Private equity firms never tire of boasting of the stellar returns
their backers enjoy. Gone are the days when private equity meant
venture capital for cash-starved start-ups. Big companies are now
within its sights, the latest being the French media group Vivendi,
which last month rejected a €40billion (£27bn, $52bn) bid from the US
private equity group Kohlberg Kravis Roberts.
But success invites scrutiny (see page nine).
With 19 per cent of the UK private sector workforce employed by
private-equity-controlled companies, and FTSE 100 companies being
targeted, the curiosity is understandable. When a private equity figure
like Roberto Quarta says the industry needs to safeguard its licence to
operate, it’s clear that keeping shareholders happy is no longer enough.
The reputational challenges now facing the industry are of its own
making. Focused on its shareholders, it has largely ignored its wider
responsibilities. Posh dinners in the City in aid of worthy causes
can’t gloss over the huge profits made by a few. Crucially, proposals
to widen the reporting requirements for public companies to include
private equity firms have been deflected. An air of arrogance hangs
over private equity.
Private equity must become less secretive. Private equity firms are
extremely sensitive to risk. Due diligence is invariably very thorough.
The social and environmental information relevant to a target’s
performance is collected, but remains within a small circle. Greater
transparency is needed, within the bounds of commercial
confidentiality.
‘Strip and flip’ merchants have given the impression that private
equity is for the short term. Yet the expected hold period for a
private equity investment is a respectable three to five years,
providing opportunities for stewardship. Pension funds are the single
biggest capital contributor to private equity. This has implications
for their trustees and for government agencies.
Private equity also provides venture capital to clean-technology firms
developing answers to environmental problems. It is a major backer of
wind power and solar energy, for example. Other areas are more
controversial. The sector claims it is a net job creator, though its
restructuring plans can initially lead to job losses. One study found a
5.4 per cent annual rise in jobs between 2000 and 2004 in firms
controlled by private equity groups – eight times the growth rate in
the EU.
Right now, public companies feel disadvantaged by private equity’s
flexibility and ability to align the interests of managers and
shareholders. But the boot could soon be on the other foot. Private
equity may find managing pressure groups and regulators even trickier
than keeping an eye on debt spreads.
