Going Private Is Not the Only Answer

Over the past decade, more than 1,000 European listed companies have been taken private^1,2. The logic is familiar: private equity investors and strategic buyers often see good businesses with unrealised potential, acquire them and seek to realise that potential away from the public markets. But going private is not the only answer.

One argument often made for going private is that major investments or a transformation are easier to execute away from the scrutiny and short-term expectations of public markets. We understand the argument. But we believe that public markets can provide a powerful platform for value creation.

A listing can be an asset

A listing comes with advantages of its own. Access to public equity capital can help finance organic growth and long-term investment without necessarily taking on the financial risk that comes with high levels of debt. It gives management another source of capital and therefore greater strategic flexibility.

Listed shares can also become a strategic currency for acquisitions. When appropriately valued, they can be used alongside cash and debt to finance transactions and allow sellers to participate in the future upside of the combined business. This can give management additional flexibility in pursuing acquisitive growth.

A public listing also creates visibility and liquidity. It can strengthen a company's profile with customers, suppliers, potential employees and acquisition targets. Listed shares can also be used to align management and employees with shareholders through long-term incentive programmes, while providing shareholders with liquidity and the company with an independently determined market valuation.

Used well, these advantages can help companies pursue ambitious long-term plans and contribute to value creation. Left unaddressed, however, a persistent valuation discount can undermine these advantages and ultimately leave the company vulnerable to the buyers described above.

Creating value in the public markets

Executing a value creation plan in the public markets does require management to bring its shareholders along. Investments and transformation programmes may depress earnings in the short term while their benefits only become visible years later. That does not mean public-market investors will not understand or support them.

A well-founded plan, with defined milestones, clearly explained and consistently communicated, can earn the support of long-term investors. Good investor relations, backed by experience, are particularly important during periods in which management asks shareholders to look beyond short-term financial performance.

The shareholder base matters too. One or more substantial, sophisticated long-term shareholders who understand the business and its strategy, and support management through an investment or transformation phase, can provide valuable stability. This is one reason why Barista Capital prefers meaningful ownership in a select number of companies over small positions in many companies. We want to understand the business, its strategy and its long-term potential, and be a committed shareholder when management executes a well-founded value creation plan³.

Successful value creation can, of course, also attract the attention of strategic or private equity buyers. An acquisition can be an attractive outcome when it is in the interests of the company and its stakeholders, but it is not the objective of our investment – it may simply be a consequence of successful value creation.

We believe good businesses can become great companies without leaving the public markets.