The Return of the Recap: Achieving Private Equity Benefits as a Public Company

Abstract

The private equity wave is now reaching most industries, affecting companies of all sizes and in all geographies. Companies as diverse as TXU, HCA, TDC, Equity Office Properties, Neiman Marcus, and Free scale Semiconductor have opted to go private, delivering sizable returns to their public shareholders in the process. The continued operational and capital restructuring that typically follows public-to-private transactions holds out the promise of sizable returns to the new private owners as well. The large returns generated by private equity firms and their investors have put significant pressure on public companies. Long-term institutional investors, hedge funds, retail investors, and the media are increasingly asking the obvious question: Why can public corporations not deliver similar levels of out performance by using the private equity toolbox? And this leads to a series of follow-up questions: Which aspects of the private equity model can be replicated by public companies? Does it pay to adopt elements of the LBO model as a public company? What types of businesses can enhance shareholder value with higher leverage while retaining their public ownership model?