And now the added risk of rising borrowing costs is also in the mix, warns Black, who argues that today’s private equity’s tailwind is linked more to low interest rates and central bank largesse than investor talent and corporate entrepreneurship. “No doubt, as interest rates rise, we are going to see poorer investment decision and the risk of debt and leverage come to the fore.”
Fleming also notes that for companies with an international footprint and revenues, treasury teams will often match the debt financing currency with the currency of its net inflows. “This can often create an overlay of hedging complexity not previously experienced or understood by management,” he says.
The focus on cash and a strong cash control function often manifests in private equity investors having little enthusiasm for best practice. Providing more colour from his days at Debenhams, Fleming observes demand for treasury systems and process improvements was capped at robust, fit-for-purpose frameworks only. “Why invest £100,000 in a new TMS when you can invest in something else with an IRR of 25%?” he asks.
Treasury teams won’t have to get involved in public reporting anymore but they should expect a new, proactive kind of governance shaped by strong board views on strategy that bring strategic, operational and personnel change. “It’s nothing short of revolutionary,” says Membrillera. Treasury in a listed company is one step removed from shareholders, and governance is balanced between executive and non-executive directors: shareholders don’t ask to see management accounts and represent permanent capital, unlike private equity, where the joke goes, managers walk in backwards because they are looking to the exit.
Listed companies comprise a diverse group of stakeholders including activist investors seeking change but also passive investors tracking an index or those just wanting yield and a steady dividend rather than bells and whistles restructuring. This diverse stakeholder base means public companies often face resistance to close stores, move manufacturing facilities or consolidate business lines.
In contrast, private equity has much more freedom to support a company through a transition. It means treasury teams under private equity ownership are frequently called on to accelerate strategies that were impossible when the company was listed. It could be around a significant capex programme, revamping operational logistics, opening new sales lines, or refurbishing stores, all requiring capital and leverage.
Private equity ownership can trigger changes in banking relationships. On one hand, large companies taken private with solid and deep banking relationships will likely keep those ties. Yet new banks coming in to finance the acquisition will also remain in the relationship going forward, and in most cases, private equity’s own corporate teams design the initial financing. It leaves treasury teams with a pre-set financing package to manage including complex debt structures within a leveraged business.
Similarly, middle-range banking partners of a listed entity are often hoofed out by global players with more experience around securitisation or asset backed lending, who will then scoop up the ancillary business. “For example,” says Membrillera, “a suite of regional Italian banks with long-dated and deep ties to an Italian company taken private may be displaced by large global financial institutions.”
Still, it is not always the case. When the new treasurer of recently re-listed shoemaker Dr. Martens began exploring the bank relationships spilling over from the company’s days under Permira’s private equity ownership, he unearthed a surprisingly long list of banks: some he’d never dealt with before; a handful outside the UK and one private equity-owned lender.
The specialist skills and relentless pace required of treasury under private equity ownership has led to a spike in demand for service providers. Treasury skills in the mid cap space, a rich hunting ground for private equity firms and where companies often lack a treasury operation or specialism and everything is done by the CFO, are in demand. Skills like re-listing for example, an ordeal at Debenhams that Fleming recalls as one of the most challenging periods of his career. “Any one of the three main work streams related to the exit strategy (IPO, IAS adoption and a refinancing) would be challenging but all together, it was hard work!”
This is made easier, perhaps, by a final key characteristic of private equity and consequence of the employee mentality of old getting binned in favour of one of ownership: treasury and the finance team can expect much more generous compensation. “A Management Equity Plan will generally be more generous than the typical stock options of a listed company. The bad news is, in some cases, they will have to work much harder,” concludes Membrillera.