Terry Stephenson still remembers the thrill of going public more than a decade later. It was 2001, and Flint Energy Services was capitalizing on the glory days of the public market. “I enjoyed it,” Mr. Stephenson says. “It was nice to work for a public company, there’s some prestige there.”
That prestige has diminished somewhat as a shaky global economic recovery has left the market less receptive to traditional Initial Public Offerings. According to investment bank Renaissance Capital LLC, global IPO proceeds dropped 27.8 per cent in 2012, the lowest since 2008. “People are staying away from them,” says James Scarlett, a partner at law firm Torys LLP, “because nobody wants to have a failed deal on their hands.”
The costs of mounting an IPO have also skyrocketed since 2008, due to developments such as increased regulation, consolidation of large brokerage houses, and increasingly wary investors.
This doesn’t mean going public is no longer viable. For many, increased access to capital, expanded public presence, and superior financial flexibility make it the best choice available. Even in a tepid public market, these advantages are still powerful motivators.
The tipping point, however, has shifted in the direction of the private option. First, an abundance of private capital has opened up the field. Just recently, Dell Inc. announced a $24.4-billion leveraged buyout – the largest of its kind since the 2008 global economic meltdown – that will allow the struggling personal computer manufacturer to reassess its position in the market away from public scrutiny.
This expanded role of private investment funds is allowing many entrepreneurs to essentially have the best of both worlds – IPO-scale funding, while maintaining tight control.
Mr. Stephenson, who now runs an Alberta-based private investment firm called Blackjack Investments Ltd., says the private option gives business managers the space to focus on creating value for the company, as opposed to managing public expectations through time- and resource-consuming communication with the media and shareholders.
“For us, staying private allows investment decisions based more on solid long-term opportunities,” Mr. Stephenson says. “We are able to keep the ball on the execution of work, servicing our clients, and basically ensuring value for ourselves and our shareholders.”
This is especially true for companies in fast-moving markets, which have may have to change their strategy on a moment’s notice. “You can sometimes make decisions a bit quicker,” says Mr. Stephenson, “and have a little more flexibility on decisions.”
From an accounting perspective, the private option also allows companies to avoid the many compliance hurdles that come with public ownership, and focus on key performance indicators that drive the business. “You can just concentrate on good, sound controls,” says Mr. Stephenson, “and best practices can be your own business function at a high level.”
Better control over investor relations is another advantage: Instead of entrusting the ownership of a company to the open market, a private company can choose partners that align with long-term goals. Private relationships also allow for candid communication without the fear of rumours or media distortion. As well, long-term investors can bring important business connections and expertise into the company.
Banks are also showing a greater interest in closer relationships as they seek higher returns on capital, meaning they are willing to take more risk, and spend more time understanding a company’s business. According to the Bank of Canada, loans to businesses in November were up 9 per cent from the previous year, to a record $326.7-billion.
Staying private also helps guard against one of the entrepreneur’s greatest fears: losing control of the company. Proxy battles in Canada have risen 84 per cent over the preceding five years, according to law firm Fasken Martineau DuMoulin LLP. Not even the most well-established companies are immune. Last November, Rona’s veteran CEO Robert Dutton stepped down amid ongoing tensions with shareholders, who are unhappy with the home-improvement retailer’s attempts to combat an anemic recovery.
The growing role of activist hedge funds is another factor. The struggling Canadian Pacific Railway Ltd. has been duking it out with its primary shareholder, Pershing Square Capital Management, after the U.S.-based hedge fund’s calls for a strategic shakeup were rejected. The investment firm eventually forced the resignation of CEO Fred Green last May.
A more aggressive stand by restless investors who are frustrated with a slow recovery is a sign of the times. “In the past, shareholders have been complacent,” Mr. Scarlett says. “They are less inclined to just sell and move on today, and some of the big ones are more inclined to demand changes to produce value from their investment.”
In spite of these difficulties, the public option isn’t likely to go away any time soon. The tipping point has shifted, but this is largely due to factors that have occurred in the past five years. In a global economy, rising energy prices, government insolvency, or the growth of developing economies could change everything.
“There’s room for both in the market,” Mr. Stephenson says. “Five years from now it could be a whole different game.”