Institutional shareholders have been called upon to replace failing chairs as part of an effort to counter companies being sold “too cheaply” to private equity investors.
According to David Cumming, chief investment officer for equities at Aviva Investors, institutional shareholders should be working harder to hold company leadership teams to account. He includes chairs, chief executives and finance chiefs in his commentary, arguing recent private equity (PE) activity can be viewed as a response to mismanagement of strategy.
Writing in The Sunday Times, Cumming called on boards and shareholders to fight acquisition efforts.
“If a bid materialises, particularly from PE, the board and shareholders must be fighters, not quitters. Boards should look first to resolve internally the valuation issues that have been highlighted by the bid, engaging with their long-term shareholders as part of the process.”
Cumming argues this approach has been lacking in recent times and sales to private equity taking place cheaply. He lists the sale of Cobham, Merlin Entertainments, RPC Packaging and Greene King, the brewery, as examples of companies that were sold at low prices.
Private equity activity has been growing in recent times. Figures from trade association Invest Europe show there is €688bn under management by PE houses.
Fundraising has been steadily growing since 2009, the year after the financial crisis when it plummeted to €21bn from a peak of €112bn in 2006. Last year saw fundraising rise to €97.3bn, up marginally from the previous year’s €96.6bn. Fundraising for buyouts fell 8% to €66.5bn.
Total investments in 2018 stood at €80bn, up on €77bn 12 months before.
Almost a third (31%) of the capital comes from pension funds, though there is continuing debate around the potential for allowing retail investors to plough their capital into PE houses.
Surveying the market, Cumming expects more low bids unless assets are more highly valued and “boards defend themselves”.
“The evidence of recent bids shows a lot still has to be done to avoid British companies being sold too cheaply. Management and shareholder behaviour has to change to limit the risk of a bid, and boards must respond effectively to maximise shareholder value if one emerges.
“Investors and boards must be more proactive in instigating management change where necessary, and be aware that these bids may be signalling excessive negativity around UK-based companies.”
In the US private equity has recently become highly politicised. Elizabeth Warren, a democratic hopeful for the 2020 presidential elections, filed proposed legislation—dubbed the Stop Wall Street Looting Act—aimed at overhauling the private equity industry.
Principal among its aims is to make PE firms responsible for the debt held in portfolio companies. The core acquisition approach used is the leveraged buyout, in which a PE firm borrows to acquire a company using its assets and cash flow as collateral to service the loan.
Warren described PE firms as “vampires—bleeding the company dry and walking away enriched even as the company succumbs”.
Warren is also concerned that private equity is more focused on cutting costs and asset-stripping companies to make them more efficient, than investing and building them up.
In a blog post she writes: “Let’s call this what it is: legalized looting—looting that makes a handful of Wall Street managers very rich while costing thousands of people their jobs, putting valuable companies out of business, and hurting communities across the country.”
Cumming is a long way from this level of attack on private equity. But his call represents a belief that private equity prices in some cases fail to reflect the value of their target companies. Whether other institutional investors will rally to his cause remains to be seen.