Comment: The myths and reality of public versus private ownership

Tesco’s shares plunged 5% on the revelation that it would abandon its historic 5.2% profit margin as it tackles UK underperformance. This would appear to confirm that it is harder to restructure a public company than a private one. But is this always the case? Not necessarily.

The pressure to produce improved figures quarter by quarter may be relaxed if shareholders buy into the long-term plan. A good example is WHSmith - under Kate Swann, like-for-likes went down but profits went up. And when Justin King went into Sainsbury’s and needed to overhaul strategy, systems and people, investors accepted the need to reduce dividends during the turnaround.

There are a few commonly held ideas about the differences between public and private retailers, but how true are they?

People sometimes say that Plcs take longer to deal with poor performance.

Because of what is at stake, generally you get more involved management from PE owners. As a result of shorter lines of communication, it’s easier to be bold and grasp the nettle if things aren’t working. But this is starting to happen in Plcs too, partly because of activist investors who no longer passively accept average or below-average performance.

Another frequent claim is that PE-backed companies focus more on running the business.

“There are a few commonly held ideas about the differences between public and private retailers, but how true are they?”

The chief executive of a Plc can easily spend 35% to 40% of his/her time on external reporting and managing relationships with shareholders, analysts and the press. This will come as a shock to some of the PE leaders about to enter the public markets for the first time, especially if they are used to being very hands-on. Also, they generally have leaner teams and will have to staff up just to handle the new demands that public ownership brings.

Some argue that you don’t get good stewardship in PE. Not all PE houses are the same - top-tier firms such as KKR, CVC and Blackstone are effectively multi-asset managers that invest and add value for the longer term, and the smaller PE houses often help transition a family company to more professional management.

It is a common view that rewards are higher in PE and compensation details are usually private.

Over the last few years some Plcs have become savvier and more competitive on long-term reward. Higher salaries, bonuses of 100% or more and attractive long-term incentive plans have made senior executives in the FTSE very well paid indeed.

Ironically, some PE execs have found themselves at the back of the queue when it comes to cashing in on exit - if there is an exit. However, there is no doubt that the demand for increased transparency - and the push-back from investors - around compensation is an issue most public company directors would rather avoid.

Some cynics say the reason so many PE-backed firms want to float is that the sector is overheating and valuations are unrealistic.

As one chief financial officer said: “Prices are too high and there is no appetite from trade buyers or for secondary buyouts.”