Has LV’s management team done a poor job of defending a private equity-backed takeover? Yes — and many policyholders and politicians agree. In a last-ditch attempt to convince members of the 178-year-old mutual insurer to back a controversial £530m takeover by Bain Capital, LV last week finally published details of a strategic review that convinced management to hoist the “for sale” sign last year.
Far from silencing critics of the deal, its publication has raised more questions than it answers. As one of the UK’s few remaining mutuals, with just over 1m members, any sale was bound to be challenged by politicians and the press. However, LV’s board appears to have drastically underestimated the level of public scrutiny, making it all too easy for its critics to cast its US private equity suitor as the villain.
LV was slow to defend its decision to pick Bain ahead of rival bidder Royal London, which would have preserved its mutual ethos. Royal London has disrupted the deal by positioning itself as the antithesis of predatory private equity, yet could come back with a lower offer if policyholders vote down the deal on December 10.
Bain has promised £160m of investment, stressing its long-term commitment and intention to ringfence the with-profits fund, throwing in a tiny uplift for the 271,000 policyholders who legally own the business.
LV argues it would be unfair for this level of investment to fall upon their shoulders, stressing the risks of funding a business with an uncertain future. Yet for all the reports it has published, none has convincingly explained why Bain thinks it can make money from LV’s business while the policyholders cannot.
Last week, MPs on the Treasury select committee raised questions over LV’s handling of the deal, and whether it was appropriate for chief executive Mark Hartigan to lead the takeover negotiations if he stood to be employed by Bain following the deal.
In the voting pack, the LV board say no bonuses will be paid if this deal is successful, but policyholders fear this does not rule out private-equity sized pay packets in future. For the sake of around £100 per member — a tiny sum compared to the thousands paid out in previous demutualisations — they may well be tempted to give the management a bloody nose.
Although UK regulators have given the vote a green light, it is right to question whether private equity companies are the right kind of owners for businesses whose long-term liabilities stretch well beyond their usual horizon of ownership. Yet the target of politicians’ ire should be poor leadership at LV rather than private equity bidders.
However protective politicians may feel about the mutual ownership model, it is no guarantee of good stewardship. From the near-collapse of Equitable Life in 2000 to the scandal at the Co-operative Bank in 2013, mutual, co-op and employee-ownership models are vulnerable to mismanagement like their listed (and, indeed, private equity-owned) peers. While the mutual structure, conservatively led, may smooth out the troughs that other businesses experience, it also places obstacles in the way of expansion.
Economic systems suffer when they verge towards a monoculture of ownership model. The UK should therefore continue to protect and encourage a wide variety of business structures, from mutuals to private equity. But if this deal is voted down, it should be seen as a vote of no confidence in LV’s management team, rather than a heroic defence of a mutual structure menaced by private equity assailants.