Friday Feedback

The heat wave is winding down, the beloved Red Sox are breaking down and unemployment is going up. In other words, it’s time for Friday Feedback. 

Lots of emails about the proposed minimum wage hike (you don’t like it), the HCA deal (you like it) and the new VC fund model proposed by Stage1 Ventures (you like it, but aren’t sure it will fly). But yesterday’s Return of the Corporate Raiders column prompted a digital deluge, so that is what we shall focus on. No comments from me this time, just your (overwhelmingly supportive) thoughts. 

UK Bill: “I thought your column yesterday to be the most perceptive, cogent, appropriate, direct, interesting and important commentary on our industry I have read in a long time. This behaviour could well lead to eventual SOX-like legislation throttling this industry. It is greedy and stupid. If the industry doesn’t regulate itself and stop this type of despicable practice the regulators will do it like a ton of bricks… This bunch better wake up and stop shooting itself and the private equity industry in the collective foot.” 

Pete: “This could be an example of penny wise and pound foolish. Because the PE guys are such large shareholders of BK, they should be more concerned about the stock price rather than a measly $30 million fee. The loss in value of the shares they own is most likely significantly larger than the after tax value of their $30 million fee. I’m sure the disclosure of that fee and the impact on the quarterly earnings cost the PE guys way more than the fee itself.” 

J: “Dan, I don’t understand why you think this is ‘unconscionable.’ At the time the PE sponsors took out the dividend, they were the only shareholders; so when you say ‘everyone else is getting slammed,’ I’m not sure who ‘everyone’ else is. And if you are suggesting that ‘everyone else’ is the investors who own the equity post-IPO? Well, they knew about the dividend and one-time management fee, so they knew what they were paying for and it should’ve been built into what they believed the stock is worth.” 

Faizal: “Wow. You actually took a hard look at the buyout industry and did not come out an apologist extolling the virtues of capitalism. For the markets you wish to inform, the answer is caveat emptor. For the lending banks which have been so accommodating in the USA, Europe and Asia, they will find their comeuppance. It is only when the liquidity dries up that those listening will realize the prescience in your voice.” 

Banker Bert: “The termination fee you object to is fairly common, and is meant to compensate the PE firms for terminating the 10-year or so contract to be paid a recurring management fee, as well as even largeradvising fees on every kind of possible future financing and strategic transactions. It would be hard to go public if you had to disclose the continuance of this form of heavy-handed related advisory cost. While I don’t agree with them as a banker, they seem to be standard operating procedure among PE firms, and provide income hits that support PE expenses and gig reported returns. Since you are often concerned with LP treatment, how does that harm the LP investor (other than the long-term impact to the remaining equity holding if the termination fee is so onerous that the investment tanks)?” 

Mike: “After reading today’s commentary I think you are probably a liberal, and I mean that in the way it would typically sound coming from a libertarian. That being said, I really liked your editorial, mainly because it goes against the theme of the private equity firms ‘getting away with what the market will bear.’ There is way too much engineering these days, which I’m sure most private equity firms would argue is due to valuations getting out of hand. So many firms these days seem to be much more concerned about capturing value than creating it. All of this ‘quick buy and lever it up an pay off debt with IPO proceeds, but make sure we have a convertible preferred so that we can get all of our money back and still own a majority of the company…’ Public investors have been getting hurt this year, and they will start pushing back in the near term.” 

Andrew: “PE firms have been doing this for a long time, and it’s even worse than you suggest. Many PE firms get to take the fees they charge and apply them partially to the management company instead of it all being applied to the partnership (for the benefit of their investors). Think about the conflicts inherent in that practice. So, they get to screw the public shareholders and their own investors.” 

John: “Well said. The press is largely avoiding the topic about how PE is making money these days… It will be interesting to see if the equity market starts to shy away from PE IPO deals, especially ones that were just taken private in the past few years. Will the institutional buyers continue to buy shares in the same company for a 50% premium to which they sold two years earlier?”