Private equity no longer Wall Street’s favorite son

On Monday credit rating agency Moody’s put out a ‘special comment’ looking at whether companies owned by private equity firms have an advantage over public companies with respect to long-term investment. Contrary to prevailing viewpoints, to Moody’s, private isn’t always more lucrative.

Given that they don’t need to put out quarterly earnings reports, private equity-owned companies could theoretically focus more on long-term investments—a luxury not afforded public companies—but according to Moody’s, they don’t.

Moody’s finds the ‘willingness of private equity firms to issue special dividends despite commitments to reduce leverage’ disconcerting. Referencing Warner Music’s 2004 buyout, and the purchase of Celanese that same year, Moody’s examines alternate reasons behind the creation of dividends. A factor countering the theory of better performance post-buyout in the creation of dividends is the pressure to raise shareholder returns. And the emphasis on short-term benefit for shareholders may not put the company in good steed.

An article on CFO’s website offers retaliation from the Douglas Lowenstein, president of the Private Equity Council, a Washington D.C.-based trade group: ‘Corporate leaders who have experienced first-hand the positive effects of private-equity ownership are quick to tell you that this structure can and does liberate management to focus on long-term growth.’

Moody’s is also concerned that leveraged buyouts may need refinancing should the economy take a hit. Though the ratings agency recognizes the competitive benefits, Moody’s worries ‘the ultimate beneficiary of these advantages may be the private equity firm.’

By Janine Armin
Assistant editor
Corporate Secretary magazine