What are the pros and cons of going from public to private?
We are regularly consulted by leaders of publicly listed businesses who are weighing up the merits of being taken over by a private equity (PE) investor. We are always happy to advise our clients on the advantages and drawbacks of each type of ownership, particularly when it comes to incentive and reward structures.
How remuneration differs between public and private
In a listed business, you are likely to have a rigid and well understood package. This will be made up of a salary, a short-term bonus plan and a long-term incentive plan, which is normally delivered through share-based payments. Such businesses are subject to stringent remuneration codes, and their compensation packages are tied to a host of factors.
Some of these will be financial targets, but there may also be benchmarks around ESG, employee engagement levels, and other less tangible metrics. That means you might find it hard to understand exactly what you are receiving on any given day. Similarly, shareholders in such businesses might find it hard to know if its executives are being rewarded for the things that really matter to shareholders.
In a PE-backed business, the reward structures are in many ways far more straightforward. You will have a base salary, a similar short-term bonus structure – both of which are likely to be comparable to, if not slightly lower than, their equivalents in listed businesses. However, the LTIP is likely to be in the form of a potentially lucrative equity incentive scheme, which will be highly transparent.
It is aligned with all shareholders including the investors, and it is based on one metric – if you grow the value of the business (above a hurdle rate), you will be handsomely rewarded. That means, over a five-year period, it is likely that the aggregate rewards for the senior managers in a PE-backed business are potentially much higher.
Of course, the trade-off in such an arrangement is also clear. Whereas a leader of a listed business might miss a target here or there, and the company might not grow quite as much as was predicted, unless that individual does a really poor job it is likely they will stay in place.
In a PE-backed context, if you are not performing and that is judged the fault of management rather than, say, an unforeseen market issue, the majority shareholder will almost certainly look to make changes.
How access to capital has grown for private businesses
Traditionally, listing on the public markets was the natural next step for many businesses once they reached a certain scale, as this was the most viable route for them in terms of accessing capital. The public equity and debt markets could provide more and more capital to fund your strategic ambitions once private equity and other sources of private investment had run out of steam.
However, in the modern era there is the potential to source considerable PE backing with the scale of funding available now on a par with public equity markets. If you are a business with a valuation running into tens of billions, PE is still a highly relevant place for you to go for investment capital.
As well as access to capital, there are other tangible support mechanisms available through PE backing. If you are acquired by a global fund you gain access to all its embedded knowledge, both in terms of other businesses it has invested in and a global reach that can inform and support your strategy.
On the other hand, a listed business is likely to have a more passive investor base that might not add as much value, insight and drive if you are looking to expand into new territories around the world.
Talk to Liberty for advice on your next step
Our exceptional experience and expertise in working with listed and PE-backed businesses gives us the insight to be able to advise companies considering moving from public to private ownership. Contact us to find out how we may be able to help you.