At the core of private equity investing is the principle of alignment of interests between company owners and managers, which creates the right conditions for businesses to progress. This is often understood to mean the alignment of economic interests through joint investment in the equity of the company in question. We believe it means more than this; it means a broader alignment of strategic agendas between owners and managers.
The listed private equity (LPE) model is ideally placed to achieve this alignment for three reasons: first, an LPE vehicle is a permanent structure with no need to return capital to investors; second, being self-determining, it has the flexibility to attune its investment strategy according to prevailing conditions; and third, being listed, it is transparent.
In practice, these have some important implications and distinguish the LPE model from the more widespread limited partnership model.
The permanent nature of LPE vehicles means that their investment strategy is not limited by time. Moreover if, as is the case with Electra Private Equity and Electra Partners, the listed vehicle is the principal source of capital for its fund manager, then the manager does not have its own fundraising cycle requiring support from a track record of realised investment returns. So an LPE vehicle can invest for the long term. Electra’s record, for example, includes a number of investments held for around 10 years, with the longest being 24 years. This means that it can support longer-term business strategies; Allflex and Capital Safety are great examples of this. This also means that it can provide new money to finance growth in year five or 10 of a deal as easily as in year one.
LPE vehicles characteristically have a broader investment appetite than most limited partnership funds, which are raised with a fixed, often closely defined investment strategy. In Electra’s case, it can invest in minority or majority stakes, unleveraged development capital or LBOs, in mezzanine or equity, providing a flexible capital solution tailored to a business’ individual circumstances.
LPE vehicles can provide stable and consistent support for almost any type of business strategy; they are able to invest when the business needs it, in a structure which is suitable, and can exit at the right time for all shareholders.
“But how can we be sure?” those doubting company managers ask. The answer is that LPE vehicles are transparent to anyone who cares to look. The public domain contains annual and interim accounts as well as other market updates; the track record, portfolio performance, balance sheet and financial health of the firm are there for all to see. This adds up to a true and proper alignment of interests.
Alex Cooper-Evans is an Investment Partner at London-based Electra Partners.