The ruthless private equity sector is well known for achieving superior returns. The formula for success is to hire a small number of skilled and highly motivated executives who can focus on getting the job done without all the governance and transparency distractions associated with running a public company.
However, an increasing problem with the model is the need to exit after three to five years because it is, inherently, a relatively short-term horizon. This is in stark contrast to genuinely long-term investors such as Warren Buffett or superannuation funds, which are continuing to grow their asset base over time (such as Australia’s industry funds).
And so we get to the problem of consumer finance business Latitude, which has clearly failed to find a trade buyer and is now pursuing a public float via the public markets run by the Australian Securities Exchange (ASX) for its private equity owners to monetise their purchase of the old GE consumer finance business.
There also haven’t been a lot of CEOs who have happily worked for private equity and transitioned across to being a successful CEO of a public company. Can Latitude CEO Ahmed Fahour manage what the likes of Bernie Brookes (Myer) and Paul Moore (Pacific Brands) failed to do, by delivering first for his private equity paymasters and subsequently for public company investors?
I reckon Fahour will struggle and part of the problem will be the controversy over the size of his pay packet.
Latitude’s current owners — KKR, Varde Partners and Deutsche Bank — are offering the business to local investors at a share price range of $2 to $2.25.
However, the current owners clearly failed to read the tea leaves by leaving in place a private equity-style CEO pay deal, which now has to be explained and justified to mum and dad retail investors. Latitude chairman Mike Tilley should have sat down with Fahour and re-negotiated the arrangement before it become public.
Sure, it’s great to have a CEO with skin in the game, but Fahour already owns around $28 million worth of Latitude shares funded by a $17.5 million loan from the company. Big loans to CEOs for share plays are rare and pretty much on the nose these days. It is unknown how much Fahour paid for his current shares but given the scale of this equity incentive, Latitude surely didn’t need to promise him up to a maximum of 10 million additional free shares worth up to $22.5 million if all goes swimmingly with the float. This is just over the top, particularly when Latitude is a business that profits from making loans to people who aren’t generally high up on the wealth spectrum.
NAB made a similar mistake with Fahour’s generous pay packet in 2004, which former NAB CEO Nobby Clarke famously called out at that year’s NAB AGM.
After being passed over for the top job at NAB in favour of Cameron Clyne in 2009, Fahour then managed to negotiate himself a sweet deal as CEO of Australia Post in 2010, back in the Rudd-Gillard era. There was nothing particularly wrong with his performance, it’s just that the long-term incentive arrangement paid out excessively, unlike anything seen in the Australian public sector before, when Fahour’s total pay hit $10.8 million as he left the business in 2016-17.
Throw in Citi’s original mistake of being way too generous to Fahour when he came back to Australia from New York to run its local operations in the early 2000s, and this makes Australia’s most high-profile Muslim business figure unique when it comes to salary negotiation.
Who else can say they have out-negotiated a big Wall Street firm, one of Australia’s big four banks, the board of Australia Post, and now the world’s most famous private equity firm in KKR? All going well at Latitude, these four negotiations will probably leave Fahour with a net wealth exceeding $100 million.
As a Boston Consulting Group management consultant back in the 1990s, Fahour cut his teeth on high-level strategic decision-making with a number of businesses and is said to have done his best work assisting Qantas.
Once Latitude lists in the coming weeks, Fahour will join the ranks of public company CEOs such as Brian Hartzer, Ian Narev, Elmer Funke Kupper, Gordon Cairns and Alison Watkins who hailed from the management consulting world.
After a decade out of banking, it will be interesting to see how sharp his antennae are on the regulatory and political challenges enveloping Australia’s financial services sector. Kicking off with an over-the-top salary package unsuitable for the public markets is not a good start.