Private assets will become more expensive than public companies due to the latter’s fixation with “governance correctness”, according to Partners Group.
A white paper published today by the firm – The rise of ‘Governance Correctness’: How public markets have lost entrepreneurial ground to private equity – states that the current trend of high valuations in the private markets are indicative of a structural rather than a cyclical shift in market dynamics, and the status quo of private companies trading at a discount to listed rivals will be flipped.
Partners Group argues that public markets have been constrained by corporate governance, which has led private equity’s outperformance. With a mandate to protect shareholders, the paper suggests that shorter term moves to focus on internal controls and manage downside risk has meant that public companies are under-prioritising long-term entrepreneurial goals.
The firm also points to increased regulation and the watch of regulators, proxy advisers with a short-term focus on performance, and “best practice” codes for public businesses as reasons for the outperformance of private equity, which benefits from a more flexible approach.
Steffan Meister, Partners Group’s executive chairman of the board of directors, said: “A worrying trend has emerged in parts of the public markets, where the requirement to adhere to corporate governance codes and industry ‘best practice’ seems to be overshadowing the need to direct and enforce a value-enhancing strategy at many corporations. In this paper, we have christened this phenomenon ‘governance correctness’.
“At the same time, the private equity industry has evolved significantly, moving away from financial engineering and toward value creation as the primary driver of growth at portfolio companies – and ultimately therefore of returns to its investors. In doing so, it has been supported by a corporate governance regime that enables entrepreneurialism in its purest form,” he added.
Partners Group believes private equity’s ability to add a governance framework which supports entrepreneurialism will become the primary driver of returns for the asset class. As such, longer-term investment vehicles, such as those raised by CVC Capital Partners and the Carlyle Group, will become more commonplace.
There has been a spike in the number of take-privates performed by private equity firms in recent years. As of September 2017, European private equity-backed take-privates had already exceeded 2016’s levels.