Private equity funded companies continue to attract top management from the listed sector and will carry on doing so, according to analysis published by Deloitte.
The report shows that for companies listed on the LSE and AIM between July 2003 to January 2005 (a significant number of which were once owned by private equity funds), the median share holding of a top full time executive (who was not also getting a share option or other type of employee share scheme award) was 11% of the shares in the company, worth approximately £7m. These shares are generally taxed at around 10% due to the low price at which they are purchased.
Those top full time executives in FTSE 350 listed companies receive considerably less. Median pay (which includes salary, bonus and share scheme awards) is around £1.5m, which is almost always subject to tax at around 40% together with social security.
Neville Bramwell, a Deloitte tax partner and share reward specialist, explains the contrast in reward offerings: “Executives who move to the private sector can expect a significant proportion of compensation to be made up of shares in their new employer. Initially those shares will not normally have the same value as an equivalent holding in a mature listed company, with a significant stock market value. However, if the private company does well, the value of its shares may increase exponentially because deals are usually substantially leveraged.” There may also be further benefits in the event of a successful float or sale. Had the same executive remained in the listed sector, their shares might have increased in value but it would be unlikely to be by the same amount.
“Of course, there is a flip side to this: the risk of losing everything is greater in a private company, because where a substantial amount of return is channelled to lenders, there may be nothing left for the holder of ordinary shares,” says Bramwell.