Article

Private matters

This one-two-three punch at public ownership is evidence that private equity is becoming a...

著者：Orit Gadiesh and Hugh MacArthur

First published on 5月 25, 2007
min read


Last week, Chrysler's major stakeholders, including the United Auto Workers leadership, voted to take the company private. In the same week, Alliance Data Systems joined the club of public companies going private, accepting a $6.4 billion bid from the Blackstone Group. And on Monday music company EMI agreed to be bought for $4.7 billion by private-equity firm Terra Firma. This one-two-three punch at public ownership is evidence that private equity is becoming a benchmark of performance for CEOs and boards of directors. Boards are asking themselves, "What would we do differently if we were privately held?" The answer is a lot. Public-company shareholders are often passive or cast votes by dumping shares. And public companies are constrained by Sarbanes-Oxley, which can slow down or hamper fixes needed for the mid-to-long haul. Private-equity shareholders behave like active owners. They understand the companies they own and drive them to address problems more rapidly while investing more deeply in attractive longer-term initiatives. What does this mean? For one, private-equity firms invest with a thesis for improving performance in a realistic but aggressive time frame, three to five years. Compare that with public companies' quarterly earnings scramble and sense that each business they own will be a permanent part of the corporate portfolio. For another, the best private-equity firms test their investment thesis hard after the deal closes with a detailed plan of where and how to build value. Their plans often include a few simple metrics—e.g., cash, market and operating measures—and top fund professionals frequently review and revise these plans with management. They swiftly move unproductive assets off the balance sheet. Finally, they compensate managers strictly on results. When executed well, private-equity-deal results speak for themselves. Consider Warner Music Group.Thomas H. Lee Partners, Bain Capital and Providence Equity Partners joined with Edgar Bronfman Jr. to acquire it from Time Warner in 2004 for $2.6 billion, at a time when few were betting on music. Digital piracy was rampant, and consolidation of traditional retailers was squeezing the industry on one end, with rising costs of acquiring and marketing artists pinching on the other. But, within two years, WMG was transformed. Working with management, the new owners took inventory of WMG's most attractive assets and developed a plan that challenged the conventional wisdom. First, Mr. Bronfman (who became the CEO) and his team pared down the roster of performers and the product pipeline. They focused on promoting established stars and investing in promising new acts. They also embraced digital distribution, making WMG's content more widely available online and on mobile devices. They created premium price digital albums, adding special bonus tracks to entice buyers to download new releases. WMG paid down debt and dramatically increased cash flow and earnings. Owners took the company public again two years later, while maintaining their equity position. The stock price rose to the point that the buyout firms' remaining stake in the company—combined with the money paid out to the investors as dividends—was worth over three times their initial investment. Now, while the industry battles significant headwinds, WMG continues to gain share. A similar willingness to buck convention may play a key role in transforming Chrysler. Indeed, when private equity succeeds, it presents an enormously compelling business model. From 1969 to 2006, the top quartile U.S. private-equity funds had annual rates of return ranging from an average of 39% to well over 200% through good times and bad. No one business model holds a monopoly on performance or profitability. Despite all the headlines, private-equity's stake in global business is small. Our analysis finds private-equity investors control assets worth less than 3% of the assets held by the world's public companies. And some boards are pushing back against the notion that private-equity firms have some sort of magic dust. In April, British supermarket chain J Sainsbury resisted repeated offers from a consortium of Blackstone, TPG and Kohlberg Kravis Roberts & Co. because it felt management could solve its own problems without taking on the massive debt involved in going private. Others have concluded the same. But more and more boards acknowledge that a private-equity deal can be bolder, faster and more transformative, while publicly listed companies are typically slower and must push harder to take the same level of risk. Until that changes, the private-equity business model will keep growing—and more iconic brands are likely to follow Chrysler and see their destiny in private hands. Ms. Gadiesh is chairman of Bain & Company. Mr. MacArthur directs Bain's global private equity practice.

Last week, Chrysler's major stakeholders, including the United Auto Workers leadership, voted to take the company private. In the same week, Alliance Data Systems joined the club of public companies going private, accepting a $6.4 billion bid from the Blackstone Group. And on Monday music company EMI agreed to be bought for $4.7 billion by private-equity firm Terra Firma.

This one-two-three punch at public ownership is evidence that private equity is becoming a benchmark of performance for CEOs and boards of directors. Boards are asking themselves, "What would we do differently if we were privately held?"

The answer is a lot. Public-company shareholders are often passive or cast votes by dumping shares. And public companies are constrained by Sarbanes-Oxley, which can slow down or hamper fixes needed for the mid-to-long haul. Private-equity shareholders behave like active owners. They understand the companies they own and drive them to address problems more rapidly while investing more deeply in attractive longer-term initiatives.

What does this mean? For one, private-equity firms invest with a thesis for improving performance in a realistic but aggressive time frame, three to five years. Compare that with public companies' quarterly earnings scramble and sense that each business they own will be a permanent part of the corporate portfolio. For another, the best private-equity firms test their investment thesis hard after the deal closes with a detailed plan of where and how to build value. Their plans often include a few simple metrics—e.g., cash, market and operating measures—and top fund professionals frequently review and revise these plans with management. They swiftly move unproductive assets off the balance sheet. Finally, they compensate managers strictly on results.

When executed well, private-equity-deal results speak for themselves. Consider Warner Music Group.Thomas H. Lee Partners, Bain Capital and Providence Equity Partners joined with Edgar Bronfman Jr. to acquire it from Time Warner in 2004 for $2.6 billion, at a time when few were betting on music. Digital piracy was rampant, and consolidation of traditional retailers was squeezing the industry on one end, with rising costs of acquiring and marketing artists pinching on the other.

But, within two years, WMG was transformed. Working with management, the new owners took inventory of WMG's most attractive assets and developed a plan that challenged the conventional wisdom. First, Mr. Bronfman (who became the CEO) and his team pared down the roster of performers and the product pipeline. They focused on promoting established stars and investing in promising new acts. They also embraced digital distribution, making WMG's content more widely available online and on mobile devices. They created premium price digital albums, adding special bonus tracks to entice buyers to download new releases.

WMG paid down debt and dramatically increased cash flow and earnings. Owners took the company public again two years later, while maintaining their equity position. The stock price rose to the point that the buyout firms' remaining stake in the company—combined with the money paid out to the investors as dividends—was worth over three times their initial investment. Now, while the industry battles significant headwinds, WMG continues to gain share.

A similar willingness to buck convention may play a key role in transforming Chrysler. Indeed, when private equity succeeds, it presents an enormously compelling business model. From 1969 to 2006, the top quartile U.S. private-equity funds had annual rates of return ranging from an average of 39% to well over 200% through good times and bad.

No one business model holds a monopoly on performance or profitability. Despite all the headlines, private-equity's stake in global business is small. Our analysis finds private-equity investors control assets worth less than 3% of the assets held by the world's public companies.

And some boards are pushing back against the notion that private-equity firms have some sort of magic dust. In April, British supermarket chain J Sainsbury resisted repeated offers from a consortium of Blackstone, TPG and Kohlberg Kravis Roberts & Co. because it felt management could solve its own problems without taking on the massive debt involved in going private. Others have concluded the same.

But more and more boards acknowledge that a private-equity deal can be bolder, faster and more transformative, while publicly listed companies are typically slower and must push harder to take the same level of risk. Until that changes, the private-equity business model will keep growing—and more iconic brands are likely to follow Chrysler and see their destiny in private hands.

Ms. Gadiesh is chairman of Bain & Company. Mr. MacArthur directs Bain's global private equity practice.