Taking a listed company private – implications for executive pay and governance
More and more companies are shunning listed status. Recent research has shown that the number of take private deals in 2019 was 40% higher than in 2018. Aggregate deal value increased from £9.9bn to £21.1bn.
Whilst the big deals grabbed the headlines (Advent’s £4.0bn offer for defence group, Cobham and the £3.3bn bid by a consortium led by Apax Partners for telecoms business Inmarsat) deals have been taking place in the small- and mid-market sectors, too, e.g. Charterhouse Capital’s £561m deal to take Tarsus media private and the c. £285m bid from funds advised by Lovell Minnick LLC for Charles Taylor plc.
What is the cause of this turn of events? A number of factors have combined to bring this about:
• Private equity fundraising activity in Europe reached record levels in 2019. If the level of fundraising activity falls-off in 2020, as predicted by some analysts, the reason is likely to be that firms will be looking for suitable deals to allocate their record funds, prior to resuming a further round of fundraising in a year or so’s time; private equity firms globally are flush with cash
• UK and European interest rates remain and are expected to remain, low
• The yield on the FTSE All-share index is about 4.0%; UK listed companies look attractively priced at present
• EBITDA multiples for listed versus private companies have narrowed in recent years, attracting the attention of private equity firms.
In addition, despite publication of the Wates Principles of good governance for larger private companies, privately-owned companies are subject to a lower level of pay disclosure requirements and governance regulation than listed companies, which might be attractive to management. It has been suggested that the decision by the family controlling property group, Daejan Holdings to take the company off the market in the biggest take private deal this year was to step away from the glare of publicity on its Board diversity policy. However, it has also been reported that this has not been referred to specifically by the family owning nearly 80% of the listed company as a reason for its actions.
The burden of regulation, pay disclosures and governance has increased for both executive and non-executive directors and those who report to them. Many small- and mid-sized companies do not have the in-house resources to keep up. It would be understandable if the boards of such companies were attracted by the prospect of easing the pressure by stepping away stepping away from the public gaze. However, stepping away from the public gaze is not a passport to operating outwith a sound governance framework and, in our experience, most boards would not wish to do so.
Whatever the reasons for taking a listed company private, they need to be thought through carefully. The financial dynamics of a company controlled by private equity are likely to be different from those of a listed company. What is the investment strategy? Is the PE house looking for long-term value creation or to make a quick return and sell-on its investment? Cash and cash-flow may assume a greater importance in a private equity context than they did in the listed environment (although free cash flow is a value driver in any business).
MM&K advises extensively in the private equity sector, which is evolving. Sovereign wealth funds and large family offices with significant amounts of capital to invest, together with infrastructure funds, are examples of longer-term investors for whom sustainable value creation over time may be a more relevant yardstick than IRR. This evolution is changing the shape of remuneration structures within the PE houses themselves.
A listed company which has been taken private should also review and, if necessary, amend its remuneration policies. If the transition into private ownership involves a change of business strategy, remuneration policy should be adapted to ensure that it is consistent with the new strategy. The new private equity investors will have their own investment strategies and expectations, which need to be understood. The company’s strategic KPIs, linked to its executive incentives, whilst supporting the business strategy, will also need to recognise the expectations of the new private investor(s).
Finally, the company’s governance framework should assist the board to run the company in accordance with a set of principles which are relevant to the business, take account of all stakeholders’ interests and encourage sustainable growth.
For further information about the issues raised in this article or to discuss any questions you may have, please contact Paul Norris.