Corporate leaders and investors should prepare for the private equity ownership of companies to continue to increase, accelerating a trend that has dominated the US business scene for the
Corporate leaders and investors should prepare for the private equity ownership of companies to continue to increase, accelerating a trend that has dominated the US business scene for the last two years, according to a survey of more than 100 chief financial officers conducted by US executive services company Tatum.
The survey finds that 75 percent of CFOs polled expected the number of companies seeking private equity to increase over the next 12 months, while 25 percent expected the number of companies seeking private equity to stay the same and none expected numbers to decline.
At the height of the capital market boom, private equity firms were acquiring public and private companies faster than ever before. In the first half of the year, private equity firms announced USD644bn worth of deals, up by 95.1 percent from 2006 and accounting for nearly a quarter of all merger activity worldwide, according to Thomson Financial.
Tatum notes that there are now more than 170 private equity funds with more than $1 billion in assets, and almost daily news reports of public companies selling a division or being taken private by a private equity firm, including Hilton Hotels, CDW and Alltel.
The report says creates a rising pool of executives who will be operating in a completely different environment from the heightened scrutiny of public ownership, instead managing enormous pressures for performance and leadership placed on private equity-backed corporations.
‘Private equity is quickly becoming the number one place that companies of all sizes are going to obtain capital,’ says Tatum chief executive Rich D’Amaro. ‘We are seeing a steady increase in the amount of public companies and divisions going private via private equity, and small companies continue to solicit these funds for growth purposes as an alternative to an IPO.
‘As more companies go the private equity route, they will find that the key to successfully making the transition is having the right financial leadership. CFOs making the jump from public companies should expect to find noticeable differences in the private equity environment, as the skills required to flourish in the world of private equity are unique and the transition is not easy.’
Tatum identifies a number of drivers for the trend toward use of private equity capital. ‘Private equity is where the money is,’ the firm says. ‘Businesses and investors alike are finding that private equity will provide them with a positive return on investment. Making an initial public offering is a longer, more formalised process that many businesses today do not want to undertake in order to gain access to capital.’
In addition, Tatum says, private equity is transition money: ‘Many mid-market private equity funds provide opportunities for consolidation or reorganisation for larger private companies and rapid growth for smaller companies.’
Company executives frequently welcome the fact that private equity is not focused on quarterly earnings. ‘Unlike the public markets, which demand favourable quarter to quarter earnings comparisons, private equity has a longer term horizon that focuses on the creation of value,’ the firm says.
‘This makes private equity an ideal source of capital for either large or small companies where there is an opportunity to significantly improve economic value, but where the required actions could depress earnings per share growth in the short term.’
At the same time, Tatum notes, private equity firms increasingly distinguish themselves by their ability to provide experienced operating and strategic financial resources to their portfolio companies. IPOs only provide capital, at a cost of significantly increased and expensive, tedious and confusing reporting requirements. Private equity firms no longer realise big gains simply by employing leverage and riding the earnings multiple cycle.
Regulatory burdens have also played a part. ‘Government regulations make private equity seem like a simple way out,’ Tatum says. ‘The intense pressure from regulatory agencies and the stringent financial requirements that have followed have caused many companies to rethink whether they want to be listed publicly.’ According to the survey, many CFOs feel immense pressure and do not see attractive career alternatives looking forward, with 90 percent saying regulatory pressures have contributed to the increasing turnover rate.
‘Private equity provides an opportunity for companies to maintain cash flow through a transition without public market reporting requirements and costs, as well as harsh regulatory restrictions, which explains the optimism with which many public company CFOs are embracing a move toward private equity ownership,’ D’Amaro adds.
Founded in 1993 and based in Atlanta, Tatum is the largest executive services firm in the US, with nearly 1,000 executive partners and professionals in 33 offices providing temporary executive services, education and mentoring as well as consulting services in finance and information technology.
