The Dr Martens flotation is still at the warm-up stage, meaning the owners announce their intention to list the company, then formally confirm their plan, as happened on Monday, all the while using the spotlight to talk up the brand’s “iconic” and “unique” status. Fair enough – that’s how the float game is played.
Soon, though, the outside world will see a prospectus, at which point there’ll be something new to talk about: the spectacular returns about to be enjoyed by the partners of Permira, Dr Martens’ private equity owner since 2014, plus management.
Welcome to the miracle of “carried interest” – the portion of an investment profit that the private equity crew and managers retain as a bonus for success. It’s normally worth 20%, so will spit out some very large numbers in the case of Dr Martens, a business bought for £300m from the founding Griggs family (which wisely kept a minority stake) and now being brought to the stock market with a price-tag of £3bn-plus.
How large will the “carried interest” pool at Dr Martens be? Peter Morris, associate scholar at Saïd business school in Oxford, has crunched the data filed at Companies House since the buyout and has an answer. At a valuation of £3bn, the carry pool would be worth £410m, at £3.5bn, it’ll be £485m; and £4bn would mean £560m.
Now consider that only 300 people work at Permira and that the “carry” spoils tend to be concentrated among senior staff. If 80% of the pool were to be shared equally among 50 individuals, at Permira and among Dr Martens’ management, each person would be looking at between £6.6m (at a £3bn valuation) and £9m (at a £4bn valuation). Those figures are averages, per head, for 50 people.
A few qualifications are needed. First, we don’t know precisely what investment hurdle Permira employs before “carried interest” kicks in (Morris has assumed 8%, typical for the industry). Nor do we know how Permira allocates its bonus pool; sums for individuals could be diluted by duff investments elsewhere by the same fund. And, of course, the numbers assume a complete disposal of Dr Martens, whereas the float is the only the first stage in the sell-down.
But the picture looks broadly correct. Dr Martens – “a canvas for rebellious self-expression across generations,” or so the corporate hype has it – is about to create a large cast of multi-millionaires. The investors in the relevant Permira fund will also do very well, obviously, but “carried interest” is the real kicker for the private equity crew.
Indeed, it gets better still for them. “Carried interest” payments are treated as capital gains, and thus taxed at only 28%, rather than at the top rate of income tax of 45%. That tax oddity has always looked indefensible since the beneficiaries aren’t putting any capital at risk and their winnings are bonuses in all but…
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