Is Private Equity a better Chief?

The latest deal in Private Equity with the acquisition of TXU by KKR and Texas Pacific Group is giving an interesting new twist in the battle between private and public control. More specifically it raises the interesting question to know if private can be better than public for governance.

 True, this is not entirely new. The raiders of the 80s were clearly showing up where management was a disaster, would sack the guilty, put some order in the accounts and take their profit and leave. This some kind of ruthless governance, but this can be extremely powerful to take advantage of the erring companies. Then, eh, this is the public governance that clearly failed to do its job.

 Arguably, such opportunities are scarcer nowadays as public has stepped up its standards. So came second wave of private equity: take advantage of the difference in regulation. With post-Enron’s ajustments, it seems it is now less costly to run a company under a private umbrella rather in public full ligth. Thus a series of public to private transformation. PE would then monitor the business for a couple of years, then return the acquired company to the public with a profit, or more likely sell it to a bigger group. There is certainly more governance in this, than in the previous round. But PE was still supposed to be fairly hands-off after some initial restructuring beyond the public’s eyes. The job was again monitoring that everything was going according to plan, if not: sack the management team.

 The new deal with TXU is interesting, because here PE clearly is clearly boasting its capacity to provide better governance on the long term. The argument is even, public market are short-sighted (not a new complaint), we will be able to drive with our eyes on the silver lining and profit will come, eventually. We will have to wait a couple of test for the acid test, but there’s enough default in public governance that give weight to the argument.

 Now, what could be the next step. More private? The answer could in fact be more of both. With peer-to-peer (P2P) governance we could indeed see a fourth wave where control returns to the larger number but possibly not through the standard public markets mechanism. It is certainly a shame that the collective brain power of all these small investors is not currently used for governing companies. It is obvious now that the bloggers have a collective power way beyond the Gartners and Forresters. We have technologies so that governance can now be expressed through web technologies instead through proxy fights and dubious shareholder meetings. The same for the accumulated industry knowledge distributed through potential small investors instead of in the heads of a handful of PE specialists. So there is obviously an opportunity to tap into this wealth of capacities.

 I don’t know if this will happen, but I would find quite funny that P2P governance comes to be a credible alternative and that everybody would wonder if the Ps stand for Private or Public.

Maybe you could join us on the BarCampBank if you’re interested in discussing this.

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