With the news that Qantas may be the most recent private equity target, it makes you wonder – is anyone safe?

Fortune produced an interesting article highlighting some of the reasons why private equity firms have produced such stunning results in recent years (PE earned 22.5% in the US last year, versus 6.6% for the S&P500).

PE has some clear advantages over public ownership. First, when senior employees work for a company owned by a PE firm with a specific exit strategy, “executives realise that they gain nothing by resisting change: with the exit looming, driving change is their only hope.”

Second, in privately held companies, a “far larger share of executive pay [is] tied to the performance of an executive’s business”. As noted by Dunkin Brands CEO, Jon Luther, whose company is privately owned:

I insisted that all officers invest personally. Management has a substantial amount of their personal money in this. It makes a huge difference in the 40 officers of the company when they show up for work they have an ownership mentality rather than a corporate mentality. [T]he resulting difference in behaviour is clear: There’s now a very different discipline in how you spend money…if it doesn’t grow the business, why would you do it?

What’s more, PE owned companies don’t have to deal with outside shareholders, analysts and the media, which distracts them from their actual job – running the company. As noted in Fortune, “a public company CEO is lucky if he spends 60% of his time actually running the place”.

All that being said, the key to PE firms earning huge returns is improving the efficiency of the publicly run company then selling it a few years later. This is being magnificently executed by Newbridge at Myer.

One wonders whether Qantas, which has been run efficiently by Geoff Dixon, has all that much fat to cut. In addition, airlines are far more prone to violent factors affecting demand (oil shocks, terrorist scares, new competitors) than retailers or media companies. Never an ideal situation when using bucket loads of debt (possibly as much as $17 billion in Qantas’s case).

It should be noted that this is not the first time that private equity (or corporate raiders, as they were called in the 1980s) have dabbled in airlines. Back in 1986, corporate raider (and Forbes 400 member) Carl Icahn acquired TWA (after a battle with fellow airline raider, Frank Lorenzo). Icahn proceeded to dismember TWA, selling off pieces to competitors. Seven years later, TWA was declared bankrupt (although Icahn was able to emerge relatively unscathed after a series of deals). TWA struggled in the years after Icahn departed and was eventually taken over by American Airlines in 2001.

Some will also remember what happened to that other famous corporate raider, Gordon Gekko, when he tried to take over Bluestar Airlines in 1987. Admittedly, that was only a movie.

Peter Fray

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