The ruthless private equity sector is well known for achieving superior returns. The formula for success is to hire a small number of skilled and highly motivated executives who can focus on getting the job done without all the governance and transparency distractions associated with running a public company.
However, an increasing problem with the model is the need to exit after three to five years because it is, inherently, a relatively short-term horizon. This is in stark contrast to genuinely long-term investors such as Warren Buffett or superannuation funds, which are continuing to grow their asset base over time (such as Australia’s industry funds).
And so we get to the problem of consumer finance business Latitude, which has clearly failed to find a trade buyer and is now pursuing a public float via the public markets run by the Australian Securities Exchange (ASX) for its private equity owners to monetise their purchase of the old GE consumer finance business.
Public investors are wary about buying into businesses floated by private equity firms after their experiences with the likes of Myer, Dick Smith and Pacific Brands.
There also haven’t been a lot of CEOs who have happily worked for private equity and transitioned across to being a successful CEO of a public company. Can Latitude CEO Ahmed Fahour manage what the likes of Bernie Brookes (Myer) and Paul Moore (Pacific Brands) failed to do, by delivering first for his private equity paymasters and subsequently for public company investors?
I reckon Fahour will struggle and part of the problem will be the controversy over the size of his pay packet.
Latitude’s current owners — KKR, Varde Partners and Deutsche Bank — are offering the business to local investors at a share price range of $2 to $2.25.
However, the current owners clearly failed to read the tea leaves by leaving in place a private equity-style CEO pay deal, which now has to be explained and justified to mum and dad retail investors. Latitude chairman Mike Tilley should have sat down with Fahour and re-negotiated the arrangement before it become public.
Sure, it’s great to have a CEO with skin in the game, but Fahour already owns around $28 million worth of Latitude shares funded by a $17.5 million loan from the company. Big loans to CEOs for share plays are rare and pretty much on the nose these days. It is unknown how much Fahour paid for his current shares but given the scale of this equity incentive, Latitude surely didn’t need to promise him up to a maximum of 10 million additional free shares worth up to $22.5 million if all goes swimmingly with the float. This is just over the top, particularly when Latitude is a business that profits from making loans to people who aren’t generally high up on the wealth spectrum.
NAB made a similar mistake with Fahour’s generous pay packet in 2004, which former NAB CEO Nobby Clarke famously called out at that year’s NAB AGM.
After being passed over for the top job at NAB in favour of Cameron Clyne in 2009, Fahour then managed to negotiate himself a sweet deal as CEO of Australia Post in 2010, back in the Rudd-Gillard era. There was nothing particularly wrong with his performance, it’s just that the long-term incentive arrangement paid out excessively, unlike anything seen in the Australian public sector before, when Fahour’s total pay hit $10.8 million as he left the business in 2016-17.
Throw in Citi’s original mistake of being way too generous to Fahour when he came back to Australia from New York to run its local operations in the early 2000s, and this makes Australia’s most high-profile Muslim business figure unique when it comes to salary negotiation.
Who else can say they have out-negotiated a big Wall Street firm, one of Australia’s big four banks, the board of Australia Post, and now the world’s most famous private equity firm in KKR? All going well at Latitude, these four negotiations will probably leave Fahour with a net wealth exceeding $100 million.
As a Boston Consulting Group management consultant back in the 1990s, Fahour cut his teeth on high-level strategic decision-making with a number of businesses and is said to have done his best work assisting Qantas.
Once Latitude lists in the coming weeks, Fahour will join the ranks of public company CEOs such as Brian Hartzer, Ian Narev, Elmer Funke Kupper, Gordon Cairns and Alison Watkins who hailed from the management consulting world.
After a decade out of banking, it will be interesting to see how sharp his antennae are on the regulatory and political challenges enveloping Australia’s financial services sector. Kicking off with an over-the-top salary package unsuitable for the public markets is not a good start.
Interesting article, but the reference to Mr Fahour’s religion was totally irrelevant and unnecessary. Inherent racism?
So we’re supposed to be surprised a guy whose reputation is based on making lucrative deals also makes the best ones for himself.
Perhaps we should look closer at the fools who were so easily parted from their money.
Agreed. One can scarcely blame Fahour for taking advantage of companies whose board members appear to be hayseeds recently arrived in town on a turnip wagon.
It seems to me that this immoral greed can’t be addressed in the sense of stopping it and moderating the pay demands of CEO’s who see themselves as “rock stars”. But perhaps it should be addressed with a high-income tax levy. Perhaps a levy of a further 10% on remuneration (not just salary) about, say, $5.0 million? I note that this dude was likely to haver made a $10.0 or $15.0 million tax-free capital gain on the sale of his mansion in Melbourne, so perhaps we also need to scale back the capital gains tax “main residence exemption” to take some tax when the mega-rich make that much money from a single transaction. Of course, the LNP won’t be doing that anytime soon.
No, no. Far better to let the mega-wealthy keep more of their money with generous tax cuts (no doubt Fahour believes he is entitled to tax cuts too!); keep Newstart at poverty levels; to hold back funding of the NDIS; to robo-debt Centrelink recipients; pushing Centrelink recipients onto spiteful drug-testing and cashless cards and keep on putting LNP supporters, failed MP’s (including those who tried but couldn’t get elected) and flunkies into $385,000 pa jobs at which they are abjectly incompetent at the Administrative Appeals Tribunal. I can’t imagine how the LNP finds the time to do all of those things to the lowest end of society, do nothing to make the mega-wealthy actually contribute something meaningful (and no, doing the annual homeless sleep-out farce doesn’t count) and proclaim their genius at managing the economy (of course that is imaginary as there is no measure I am aware of that indicates the LNP even comes close to bettering Labor), even under Howard). They truly can walk and chew gum at the same time!
What on earth do these CEOs spend their megabucks on?
I couldn’t find anything to spend $100,000,000 on no matter how I tried.
I know there are many corporate know-it-alls who will just sneer, but fair dinkum, how much does one human really need as a salary. Despite the mild public odium about patently ridiculous CEO remuneration over now 2 decades in Australia at least, these self-important CEO types continue to treat mere salary earners with distain, clearly supported by self-important and often incompetent boards.