AUSTRALIAN BUSINESSES think private equity is a force for good because it results in more focused organisations and performance-oriented remuneration, however, some Australian executives are concerned about leverage ratios in private equity buyouts and the impact this may have on cost-cutting and redundancies.
In 2006 Australia saw a record number of private equity buy-outs and the global who’s who of the industry –Kohlberg, Kravis, Roberts & Co, Carlyle, Texas Pacific Group – had arrived. In 2007, however, Australian managers and shareholders began rejecting the huge deals proposed by private equity firms to take Australian companies private, largely because they felt the prices offered were too low.
However, recent research has found that Australian attitudes to the concept of private equity are, on the whole, quite positive, and Australian businesses expect it to continue to play a key role in corporate life in the country.
Based on a survey of nearly 300 Australian executives as well as in-depth interviews with private equity firms, bankers and other players in the industry, the research found that the arrival of private equity has compelled business to become more efficient and has given it more strategic options.
It found that 79 per cent think that as a result of the arrival of private equity, companies are now more focused on efficiency (among large companies that proportion rises to 83 per cent), and 68 per cent think strategic options have been expanded (75 per cent among large companies).
The research, which was published by the Economist Intelligence Unit and sponsored by LEK Consulting, UBS and Baker & McKenzie, found that 70 per cent of respondents felt that the influx of private equity in recent years has resulted in a greater focus on performance-oriented remuneration, and this is a good thing – 77 per cent of respondents see this as a benefit of private equity.
Aside from getting rich, the major perceived benefit of private equity ownership is a more focused organisation – 66 per cent saw streamlined decision-making as a benefit of private equity ownership, while 65 per cent point to a clarity of business focus and objectives.
Another factor is the speed with which changes can be made when there are no public shareholders and analysts to question decisions –noted by 62 per cent of respondents.
However, Australian executives are concerned about the impact that leverage ratios may have on cost-cutting and redundancies, as 85 per cent of respondents agreed that high debt burdens are a risk of private equity ownership, while 75 per cent say that a short-term focus on cash flows is a risk.
This reflected their concern that the need to focus on debt servicing will result in cost-cutting and headcount reductions. By comparison, respondents were less concerned about management conflicts of interest (57 per cent agree it is a risk) or reputational risk (48 per cent).
However, there is a tendency to believe that the benefits of a private equity buy-out would outweigh the risks according to 36 per cent of respondents, while 30 per cent feel the risks would outweigh the benefits (34 per cent were uncertain).
The research also found there was a perception gap between short-term and long-term expectations, and Australian businesses were not convinced of private equity’s professed concern for the medium- to long-term payoff. Sixty-one per cent of respondents thought that private equity buy-outs have resulted in a greater focus on short-term investment returns.