The credit-driven downturn has affected the markets for both public and private equity almost equally, says Gregory La Blanc, a lecturer in the finance group at the University of California at Berkeley Haas School of Business. The relative benefits of private vs. public have more to do with governance issues and the feedback that you get from the governance structure, La Blanc says.
The type of equity a company uses is less important right now than how highly leveraged the company is and how soon that debt is due, La Blanc says. For privately held companies, he adds, You can just shut down the dividend whenever cash flow is a problem. You cant shut down the interest payments on debt. So thats why leverage is the more critical problem.
Privately held companies may have the advantage of not having to placate fickle public shareholders during a deep recession, La Blanc says. Their private equity investors are locked in for five to seven years, and they are more amenable to long-term growth strategies than mutual fund managers who have to show more immediate returns to their investors, he says.
Research has shown that companies that are able to invest more than their rivals can really take advantage of downturns, La Blanc says. The classic example that is studied is Kellogg Co. and Post Cereals during the Great Depression, he says. Kellogg boosted advertising as Post cut its ad spending, and Kellogg dominated when growth resumed, La Blanc says.
That said, the greater debt that companies often take on in order to go private could blunt this advantage, La Blanc adds.
Buddy Gumina, a partner in the New York offices of private equity firm Apax Partners, suggests that the best reason to take a company private is a compelling long-term growth strategy that requires large upfront investments that would spook public investors.
To get out there and really expand and get into new businesses is probably going to be a difficult story to tell and will probably lower the value of the stock, Gumina says. Old investors may flee before new investors come in.
Another big advantage is the alignment of incentives when managers and perhaps the employees at large own a significant stake in the company, Gumina says.
Gumina, however, largely dismisses one of the oft-cited advantages of taking a company private: lower costs of complying with regulations such as the Sarbanes-Oxley Act, which boosted financial reporting requirements for public companies. For one thing, many companies that go private still have to file financial reports with the U.S. Securities and Exchange Commission because they have publicly held debt, Gumina says.
Moreover, the internal reporting requirements of Sarbanes-Oxley have become pretty much the normal course of business for any decent-sized business whether its equity is publicly traded or privately held, Gumina says. Going private does lower the costs of investor relations and the liability from shareholder lawsuits, he adds, but the internal controls sought by Sarbanes-Oxley are good for businesses to have.
Dan Slipkovich, CEO of privately held Capella Healthcare, cites many of those advantages for his company. Private companies generally have the ability to make portfolio changes quickly in order to grow their business, Slipkovich says through a spokeswoman. For example, should a strategic plan require additional equity contributions, private equity firms are typically equipped to evaluate business opportunities quickly and to make focused decisions on the merit and reward of the project.
Milton Johnson, executive vice president and chief financial officer of HCA, echoes the same points: As a private company we have been able to continue to make solid investments in our growth strategies and clinical areas, building long-term value without having to worry about short-term fluctuations in the equity markets.
On the other hand, Gumina says, there are some downsides to going private. A large, publicly traded company may have more cachet to potential employees, he says. A publicly traded company that regularly taps both debt and equity markets might have a bit better access to capital than a privately held company that is less familiar to investors, he says. And the process of going private is difficult, Gumina says. It takes a lot of management time, a lot of professional fees and it may disrupt the business, all for an uncertain outcome, he says. Communitys acquisition of Triad bears that out.