Private+equity+moves+offstage,+Ann+Crotty,+Business+Report

Business Report, January 31, 2007
=Private equity moves corporate drama offstage=


 * Ann Crotty**

What impressive demonstrations of corporate activity we saw last week!

The guys at Brait revised their offer for Shoprite in a manner that addressed many of the oppressive aspects of the deal, while Barloworld appointed its first black executive director, following criticism about its lack of transformation.

In the Shoprite buyout, chairman Christo Wiese's voting rights are still a matter of contention, as is the need to secure only 50 percent plus one of the votes to do the deal.

And assuming the JSE gives the go-ahead for the listing of the hybrid currently referred to as Listco, one thing seems likely: in five years' time we may all be wondering how this strange animal came into being - just as we all can't quite remember how Wiese secured the strange voting arrangement at Shoprite.

But all in all, the revised offer does represent a victory for shareholder activism and is a decent, if not sufficient, response from the decision makers involved.

Then there was the brouhaha at Barloworld, where an emotional Warren Clewlow bid a sad farewell to a group he had ruled over for more than 20 years.

One of many questions raised by this affair is how a board can be so isolated from the real world that its members did not realise that transformation had become such a crucial issue. This is all the more puzzling given that two of Barloworld's directors, Clewlow and Steven Pfeiffer, are members of the Sasol board and will have had first-hand knowledge of the Public Investment Corporation's spat with that untransformed board a few years ago.

While the packed annual general meeting at Barloworld produced some dramatic headlines, equally dramatic events were unfolding just outside the glare of the media spotlight. That drama concerned the proposed unbundling of much of Barloworld's asset base, which is likely to see the group shrink back to the sort of size it was in the 1960s.

In both of these companies the dramatic events come against a private equity backdrop. Management at Brait and Shoprite seem close to securing support for the bid to delist (most of) the retail chain. At Barloworld, frustrated shareholders appeared to have given management the choice of streamlining operations or waiting for a private equity group to do it to them.

But the critical consideration is that the processes were open to public scrutiny and it is likely that, for shareholders, this scrutiny had a positive influence on the outcomes.

Which is, perhaps, why the absence of such public scrutiny represents one of the attractions that private equity holds for incumbent management teams. In a private equity environment there is little an investor can do, other than sell out.

Willing targets of the global private equity tsunami make much of the benefits of being able to operate behind closed doors and not being held accountable to the whims of institutional fund managers, analysts and the media, which demand short-term performance.

They stress that this allows them the freedom to take decisions that may cost earnings in the short term but will create a stronger, more profitable operation in the longer term.

Then there is the constant need to account to regulatory bodies and disclose sensitive details such as executive remuneration levels.

That there is substance to most of these points highlights the extent to which equity markets have failed in the much-touted objective of creating the most efficient environment in which to fund and grow companies.

In theory, movements in a company's share price are an excellent way to show what an informed market thinks of its prospects under the incumbent management. The share price is meant to act as an incentivising as well as a disciplining tool.

In reality fund managers, analysts and the media are focused on the short term. Offered the choice of a reasonably interesting story today or a very exciting story 12 or 24 months down the track, they will invariably opt for the former, on the basis that a bird in the hand is worth two in the bush. This may occasionally be explained by a lack of faith in the incumbent management, but more often it is due to the short-term incentives that motivate fund managers, analysts and journalists.

The critical question, which can only be answered in three to five years' time, is whether this short-term focus is any more debilitating than the focus of the new breed of private equity managers.

After some fancy financial engineering, will these debt-focused overseers seem any less whimsical than the fund managers that preceded them? Will they look to the long-term health of the company? Or will they merely want to dress it up to look good for the inevitable re-entry to the public equity market?

As a columnist in the Financial Times recently noted, the evidence to date is far from encouraging.

There is no doubt the private equity fad has been very useful in highlighting general inadequacies in equity markets, as well as specific weaknesses in individual firms. In the years ahead it will be useful in showing executives that exceptionally generous pay packages can only be secured through exceptional performance.

The cost-sensitive private equity operators will not exhibit the same unquestioning generosity that institutional fund managers do with the funds they manage on behalf of other people, and there will be appropriate levels of risk attached to the rewards offered to executives.

But after the initial profit surge, it is likely that there will be increasing concerns about the lack of public scrutiny and accountability in a system that is ultimately heavily reliant on funds that belong to the public.


 * From: http://www.busrep.co.za/index.php?fArticleId=3654574&fSectionId=560&fSetId=662**

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