Publicly active

There has recently been an enormous amount of coverage and public debate about the benefits of private versus public ownership. One thing that is evident is that good management teams are able to perform both inside and outside the public arena.

In the UK, Babcock International, under the management of Gordon Campbell, Peter Rogers and Bill Tame, has increased its market capitalisation from £86 million to over £1 billion in less than five years in what has been described as a “textbook case of why investors should back management teams”. The performances of Stuart Rose at Marks & Spencer and Richard Cousins at Compass Group are more high profile examples of management teams taking the helm of underperforming companies seemingly destined for private equity ownership and creating substantial shareholder value.

However, it is noticeable that the turnaround of fortunes led by the management teams at both Marks & Spencer and Compass have taken place under the constant threat of a private equity bid. Whilst Rose at M&S and Cousins at Compass have performed well, it is questionable whether they would have been able to implement so many changes so quickly if their boards had not been under such pressure. As John P. Kotter, Emeritus Professor of Leadership at Harvard Business School says in his influential book Leading Change that “ a high urgency rate helps enormously in completing all the stages of a transformation process”.

The hedge fund industry learnt some time ago that a company does not always have to be taken private for an activist investor to exercise a degree of control over it. By taking relatively small positions, often through the use of CFD’s and other imaginative instruments, a single or small coalition of activist investors can put pressure on management teams to force through changes in a company’s strategy, and even management. Indeed, the emergence of this new breed of “activist” investor is causing headaches for regulators such as the Takeover Panel who are concerned about the speed at which funds are able to build positions and the close links between various funds within the industry.

The recent acquisition by Robert Tchenguiz of a 5% stake in Sainsbury, followed by the “dawn raid” by Qatari-based investment fund, Three Delta (itself linked to Tchenguiz through Three Delta’s manager, Paul Taylor), of a 14% stake in Sainsbury, shows just how bold activist investors are becoming in attempting to influence the management of what have been until recently regarded as “impregnable” boards backed by strong institutional shareholder bases (in this case the Sainsbury family). Tchenguiz and Three Delta have demanded that Sainsbury undertakes a sale and leaseback of its property portfolio (which they believe is undervalued by at least £2 billion) and return £4 billion to shareholders. Whilst this proposal, along with KKR’s attempt to take the company private, have been rejected by the board, supported critically for the time being by the Sainsbury family, the Sainsbury board remains under enormous pressure to either deliver increased profitability and rapid growth, or to take Tchenguiz’s ideas seriously.

With the potential rich pickings to be gained from “activist” investment (the Sainsbury share price has continued to rise following the Tchenguiz and Three Delta investments) the question remains as to whether we will see a trend towards private equity funds, the managers of which are best equipped with the skill set for active management, taking positions in publicly traded companies.

One partner at a leading mid-market private equity house commented: “This kind of investment is currently a mile away from our business model, but the hedge funds are already there, and starting to recruit private equity people into their teams. So in effect, this is already happening.”

The debate about the overall benefits to society of public companies being gobbled up by private equity funds will inevitably continue for some time yet. However, the emergence of privately managed funds taking and actively managing minority positions in public companies must be welcomed by both pension funds, who benefit from the enhanced performance of the companies that they are invested in, as well as employees, who will be comforted by the long term job prospects of working for a focussed and highly motivated management team.

Tom Cartwright a partner in the Private Equity Group at Taylor Wessing