Legal Village

Not-so-friendly private equity

Posted 16/01/2007 by Charles Martin

Welcome to the first of my blogs, which will focus on corporate, M&A and private equity issues. Any thoughts on burning topics for future blogs would be gratefully received, but plenty of ideas are bubbling around, including:

• the Financial Services Authority report on private equity and regulatory security of the indemnity generally;
• hedge funds and shareholder litigation;
• controlled auction processes;
• corporate social responsibility and private equity;
• due diligence nightmares; and
• incentivising listed company management teams.

Firstly, private equity-led P2Ps. Lots to cover here but, most topically, let me report that frustration is building in private equity land. No, it’s not just about the chronic shortage of £5m-plus homes in central London or the long waiting list for Aston Martin V8 Vantage convertibles.  It’s about wrestling public-to-private deals to the ground in the UK market.

The sources of frustration are manifold:

• hedge funds building stakes and blocking deals, forcing offers or hanging around post-deal as long-term forced co-investors;
• the Takeover Code requirements that mean once a company has opened its books to one potential buyer, it must open them to all (how can you put together a meaningful, credible offer without access?); and
• the worries of independent directors in being seen to have sold too cheaply to private equity houses which have hooked up with the companies’ own existing management.  Almost worse, look what happens when the house gets cold feet – Woolworths is a good example. 

And there are plenty more.

The US has seen a flurry of huge P2P LBO deals over the last months and this has not been matched in Europe, notwithstanding the weight of private equity money and debt finance looking to do these types of transaction. That weight of money increases week by week as private equity fundraising looks forward to a rosy 2007, with huge funds being raised by the likes of Apax as well as the existing war chests raised last year.

Recently, CVC sought and obtained consent from the investors in its fund to execute hostile transactions. No doubt they will have little difficulty in convincing banks to move forward alongside them without the deep due diligence or comfort of management continuity that has been the norm in UK public-to-privates.

The implications for the way that private equity approaches are seen by corporates will be considerable. And yet this was surely inevitable: in an era in which a £1bn LBO is not huge and many houses are focusing on deals significantly larger than that, where are the candidates going to be found if not on the public markets?