Private equity-backed IPOs

Private equity bashing is inevitable as entrenched interest groups defend their corporate turf. They will try to show that substitutes are hazardous – despite the manifest difficulties with corporate governance we’ve observed, especially lately.

Consider in that light a recent report by the Investor Responsibility Research Center Institute. The report shows, per Dealbook, that “on average, private-equity-backed companies that go public are more likely to have takeover defenses and less likely to link pay to performance — just the kind of things that usually have activist investors up in arms.”

The study, per its executive summary, “makes no claims about the actual performance of companies with these structures” and doesn’t try to explain these features. The apparent idea is that, just because these IPO firms don’t look like standard corporations, this must be a problem.

But as Dealbook notes, "the whole issue becomes more complicated, however, when you consider that private equity firms generally keep a large ownership stake in their portfolio companies for years after they take them public."

I’ve pointed out in my Uncorporating the Large Firm:

A “reverse leveraged buyout” involves a public offering by a firm that had been taken private. The resulting firm appears to be a conventional publicly held corporation. However, the firm retains a key uncorporation-type high-powered incentive characteristic of the privately held firm -- manager-ownership. A leading study of these transactions notes that after the public offering the buyout group retains on average a 38% stake, while its managers and directors retain an average 36% share (citing Jerry X. Cao & Josh Lerner, The Performance of Reverse Leveraged Buyouts).

And more generally, let's keep in mind, as I say in my more recent and shorter paper on this subject, "courts [and regulators!] need to consider the firm’s entire bundle of rights and obligations before applying corporate restrictions on contracting."

Comments

[MAW]

My take on the study is here:

http://lawprofessors.typepad.com/mergers/2009/06/are-pe-ipos-shareholder-friendly.html

My bottom line:

"In addition to being a sample that must be too small to be of any statistical significance (can we really draw any conclusion from the fact that 5 of 48 PE backed companies had poison pills compared to 1 of 42 companies without PE sponsorship?), the study seems to have stolen a base that the DealBook implicitly recognizes.

"Since 'private equity firms generally keep a large ownership stake in their portfolio companies for years after they take them public' isn’t it at least as likely that the policies in the PE backed companies are ones the PE funds believe are MORE shareholder friendly? After all, why would these funds do anything other than maximize the value of their ultimate exit?"

MAW