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Transcript
New Financial Intermediaries: Private Equity and the Corporation Eileen Appelbaum Rutgers University U.S. Corporations in Recovery and Beyond New School for Social Research April 22‐23, 2010 1 Macro Context: New Growth Model Retreat from “Golden Age” growth model Neo‐liberal growth model (1970s/1980s) 2 From Managerial to Financial Capitalism Managerial capitalism (1950s – 1980s) Principal‐Agent problem Deregulation of financial markets (US in 1970s) 3 Agency Theory Argues low‐growth, mature firms should return free cash flow to shareholders (dividends, stock repurchases) Provides rationale for leveraged buyouts (1980s) Debt financing Assets as collateral High free cash flow to repay debt Debt disciplines managers; requires shareholder focus LBO movement ended in scandal, replaced in 1990s by PE Argues private equity improves corporate governance Better monitoring of managers to maximize shareholder value Private Equity: New Proactive Intermediaries Equity investment by PE firms: 1989‐2009 Substantial growth since mid 1990s US is center of most investment But substantial activity in UK, Europe Has declined since financial crisis – it or similar will re‐ emerge 5 PE Business Model 2 and 20 fund income model Value Extraction by PE Firms Operational strategies (Increase revenues, reduce costs) Earnings multiple (Increase share price between acquisition & exit) Financial engineering (Dividends and distributions to PE partners; Higher returns due to debt financing) 6 Private Equity and Retail Chains Two high profile, highly profitable PE successes Aeropostale acquired 1998, went public 2001 Burger King acquired in 2002, went public 2006 PE active 2001‐7 in retail chain sector Business model based on financial engineering Worked for all regions during bubble Failed spectacularly after bubble burst 7 PE Business Model in Retail: US (Mervyns), UK (Debenhams), Germany (Hertie) 8 PE and Risk of Bankruptcy Debt PE leveraged buy outs Public firms Average net debt to enterprise value of 67% Average net debt to EBITDA of 5.4 Average net debt to enterprise value of 14% Average net debt to EBITDA of 1.1% Bankruptcy rate 1980 to 2002 PE leveraged buyouts – 1.2% a year Only follow to exit, data set misses smaller deals, recession Public firms – 0.6% a year 9
