More Private Equity Ping Pong

 
Photo: K Gradinger

Greg Minton (Archer Capital), Robin Bishop (Macquarie Capital) and Greg Clark (Westpac) discuss secondary buyouts in The Australian:

MINTON: The other factor is management. They’re a stakeholder, a shareholder. They are trading off going through the grief of being publicly listed with going again with a different private equity investor. Many are asking if they can go and find another private equity buyer that might back my team for the next five years. So the secondary market is also being driven by many management teams saying they enjoy this environment. It seems much more user-friendly than the public market.

BISHOP: I think the issue of one private equity firm selling to another private equity firm says more about the issues associated with the listed market than it does about the private equity market. The listed market will be thinking of how it can ensure it gets quality businesses on our exchange. Listed companies come under tremendous public scrutiny, personalisation of management, media reviewing every step they take. Whereas if you’re a manager working for a business owned by private equity, the focus can be on the business to a greater extent. How much time would a CEO of a listed company spend talking to investors, dealing with media, etc? It’s enormous.

CLARK: As a lender we like the secondary buyout story because it’s a company that’s lived with a leveraged finance debt structure and the focus on cash flow that this requires. Management is used to the demands.

Comments

[deldallas]

In the US, there's a pretty strong case against going public due to regulation (sarbox, reg FD, etc.), increasingly expensive (due to liability mitigation) BOD members, IR + PR costs, feedback from non-investing populists, and the concern over 'will regulators find a reason to make more public market regulations'.

Personally, from an asset management perspective, I'd typically rather own a stake in 'XYZ Co.' with a PE BOD and PE costs than 'XYZ Co.' with a public co. BOD and public co. costs.

I think all this drives PE funds to be a larger percentage of equity capital going forward and makes a strong argument for secondary buyouts. I think you can make an argument for many businesses being basically permanently managed by PE firms, with a sales transaction occurring every 5 years or so.

Tangentially however, if, say in 10 years, Carlyle, Blackstone, etc. become ~$500 billion funds, secondary buyouts become standard practice, and public markets become ghost towns of the financial world, will regulators start coming up with reasons for increased oversight of PE firms?

[GP]

Agree with your comment deldallas.

In some European markets the regulators and unions are already raising this issue and arguing that very large private equity funds/portfolio companies represent "too big to fail risk" and should therefore be monitored and regulated like public cos.

[PE GP]

Intuitively, secondary buyouts represent failure. Firstly, PE buyers never want to be the highest bidder in an auction; they want to close opportunistic deals at lower than market to effect multiple arbitrage on exit. Secondly, a PE buyer is rarely the natural buyer of a firm, unless they're making an acquisition that represents synergies. Trade buyers should be able to pay more. Of course there are caveats to all of these points, but in my mind, secondary buyouts just show how PE is grasping at straws at the moment.

It's this simple, PE prides itself on entering and exiting at great prices. Well how can one PE firm enter at a great price and the other PE firm exit at a great price on the same transaction???

Of course, like the first commenter said, at the very big end of town, there's not much choice but to do secondaries since the pool is limited. By I stand by my comment that in the mid-market, secondaries don't make sense.

[Murphy]

Hmm there seems to be no mention of the likes of Fortress or ICG etc. on this website.

Are these funds not considered active?

[Private Equity]

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