Public good

Private bad?

I have to credit the Daily Mail with the inspiration for this week’s Moving Tribes. In response to the massive Walgreens Boots Alliance business (owners of Boots in the UK) being taken private in an $18bn transaction, the Mail has managed to produce the single most hysterical (in both senses of the word) article about corporate ownership I think I’ve ever read.

If you don’t want to grace the Mail with a click, the sentiment of the piece can be summed up with one quote:

“Good businesses are slain and the private equity partners, enjoying the tax breaks which come with carried interest, benefit from a good life of private jets, yachts and lavish parties.”

Now I’d like a private jet as much as the next person, but sadly the article is vague about how you actually get one by slaying good businesses.

The thesis of the article, as the quote suggests, is that private equity owners are terrible custodians of retail businesses. Its robustness, however, is challenged by the fact that it goes on to cite the bankruptcy of Toy’s R Us (8 years ago) and Debenhams (5 years ago, having been owned by a private equity investor 15 years before that) but fails to mention any of the PE backed businesses which have done well over that period, or indeed the many publicly quoted or family owned businesses which have failed in the same period.

Notwithstanding that, there is a perfectly good question about what the right ‘ownership model’ for a retail business should be. Is being floated on the public markets as a PLC better than being owned by a single private equity investor, or would the third option of being owned by a founding family or partnership trump both of those?

The awkward truth, though, is that the answer is that there are good and bad retail businesses in all three of these categories. Indeed, I wrote about the pros and cons of the three main ownership models extensively 2 years ago:

In summary:

• Being a PLC gives a management team lots of theoretical freedom (no powerful owners telling you what to do) but ties you to an expensive quarterly reporting cycle that can lead to lots of short termism

• Being owned by a private equity investor can mean having a lot of really clever professional investors advising and guiding you and liberates you from the short term reporting, but can mean the business gets stuck in a cycle of preparing for the next sale in a few years time and has also often meant businesses taking on dangerous amounts of debt in low interest environments that then become a huge burden when interest rates go up

• Being owned by a family or partnership can be great for long term planning and investment, but can also go horribly wrong when things get political, generations of ownership change or the business gets bogged down with committees.

Every model, therefore, has strengths and weaknesses which explains why, in just the last couple of weeks I’ve listened to private equity business bosses who can’t wait to float onto the stock market and also CEOs of public companies who can’t wait to take their businesses into private hands. In both cases, the grass looks greener on the other side.

So it is a fallacy to conclude that one mode of ownership is better than another. In fact, is the quality of shareholder and the quality of the Board and management that determine if a business will succeed.

There is plenty to be written about exactly what that magic formula of good ownership and good governance looks like, and it is a topic we will return to here at MT over the coming months. I hope that will make interesting reading for you, though I doubt it will reach the hysteria level to get picked up by the Mail!