Financial backers of a number of Leveraged Buy Outs (LBOs) which were concluded at the top of the market will shortly be looking to exit their investments. Many market commentators will be keen to see how changing economic conditions have altered people’s perception of the validity of the management compensation packages which will become public at that time.
As Frederic Dubuisson of KPMG Advisory* explains, this is likely to bring pressure to bear on regulators and investors alike to monitor the scale of the management packages on offer in future. In addition, a major challenge awaits those valuations specialists who will likely be called upon to assess the scale of these and future management packages.
You would be hard pressed to find a single investor who hadn’t fervently hoped that the recent halcyon years in the mergers and acquisitions market were going to last forever. But change they did — and the after-effects of that change will be felt for some time yet.
A prime example is in the way in which investors are now going to react to the scale of the management compensation packages which will be paid out when the LBOs struck at the top of the market come to exit in the near future. These pay-outs will be seen as the legacy of a market at its zenith; the children of a period of largesse and riches.
Apportioning blame
As ever, the children are not to blame. In such a dramatically altered economic landscape, fingers will start to point at the parents; the architects of these large pay-outs which seemed so perfectly acceptable just a matter of 12-18 months ago. ‘The unacceptable face of times gone by’ may be the claim levied at numbers which now seem out of kilter with our revised economic circumstances — where prudence now ranks above premiums.
While many will be sensible enough to realise that this is simply a legacy issue, it will nevertheless bring the topic of management compensation packages back under the microscope. The problem is that investors had previously adopted quite a laissez-faire attitude towards these packages. However, many investors are only now discovering the extent of the pay-outs, brokered by the financial buyers who they had backed, once the deal exits. Let us not forget that it was their own money that they were previously happily waving out the door.
All of which means that pressure will build on the financial buyers and the various regulators to provide some form of monitoring of these compensation packages; in particular to provide clarity on their scale and terms at the outset of the deal, rather than at its exit. More sophisticated investors, who have been dealing with the large venture capital and private equity funds for years, may prove rather more relaxed than the smaller, more occasional investors but pressure will build nonetheless.
*Frederic Dubuisson is a Director of Valuations Services with KPMG Corporate Finance in France
