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Private equity firms are cooking up elaborate ways to bring retail investors into what used to be an elites-only asset class. Sometimes, opportunities arise in surprising places. Take the $9bn buyout of US footwear company Skechers, led by 3G Capital.
3G has turned to a novel source to finance its takeover: Skechers’ existing shareholders. Up to a fifth of their existing stock can be swapped for a mixture of cash and a stake in a new, privately held Skechers. The rest get cash only. It is not unusual in the US to let large shareholders, such as founding families, roll over shares in this way. Usually, ordinary investors can only cash out.
The Skechers situation is almost unprecedented in this respect. One reason is that the company’s bylaws required that ordinary shareholders and the founding family, with its super-voting shares, get equal treatment in a buyout. Most mutual funds, which cannot hold private, illiquid stock, would take the all-cash option anyway.
But for others, including retail holders, there is a decision to make. They can either take $63 per share in cash, or 10 per cent less cash but with a kind of lottery ticket thrown in. The equity in the private Skechers cannot be sold without 3G’s permission, and it comes with no governance rights or guaranteed dividends.
This will still appeal to shareholders who believe 3G can increase the value of Skechers, take out cash and eventually sell or float the business — as it presumably wants to do. But that will take time, during which their rollover equity will be tied up in a highly leveraged, consumer-facing, tariff-challenged business.
For most investors, it is better to own a portfolio of private equity owned businesses than just one. Firms like Hamilton Lane and Blackstone offer retail funds exposed to a pool of companies acquired in leveraged buyouts. These funds offer some opportunity to sell out on a quarterly basis. The buyout firm takes out management fees and then about 13 per cent of the deal’s profit. Blackstone’s fund, roughly a year old, has produced a decent 15 per cent annualised return, after fees.
3G may be banking on few shareholders jumping at its offer. Skechers’ founding Greenberg family owns 14 per cent of the shares and has already agreed to take the equity option, which is only open to a maximum of 20 per cent of the company’s stock.
Skechers will be a test of the appetite for this kind of financial engineering. As private equity wheels out various new contraptions, ordinary investors are presented with new ways to put their cash into an asset class not previously open to the hoi polloi. Private equity is not for everyone, but these days it is no longer just for the few.
