Dick Smith puts private equity in the firing line

The collapse of Australian electronics retail giant Dick Smith this month has prompted a public outcry. The listed company, which has sold products into the homes of millions of Australians for almost 50 years and employs more than 3,300 people in Australia and New Zealand, ceased trading with its shares worth about a quarter of their value three months ago.

As the well-loved retailer was put into administration, its pre-IPO owner, Sydney-based turnaround firm Anchorage Capital Partners, has been singled out for criticism.

The firm bought the underperforming company from Woolworths for A$20 million ($13.7 million; €12.6 million) in 2012 and exited in 2013 through an A$520 million initial public offering on the Australian Stock Exchange, retaining a 20 percent stake. It sold its remaining stake in September 2014 and reportedly generated 4x return on its original investment.

Prior to the November plunge in the company’s share price, a broker note from Forage Funds Management set the tone for the ensuing public debate. “Dick Smith is the greatest private equity heist of all time,” the analyst proclaimed, saying there had been a “clearance sale” of the company’s inventory and too “rosy” profit forecasting.

Anchorage could now face a senate inquiry following demands from South Australian senator Nick Xenophon that it explain what went wrong.

Anchorage, for its part, said it had “implemented a rapid and highly successful turnaround programme”, installing new management, rolling out key performance indicator dashboards in all stores, creating new marketing programmes, and significantly clearing obsolete stock. As a result, EBITDA increased from A$23.4 million in 2013 to A$71.8 million a year later.

Anchorage is not the first GP to find itself in the middle of a political and media firestorm. In the UK, Better Capital founder Jon Moulton was hauled before a parliamentary committee in January 2015 to explain the collapse of its portfolio company, UK parcel delivery company City Link. The company, with its highly visible yellow and green vehicles and 2,300 staff, entered into administration at Christmas in 2014.

The following December, three former City Link directors, including a Better Capital assistant director, faced criminal charges in a case brought by the government for failing to notify it of upcoming redundancies. They were acquitted.

The private equity industry is undoubtedly subject to intense public scrutiny everywhere. In the Netherlands, the Labour Party, members of which have campaigned against “robbery capitalism”, has reportedly unveiled a green paper proposing reforms to the industry. It follows a parliamentary round table in April last year held partly in response to troubles at Dutch department store Vroom & Dreesman, which is owned by Sun European Partners and was declared insolvent at the end of 2015.

Clearly each of these cases is the result of very different circumstances. The common thread is the willingness of the public and political representatives to lay the blame at the door of a private equity owner (even, in some cases, if that owner had long since divested from the business).

Is private equity being unfairly scapegoated? Possibly, but the fact is: it doesn’t really matter. GPs need to be alive the reputational risk posed by the failure of a past or current business, particularly when that business is in the public eye.

As we explore in the Responsible Investment supplement in Private Equity International’s February issue, the private equity industry is advancing the way it incorporates, monitors and reports environmental, social and governance issues in its portfolio companies.

Businesses fail for a number of reasons, not all of which can be mitigated by sound ESG policies. As the judge in the City Link case said: no firm has a crystal ball.

However, the culpability that seems to be directed at private equity firms even after they have exited businesses should underline the importance of creating sustainable businesses that are, as much as possible, future-proofed.