Private equity was once the domain of smaller scale investors buying up struggling small to mid-sized companies in order to turn them around and sell them off years later for big profits. Today, the fundamentals of private equity remain the same; it is only the scale that has undergone a revolution.
These days no corporation, no matter how large, is safe from the private equity predator. Australian icons such as Qantas, Coles Myer and Channel Nine all fell under private equity firms' radar last year and there is no prospect of this trend easing in 2007.Speaking at a lunch in Sydney last month, Tyndall head of equities Bob Van Munster said private equity involvement in merger and acquisitions would continue unabated.
For Van Munster private equity can provide companies with opportunities to re-invent themselves. "They present traditional companies with new choices and opportunities to pursue new kinds of financial strategies that to date would be unacceptable in the public domain," he said.
As Alinta's recent management buyout (MBO) attempt has shown, however, the role of private equity in public companies can also present potential bidders with corporate governance challenges. Macquarie Bank faced accusations of a conflict of interest after it was revealed it might back the billion dollar MBO, despite being an adviser to Alinta.
Alinta has since terminated all future advisory roles with Macquarie Bank. Alinta chairman John Poynton and chief executive Bob Browning were also forced to resign last month after their involvement with the MBO was made public. As chair of corporate governance research and education organisation, the Australian Council of Superannuation Investors (ACSI), Michael O'Sullivan said the case was a clear example of how directors could be conflicted.
"When an offer is made by a merchant bank, it is important that conflicts are managed in a way that the company's directors are not compromised.
In the case of Alinta everyone compromised themselves," O'Sullivan said. He said that the fundamental reason investors invested in the equity market was to get growth and value. It is then up to the chief executive to make sure that happens.
"We need to be assured that both the board and management are there to ensure the company delivers value to its shareholders," O'Sullivan said.
It is an issue industry body the Australian Institute of Company Directors (AICD) has also addressed. On January 17, the AICD released a position paper on directors' responsibilities during a period of M&A activity.
AICD chief executive officer Ralph Evans urged directors of listed companies to be "meticulous in their corporate governance processes during an M&A or corporate activity, particularly in the areas of disclosure and where there was a potential for conflicts of interest".
"If in doubt about any issues it is better to disclose them to the market, and if appropriate, seek independent advice. More than ever, directors of Australian companies need to be aware of, and to adhere to, their statutory duties that fall under common law," Evans said.
With a mandated super environment, O'Sullivan said super funds would continue to have "huge purchasing power" and with that private equity involvement in public markets would only continue.
He acknowledged such super funds would also be party to both sides of the transaction, as investors in the equity market as well as in private equity transactions. Nevertheless, he said this would only heighten the importance of investing with integrity and avoiding any conflict of interest.
"As institutional investors we expect integrity and we will not get returns in a sloppy way where profits are delivered from unethical practices," he said.
