ALEX BRUMMER: Loss of confidence in Bridgepoint
Private equity has done irreparable damage to the UK economy and social structure. Still, it has always been possible to identify positive interventions where it intervened, invested and improved the underlying businesses.
Worldpay, which is funded by Advent (the destroyer of Cobham), and the Pret A Manger grocery chain, supported by Bridgepoint, are examples of this.
What really offended is the reckless use of debt financing models by private equity, the key to the offerings for the grocer Morrisons, and the lack of transparency. It is impossible to track the terms of employment, finances and pay of the underlying companies.
Murky: What really hurt was the careless use of debt financing models by private equity
Private equity fans would say that’s what the whole concept is about. The ability to make bold decisions behind closed doors enables difficult judgments to be made without the constant scrutiny of public shareholders. It has also cut investments, laid off employees, raided pension funds, moved tax domiciles overseas, and blatantly neglected public interest.
The flight from public to private for investors and executives has proven very rewarding in the short term.
Without exception, when deals are closed, the bosses receive a bonus for their shares and the incentive plans are paid out. When they hang around, there is the added attraction of so-called “carried interest,” the roughly 20 percent of the profits generated by private equity barons who are qualified for favorable tax treatment.
When British private equity firm Bridgepoint, led by William Jackson, went public this year, it seemed, by and large, a good thing. After all, public companies have to say everything. We know a lot more about those with less than standard governance – like The Hut Group (THG) and Boohoo – than if they were tucked away in offshore centers.
At the time of Bridgepoint’s initial public offering, it was evident that Jackson, who is chairman of the board (himself a violation of governance rules), was willing to pursue unusual strategies in building his board. Archie Norman, chairman of M&S, accepted a signing-on fee of Â£ 1.75 million to become a non-executive director. Golden hellos are not unknown.
But Norman’s value, six times the norm of around Â£ 250,000, was exceptional. As good as Bridgepoint was at gaining a respected retailer, it essentially meant that Norman’s independence was in jeopardy.
Thanks to the FT and research conducted by a researcher at Said Business School, Oxford, we now know that incentives for independent directors aren’t the only unusual aspect of the Bridgepoint float.
The published executive salary levels only show a fraction of the income.
Far from the transparency advertised before the Â£ 4 billion company went public, bosses’ real income is several steps away in the accounts of the companies they are invested in.
London likes to think of higher government standards than New York. In the US, however, it is necessary that the SEC filings come from the “carried interest” of the heads of listed private equity firms. Indeed, for Blackstone’s Steve Schwarzman and KKR’s Henry Kravis, being the top earners in a year is a matter of pride. This gives them maximum credibility as a fundraiser for the Metropolitan Opera.
Here in the UK, new money is despised. The possibility that Michael Murray, the newly appointed CEO of Sports Direct owner Frasers, could earn a Â£ 100 million bonus package has already attracted negative attention despite his father-in-law Mike Ashley owning 60 percent of the stock.
After all, Sports Direct was at the forefront. Because of the clandestine payment method used by Bridgepoint reports, other than carried interest, it is impossible to know exactly how much Jackson is making. It is estimated that it was up to Â£ 32.6m in 2019. Bridgepoint sees companies it has invested in as separate entities, so no income declarations are required.
This is a special form of accounting. It bypasses clear review rules for investments in affiliated, affiliated and affiliated companies. For example, through such disclosures, we learned of Matthew Molding’s dual role as Executive Chairman of THG and the company’s private landlord.
At the very least, circumventing Bridgepoint should be a matter for the regulators of the Financial Conduct Authority and the Financial Reporting Council.
Better yet, Jackson should admit a mistake and demonstrate the openness the city can count on.
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