Public vs Private Ownership: The Agency Quandary
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Holmes Report
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Public vs Private Ownership: The Agency Quandary

Rightly or wrongly, public corporations are perceived as being more stable than those owned by one or several industry professionals

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The communications industry is an exciting place at the moment. Last year’s Holmes Report showed many firms growing and record profits being made. Our industry is full of talented people and technologies that are developing and maturing. New markets are opening up geographically and vertically.

The opportunities though - whether adding people, acquisitions or expanding into new territories - all have to be financed. There are many advantages to being publically owned, such as the sheer credibility it grants - for instance when acquiring other companies. Rightly or wrongly, public corporations are perceived as being more stable than those owned by one or several industry professionals. They have higher values expressed as a multiple of profits, which is a key metric. Public companies usually buy at a discount to their multiples for obvious reasons.

The main disadvantages are, firstly, what it costs to go public. Currently, this is in the region of £250k plus four percent of any money raised. Even then, there will probably be a limited after-market demand for the shares unless the company is above £5m of profits. Of course, you CAN float a smaller company. Whether you SHOULD is another matter.

All public companies need to offer a competitive return for shareholders. During a time when share prices have been static or declining this means paying out dividends, which could be used for further investment.

The public markets have been unattractive for three years. So in the meantime, we’ve seen the entrance of more Private Equity (PE) funds. The funds available to them are at an all-time high. They can move faster to provide funding and can be more flexible. God, however, did not create them equal or necessarily in his own image. One major difference among them is their financing. Some have Lending Partners (or LPs). Some like Lloyds Development Capital, the largest player, don’t. All of them though will insist on putting at least two people on your board. In many cases, they will insist on overseeing the additional (and substantial) amounts of leveraged debt placed on the balance sheet.

In recent years, private investment has outstripped public as the main source of industry funding. It’s not difficult to work out why. It also explains how companies like Freud Communications, MWW and Brodeur have returned to private ownership from public companies.

Entrepreneurial brands often find it easier and quicker to deploy private investment, for instance on acquisitions. An acquisition completed privately might take 90 days. In a public deal, it would take 90 days just to raise the finance.

Many would say there’s little point taking any form of equity finance if bank debt is readily available. Banks will happily lend 2.5x profits for most ventures, even more for public companies.

For that reason, many have simply opted to use debt and reinvestment of profits as a quick, easy and controllable alternative. Unless you like lawyers, accountants and analysts, this remains the most sensible option, primarily because it preserves the opportunities for all the others. 

Chris Lewis is founder and CEO of Lewis PR

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