ALEX BRUMMER: Bridgepoint’s loss of trust
Private equity has caused irreparable damage to the UK economy and social structure. Nevertheless, it has always been possible to identify positive interventions where it has intervened, invested and improved the underlying businesses.
Worldpay, funded by Advent (the Cobham Destroyer), and the Pret A Manger food chain, backed by Bridgepoint, are examples.
What really pissed off was private equity’s cavalier use of debt financing models, the key to offers for the Morrisons grocer, and a lack of transparency. It is not possible to monitor employment conditions, finances and compensation in the underlying companies.
Murky: What really shocked was private equity’s cavalier use of debt financing models.
Private equity fans would say that’s what the whole concept is all about. The ability to make bold decisions behind closed doors allows difficult judgments to be made without constant scrutiny from public shareholders. It has also resulted in reduced investment, job cuts, raids in pension funds, transfers of tax domicile abroad and blatant neglect of the public interest.
The flight from public to private, for investors and managers, has proven to be very profitable in the short term.
When deals are done, bosses invariably receive a bonus for their actions and incentive plans are paid. If they hang around, there’s the added attraction of what’s known as “deferred interest,” the roughly 20 percent of the profits that go to private equity barons and qualify for favorable tax treatment. .
When UK private equity firm Bridgepoint, led by William Jackson, went public this year, it seemed like a good thing overall. After all, state-owned companies are required to say everything. We know a lot more about those with less than standard governance – like The Hut Group (THG) and Boohoo – than if they were hidden away in offshore centers.
By the time of Bridgepoint’s float, it was evident that in building its board of directors, Jackson, who is executive chairman (himself a violation of governance rules), was willing to engage in unusual strategies. Archie Norman, Chairman of M&S, has accepted a signing fee of £ 1.75million to become a non-executive director. Golden salutes are not unheard of.
But Norman at six times the standard of around £ 250,000 was extraordinary. As good as it was for Bridgepoint to capture a respected retailer, it essentially meant Norman’s independence was compromised.
Thanks to the FT and research conducted by an academic at Said Business School in Oxford, we now know that incentives for independent directors aren’t the only unusual aspect of the Bridgepoint float.
The published pay levels for executive directors show only a fraction of income.
Far from the transparency announced before the IPO of the 4 billion pounds sterling, the real incomes of the bosses are suppressed from several levels in the accounts of the companies in which they are invested.
London likes to think of itself as now having higher standards of governance than New York. Yet, in the United States, it is mandatory that SEC filings relate to the “vested interests” of the bosses of listed private equity firms. Indeed, it is a matter of pride for Steve Schwarzman of Blackstone and Henry Kravis of KKR to be the highest earners in a year. This buys them maximum credit as fundraisers for the Metropolitan Opera.
Here in Britain there is contempt for new money. The possibility that Michael Murray, newly appointed chief executive of Frasers, which owns Sports Direct, could earn a £ 100million bonus has already drawn unfavorable attention, even though his stepfather Mike Ashley owns 60% of the shares.
At least Sports Direct was up front. Due to the clandestine manner in which the Bridgepoint reports pay, excluding “deferred interest”, it’s impossible to know exactly how much Jackson is earning. It is estimated to be £ 32.6million in 2019. Bridgepoint considers the companies it has invested in as separate entities, so there is no need to report income.
It is a special form of accounting. It bypasses clear audit rules regarding interests in associated, related and affiliated companies. We learned, for example, of Matthew Molding’s dual role as executive chairman of THG and private owner of the company through such disclosures.
At the very least, circumvention of Bridgepoint should be the responsibility of regulators at the Financial Conduct Authority and the Financial Reporting Council.
Better yet, Jackson would have to admit a mistake and demonstrate the openness that City should be able to count on.
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