Are we witnessing the beginning of the end of the public corporation? The arrival of the Blackstone private equity has given rise to the idea that the publicly held corporation—which has dominated the business model in the US and much of the world—may be in eclipse. Blackstone offers shareholders a very different mix of rights and opportunities than a typical public corporation, according to Larry Ribstein’s column in The American.
While the business columnists prate about “shareholder democracy,” this prospectus shows us where business is really headed. These partnerships make publicly held corporations, which activists disparage as dictatorships, look like New England town meetings. The owners are not protected by voting, shareholder proposals, majority voting for directors, or any of the other paraphernalia of the publicly held firm. Rather, the owners’ solace lies in the regular distributions of cash, the managers' high-powered incentive compensation, and the portfolio companies’ debt load, which concentrates their managers’ attention producing enough cash to avoid bankruptcy.
Why should shareholders be willing to forgo so many of their long-earned traditional rights? Largely because the partnership model—with its limited rights for common equity holders—has been winning in the way that counts the most: money. Private equity companies, in particular have been making a lot of it. And now the public is apparently craving a chance to stick its fingers into the pie.
This is almost a counterpoint to the story about public corporations adopting private equity style debt levels. As we noted this morning, the problem with modeling a public corporation after private equity is that you take on the risks faced by a private equity shop’s portfolio company—namely, higher debt maintenance costs—without eliminating some of the more onerous costs of the public company form—agency costs of a non-owner management, litigation, government regulation and activist shareholder uprisings.
But Ribstein isn’t sure what he calls the “Privlic Company” model is the wave of the future. It is threatened by the IRS—which may not permit Blackstone to continue enjoy the tax benefits that have helped make it so profitable one it becomes public—and has yet to be widely tested. If shareholders get burned in the Blackstone deal, they may turn against the structure.
Going Privlic [The American.com]