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Mar 29, 2007

Private equity adds nothing to intrinsic value

With the Qantas story awash for conflicts of interest, Michael Pascoe thought he’d try to find a disinterested observer with no money at stake for a Eureka Report interview. Enter Peter Doherty of Capital Partners.

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With the Qantas story awash for conflicts of interest, I thought I’d try to find a disinterested observer with no money at stake for a Eureka Report interview.

Enter Peter Doherty of Capital Partners.

Capital Partners has some $2.2 billion under management, mainly in infrastructure, but until last year it was also a respected provider of investment research to institutions. Now it’s concentrating on applying its research to its own highly concentrated fund:

MP: What do you make of the surge of private equity LBOs? Does it add anything to intrinsic value?

PD: Well private equity adds nothing to intrinsic value. If they’re able to add something to the enterprise that internal management weren’t able to do then that could add to intrinsic value, but a takeover and the addition of high leverage doesn’t do anything to value.

MP: Does it make sense when they just keep the same management and pay them more?

PD: Well that would reduce one of those options to just leverage then, wouldn’t it? Or they’re able to buy an asset below what they think it’s worth.

MP: If one of the stocks you invest in was subject to a takeover bid by private equity and management was involved, what would your attitude be?

PD: I think if management of an enterprise that we are an owner of sided with a takeover group then we would feel very strongly that they had an obligation to step aside.

MP: As soon as they decide to go with the approach, whether or not it gets up?

PD: Absolutely. They’re no longer working for us, they’re working for another group. Those interests aren’t aligned. There’s no ongoing integrity of actions in that case, in my view. Very clear-cut decision.

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