PE "at a disadvantage" – Takeover Panel

He raised this issue this morning at a public forum on the Takeover Code, put on by the ICAEW's Corporate Finance Faculty.

Takeover Panel director general Robert Gillespie responded: "The world of private equity will always be at a disadvantage to cash-rich buyers. This situation will always exist. But if private equity is the preferred bidder, this timetable should not make it impossible to compete."

He continues: "The Code does not intend to prevent friendly transactions from proceeding in a reasonable manner. The Committee is confident that no impediment should exist to prevent a consensual P2P."

Perhaps not, but it will be more difficult.

This is because by nature, private equity relies on external funding. To arrange this, it must do extensive diligence on a target, which is nigh impossible in 28 days.

"The take-private process is always one where there's a big potential to waste time chasing wild geese. The limited access to due diligence creates issues for both sponsors and funding banks and I am not sure the new guidelines will make this any easier," says Ian Sale, managing director of Lloyds Bank Corporate Markets.

If consensual, the Code states that the offeree can agree an extension to the process if needed. This, it is intended, will allow breathing space where the offer is a friendly one. But it is unlikely to help the matter, according to Florman.

He says: "For private equity to start something, it needs certainty it'll get to the end because it incurs early costs. You know you can't do it in 28 days, because that is insufficient time for proper diligence. You may not take the risk of not getting an extension."

His views are echoed by Emma Danks, private equity partner at Taylor Wessing: ""Notwithstanding the disruption caused to a target by lengthy hostile takeover approaches, the time pressure to deliver an offer within 28 days is of potential concern to private equity bidders. Any bidder needs adequate time to value the target, and this new timeline is going to create due diligence constraints for both private equity bidders and their financing banks."

Other ways to take a company private include funding it entirely by private equity at the outset and then bringing leverage on board later. Says Sale: "You could see more take privates being funded on an all-equity basis initially and then re-capped with debt once completed."

There is also the possibility of undertaking a PIPE with a view to using a small shareholding to get under the skin of a company before deciding whether or not to launch a takeover. However many LPAs limit a GP's ability to do such a deal.

It is clear the Panel is not intentionally out to create barriers for private equity. At the outset, Gillespie stated that the intention of the Code changes are to protect the interest of the offeree shareholders, and it makes no distinction between UK and foreign bidders. However that private equity will undoubtedly suffer as a direct result of these rules is undisputable.

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