insider commented to us outside the conference. He made the point that just because the public demands greater transparency, it doesn't mean it has the right to get it; they might as well ask him to account for how he spends his time in the privacy of his own home.
But this is missing the point. If a private equity manager was suspected of doing something illegal, or carrying on an abusive relationship, then he or she would most certainly be expected to account publicly for how they spend their time privately. Private equity is, unfortunately, suspected of just such an abusive relationship in its use of debt to leverage its deals, the extravagant profits that have been seen to be made, the jobs that have been seen to be lost, and the “pump and dump”, “rip and run” newspaper taglines it engenders.
Action needs to be taken as private equity’s reputation spreads far beyond the headlines – to the employees of private equity-backed firms who regard their employers with suspicion, and to all other types of counterparty that deal with private equity portfolio companies. It was mentioned in another session that suppliers, for instance, are often more reluctant to extend credit to private equity-backed companies.
Managers in Australia could do worse than to look to KKR's handling of its buyout of South Korea's Oriental Brewery in May this year for some tips. Although a buy-in, rather than an exit, the firm was extremely careful to pay attention to what it calls “stakeholder issues”, as John Brakey, a partner at the firm, said in another session at the AVCAL conference. Brakey said KKR's Global Affairs team got involved in the OB deal very early on, engaging in talks with the media and the unions about their plans to grow the company post-investment. The resultant publicity around the transaction was positive and while this cannot be attributed entirely to efforts to woo the stakeholders, the careful management of relationships with the media and unions certainly didn't hurt.
Recalcitrant GPs take note: it's a timely reminder to acknowledge that private equity, in Australasia and elsewhere, needs to go public and act accordingly.