Industry Thoughts | Revisiting Private Equity, Public Relations,and Dividend Recaps

While catching up on some reading, I perused Dan Primack's recent piece on dividend recaps and how private equity firms should be frank about dividend recapitalizations. Dan mentions that at the recent Columbia Business School private equity conference, many executives were complaining that the industry has gotten bad press (see: "strip and flip") and hasn't done much at all in terms of PR. However, many firms continue to perform the ever-controversial dividend recap (create a term loan designed to pay a dividend to the investor or investors) and still state that they're adding value to their portfolio companies.

First off, regarding the PR effort, I have written many posts as messages to the PEGCC and ACG to help out the private equity industry; the ball is in their courts to help generate a good PR effort and show the general public (in some way) that private equity firms are helping portfolio companies and the American industries become better. However, there's been a limited push from both organizations (I can understand ACG's reasoning as I wrote here, but the PEGCC doesn't get let off the hook). Much more CAN be done and the clock is ticking until Congress moves its target from hedge funds and banks to private equity. The upcoming HCA IPO is probably going to quicken the countdown clock.

In terms of dividend recaps, I absolutely agree with Dan. You're NOT adding value by enforcing these loans; in some drastic cases, I've seen private equity firms take a too drastic approach, giving the portfolio company no choice but to file for bankruptcy.
Now while I am not a fan of the strategy, I understand that it is necessary to execute it at times; LPs may be wanting money back, the company may be on the right track to success that they are able to pay up the investors, or the firms want to apply pressure on their portfolio company to improve their performance.

However, like Dan said, private equity firms need to admit why they're executing a dividend recap. Admit your mistakes. Explain how it fits into the main plan for the company you're working on. As frustrating as it may be to admit in the short-term, firms will win support from consumers who will understand that there is a true and heavily successful growth strategy plan in the works and that there's a good chance that the plan will live up to its standards.

Be smart, PE firms. Stop beating around the bush with value-added fluff.