INTO THE JUNGLE

Private equity returns have been superior to public markets for a very long time - a fact many people seem happy to accept without asking why.

- Andrew McKean writes.

It's generally accepted that the higher risk and illiquidity of private equity should command a premium of 3-5% over public markets a hurdle the Australian Private Equity and Venture Capital index has consistently cleared across periods, according to a report prepared by Cambridge Associates for the Australian Investment Council.

Ultimately, the connection between the shareholder - a private equity firm and a company's management team is much stronger. There's no procession of non-executive directors to work through; it's a proper partnership with management, and that set up engenders faster decision-making, clarity around strategy, and an understanding of what everyone's trying to achieve - creating and maximising value.

By contrast, public companies are beholden to a crowd of shareholders and stakeholders, each with their own agenda tied to their stake in the business. It's a dynamic which can quickly turn messy, especially in takeover talks, where competing interests tend to muddy decision-making processes, according to commentary published by Russell Investments.

Governance structures in public markets are also cumbersome.

While a large board may be appropriate for companies with tens of thousands of employees, it's a different story for a $100 million revenue business in Australia, Pacific Equity Partners managing director Cameron Blanks¹ says.

For smaller companies like that, he says, having six non-executive directors subject to remuneration committees and proxy advisers "is distracting for management teams," adding that their investors only hear from them every six months, which is "kind of crazy." "Our model is: you source a deal, sit on the board, and then you sell the deal - it's cradle to the grave. If it's one of my deals and I'm sitting on the board, I'm talking to the chief executive of that company every day. But it's not like I'm micromanaging the company," Blanks says.