Friday, January 19, 2007

PE and LBO - where are they headed...?

Some excerpts from an insightful interview by Justin B Wender, president of Castle Harlan, a Private Equity firm in New York as appeared in New York Times. Covers a lot of contemporary questions on club deals in private equity, their sustenance and how fair it is to Public investors when PE funds take public companies private etc. It gives some wonderful insights

( may need a simple process of registration to read. Worth it. Just check out ).

Few snippets :

“ Q. Will the wave of private equity deals increase, or is it nearing the end of the cycle?

A. Given the dollars raised in private equity, it’s likely we’re going to continue to see significant-size leveraged buyouts. But it’s important to remember that this represents a relatively small percentage of all the securities traded in the United States. I don’t believe this is a huge cycle that’s cresting. It’s just a function of the money that’s been raised.

Q. Why are public companies going private to fix themselves, instead of restructuring while they are still publicly traded?

A. As to why some companies are going private, there is increasing scrutiny and regulation, namely the Sarbanes-Oxley Act, and that has had an impact. Chief executive officers are spending much more of their time on compliance issues and dealing with shareholders and analysts and the outside world. They have less time for their business than they might like. And when they’re private, they can dedicate time to the business itself.

Q. Are you suggesting that a climate has been created in which public companies can’t really take tough steps to correct their business model?

A. I don’t think that’s true. But there are challenges in making changes in public companies. There is constant scrutiny. The research analysts and others are constantly digging into the business and putting out research. You have a lot of public documentation that has to be filed. You can’t spend 100 percent of your time fixing the business.

Q. Who are some of the C.E.O.’s who’ve been lured into the private sector?

A. One good example is David Calhoun, leaving General Electric for an opportunity to join an LBO of the Dutch firm VNU. The public speculation was that he got a $100 million package to lure him. So here’s a guy who was a vice chairman at G.E., where he ran $60 billion in revenues, and he left.

Q. Isn’t it bad for the average investor that people are taking companies private and reaping big gains that public shareholders might otherwise have shared in?

A. The only way that a private equity firm is going to buy a business is as a result of a process in which the board looks for other buyers. Nobody is buying a business without paying a market-clearing price. Now, are private equity guys taking upside profit that shareholders would have gotten? The complication with that analysis is that doing a buyout creates a different risk profile. If you take a business and double its debt, you’re taking different kinds of risks than when public shareholders were involved. The other point to add is that most of these buyouts probably will end up being taken public as an exit vehicle for these private equity firms.

Q. Isn’t it bad for the average shareholder, at least in the short term?

A. Isn’t that an apples-to-oranges analysis? Return and risk are correlated. When these buyouts happen and more debt is put on the company, it’s a different level of risk. It’s not exactly comparable to say that the same amount of equity value would have been created. There may be situations where the public market doesn’t appreciate aspects of a business that a thoughtful private equity investor might see. “

No comments: