News over the weekend that Morrisons had rejected a £5.5 billion takeover proposal last week drew a familiar wave of criticism about the impact of private equity. Many commentators think that Clayton Dubilier & Rice, the US private equity firm, would do more harm than good to the supermarket group by sacking thousands, reducing service quality, loading the group with debt or stripping its assets in another way.
The critics extended to the political sphere, with Labour also chiming in, warning that the takeover would put jobs at risk and urging the government to intervene.
The critics’ contention, in a nutshell, is that PE-owned businesses are starved of investment, have costs slashed to near breaking point and are leveraged to the extent that they are vulnerable to any downturn. The aim of private equity, it is claimed, is to disguise the harm done and sell the business on before it becomes clear. But is this fair or accurate?
In short, the data suggests otherwise. A study by PwC looked at British flotations between 2009 and 2017 and found that formerly PE-owned IPOs did better than other IPOs – in fact they outperformed the FTSE All Share by 24% while the other IPOs under performed.
An EY study found that PE-backed companies do not risk jobs either. They are marginal net hirers on the whole, with employment increasing by 1.5% in 2019 over the private sector average of 1.2%. They also do not drive wages down, with average in pay in PE-backed businesses increasing by 3.2% compared with 3% in the private sector.
Private equity houses are inherently focussed on increasing the value of their assets, not damaging them, with a view to selling them on for a profit or floating in three to seven years’ time. To do so, they are reliant on customers and employees remaining content and the business maintaining good prospects.
The negative view also assumes that potential buyers do not carry out proper due diligence or are naïve about what they are purchasing. The truth is far closer to the opposite, illustrated by the number of proposed buyers who are other private equity houses buying up the businesses as part of secondary deals.
Negative bias seemingly distorts the view of many, who are quick to cite the few PE disasters (Debenhams, Saga) whilst overlooking the many hugely successful stories.
The conclusion, seemingly, is that private equity does have a problem with its image but there are a number of things it could do to help itself. Contrasted with listed companies, senior management at PE houses seldom engage publicly with those raising objections to proposed takeovers and public disclosure also tends to be very low – the result is a scepticism around a practice perceived to be shrouded in secrecy. It could be more open, engage in more public dialogue and be more forthcoming publicly with its plans. Otherwise, it leaves itself open to further unfair criticism and unjustified threats of political intervention.
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