Subscribe to this page
EquityFC Blog
The value of management | 26 November 2009
There's been a lot of talk recently about distressed private equity businesses getting sold off cheap. The culprit? Debt. Take Springer, for example, the scientific publisher. The Times reports that Cinven and Candover were trying to flog half of it for €400m - but failed, and with a £2bn debt roll-over around the corner are now asking for bids of half that amount. It's reverse leverage: tiny changes in perceived value kill the equity stake while the senior debt holders hover menacingly on the sidelines. (Menacingly and nervously, of course – a frightening combination.)
What's telling, however, is how management figure in all this. I was surprised, for example, that when one of my old employers breached its debt covenants, the bank left a chunk of management's equity in place. Incisive Media is now owned by RBS, more or less, with Apax having taken a bath - its stake fell from 49% to 2%. But management kept a big slug of equity on the grounds that no-one's going to see much of a return if they just toddle off in frustration.
That's worth bearing in mind if you're looking at a PE-backed position. Of course, PE investors have a (some say deserved) reputation for being tough on management - and for rewarding them well if they perform. But they also need management to be bright-eyed, bushy tailed and in a positive, well-incentivised frame of mind. So if you know you can add value to a business - don't be shy about getting the right rewards.
(Oh, and get your PE backer to borrow far too much money, too. They might have ideas about how to run your business - but the bank almost certainly has none, so when they're in the driving seat, they need you even more!)