Thinking Things Over  (#21)
Private, national & common wealth in the post-socialism/capitalism era
Bewildered by what's been happening, both nationally and globally, in the wake of the fall of the Berlin Wall?
I.e. where the unwittingly weakened nation-state - formerly a bulwark against plain-levelling & globalization -
no longer tempers the social, economic & other pitfalls foreseen by Marx, Gramsci, Minsky, McCulley,etc.
Where - as the Laffer & Rider Curves illustrate in the tax & the social fields - excessive poor/rich gradients
are upsetting the delicate social fabric, thus washing away fertility factors with uncontrolled erosive powers.
Where indeed, as Patrick Martin pointed out, monopolistic capitalism and the associated reckless greed
are no longer kept in check by Adam Smith' invisible hand, i.e. by the balance of contradictory interests.
And where the capacity for self-correction is increasingly inhibited by loss of freedom, mooring & orientation
which led to market frenzies & false alpha birdsfeeding on hype & bubbles, reminiscent of the Roaring 20s.
IMF & FATF estimate black funds (drugs, tax evasion etc) to be 2-5% of world's GDP (2006: $960-2400bn).
An IMF Report indicates these funds to be increasingly chased under anti-terrorism & ever flimsier pretexts.
Courtesy by the IV Reich's Secret Service, the world has indeed been made hostage of ill-considered rules
which impede more legitimate business than crime. For big time money laundering, the US Treasury set the
standard in 2001 with its 31% confiscatory backup withholding tax on unidentified investors in US securities,
turning foreign bankers from trustees of clients into IRS agents (qualified intermediaries) subject to US laws.
Private equity & hedge funds thus found a government-sponsored access to black funds, while the latters'
entry into subprime markets was also eased by the Internet. Results: predatory lending & systemic risks.
Society's organization needs re-thinking with Plato, Gottlieb Duttweiler, José María Arizmendiarrieta etc.
For man's evolution may only be stressed by technological leaps but not accelerated beyond natural limits.
Also: return on investment rates above productivity gains & organic growth are predatory & not sustainable.
If driven by managers, lawyers & funds on the back of other stakeholders, M&As are thus Ponzi schemes
where shareholder value adepts can maraud with stacked Monopoly cards, helped by micro-economic laws.
Like compulsory social insurance systems whose doom is delayed or obscured only by inflation, war, etc.
And where the cunniest operators are state-supported by myopic magistrates hood-winked into fiscal deals.
Gary J. Aguirre's US Senate testimony details fraud & market mechanics which were at work before 1929,
e.g. Ponzi structures, unregulated pools of money, siphoning from unsuspecting mutual fund investors, and
abuse-prone market dominance: hedge funds' $1.5 trillion drive half of the $28 trillion NYSE's daily trading.
Tongue-in-cheek, Warren Buffet famously opined: "derivatives are financial weapons of mass destruction";
yet, under increasing performance & compliance pressures, some bankers still see a future in fee hunting.
Society wised up against churning of accounts by undelicate trustees, but not yet against macro-parasitism
which feasts on ignorance, sucks & devours a firm's life-preserving substance, & weakens society's pillars.
Which turns economic rat races into societal tailspins with early burn-outs & senior citizens being wasted,
& instills values causing youth to be educated out of sync, resulting in drug, violence & €1000 generations.
With profit-driven quarterly thinking & cost-cuttings also eroding due infrastructure maintenance & renewal,
& democracy's promises ridiculed by Fatf, EU & UN bureaucratic lawmaking as if Berlin Wall fell eastwards.
So why not thinking things over & Revisiting Das Kapital while some dance on the Titanic”?   Iconoclast


Buccaneers on the Titanic
courtesy by: Swiss Investors Protection Association - url: www.solami.com/buccaneers.htm ¦
www.solami.com/capitalism.htm
.../capitalism.htm ¦ .../1929.htm¦ .../bubbles.htm ¦ .../caisses.htm ¦ .../hedge.htm ¦ .../goldies.htm
.../swissbanks.htm ¦ .../costbenefit.htm ¦ .../oecdmandate.htm ¦ .../GAFI.htm ¦ .../crime.htm

tks 4 notification of errors, comments & suggestions: +4122-7400362 ¦ swissbit@solami.com

The U.S. Gross National Debt
globally floating IOUs tied to US housing: $7.5 trillion
hedge-fund asset growth 2001-06: $0.539 to 1.43 trillion
IRS-protected & FATF-targeted black funds: $1 to 2.4 trillion
M&A totalling in 2006: $3.8 trillion ¦ billion dollar boni gurus
paycheck devide: food for next revolution


Private equity: Locusts and asset strippers or dynamic saviours of clapped-out companies?
Current players  ¦  Past negative headline makers: after a bout with the law, where are they now?
1929 crash mechanism spinning again? ¦ TV's Big Brother Ponzi scam ¦ Gold matters ¦ The €1000 Generation
Le capitalisme est en train de s'autodétruire ¦ Le nouvel âge du capitalisme: Bulles, krachs et rebonds

9 Apr 08    A Silicon Valley Slowdown, NYT, MATT RICHTEL and BRAD STONE
8 Apr 08    Looking for an End to Deleveraging, New York Sun, Liz Peek
3 avr 08   Quel future pour la finance canibale où le serpent se mord la queue?, Maitre JR, satire
29 Jan 08   "Economic Amaggedon": artificial & deliberate!, KM.ru, Lyndon LaRouche, video
29.Jan 08   Der Finanzcrash und der Betrug im Weltwährungssystem, www.ethikpartei.ch
27 Jan 08   Responsibility on Wall Street: $34 billion big time loosers' comeback, NYT, Landon Thomas Jr.
23 Jan 08   Worries That the Good Times Were a Mirage, NYT, David Leonhardt
23 Jan 08   The interest of gold: confidence, Iconoclast
23 Jan 08   From Storage, Moving & Mutual Back-scratching Back to Confidence Business, NYT, Iconoclast
23.Jan 08   Harvard's Kenneth Rogoff: "Viele Banken werden nicht überleben“, HANDELSBLATT, Ingo Narat
23.Jan 08   Asiaten und Araber werden nervös, HANDELSBLATT, Pierre Heuman
22 Jan 08   The worst market crisis in 60 years, FT, George Soros, Davos Video
22.Jan 08   „Gier frisst Hirn“, HANDELSBLATT, Jörg Hackhausen
18.Jan 08   Peer Steinbrück re Nokia: Karawanenkapitalismus, Vertrauensverlust 'ist eminent gefährlich', HB
18 Jan 08   Dire Wall Street Year With Record Bonuses of $39 Billion, WP, Bloomberg, Christine Harper
16 Jan 08   Why regulators should intervene in bankers' pay, FT, Martin Wolf
16 Jan 08   Could subprime crisis trigger credit default swaps CDS tsunami?, Chronique Agora, Dan Denning
10 Jan 08   Exchequer Club speech by Fed-Chairman Ben S. Bernanke
9 Jan 08   Bankers' pay, often based on fake alpha, is deeply flawed, FT, Raghuram Rajan
4 Jan 08   The Next Credit Crisis Will Originate in China, Seeking Alpha, J. Christoph Amberger
1 Jan 08   '07: Buyouts and Bailouts, WP, Allan Sloan
31 Dec 07   Wall Street is about smart guys thinking about ways to make money from dumb ones, NYT, Dash
29 déc 07  Quand le rêve américain tourne au cauchemar planétaire, Le Temps, Marie-Laure Chappatte et al.
24 Dec 07   Dollar's Fall Is Felt Around The Globe, WP, Anthony Faiola
24 Dec 07   Swiss bank regulator to probe UBS: report, WP - Reuters, Jonathan Lynn
23 Dec 07   This Is the Sound of a Bubble Bursting, NYT, Peter S. Goodman
22 Dec 07   A Major Subprime Victim: the American Dream, NYT, Bob Herbert, Op-Ed Columnist
21 Dec 07   Wall Street to get fatter bonuses while many stakeholders suffered huge losses, CNN, AP
21 Dec 07   Blindly Into the Bubble, NYT, Paul Krugman, Op-Ed Columnist
18 Dec 07   Fed Shrugged as Subprime Crisis Spread, NYT, Edmund L. Andrews
2.Dez 07   Hans-Jörg Rudloff: «Ein unglaubliches Desaster», SonntagsZeitung, Victor Weber
28 Nov 07   Why banking remains an accident waiting to happen, Financial Times, Martin Wolf
28 Nov 07   Bankers are in the confidence, not in the storage or even moving business, FT, Peter Thal Larsen
24 Nov 07   At the gates of hell: Now the misery is spreading, Economist
23.Nov 07   UBS: Das angekündigte Debakel; Ospels Abgang im Frühling 08?, BILANZ, Lukas Hässig
23.Nov 07    Ken Moelis: Zur Branchenkrise, Geldgier und Aufspaltung der UBS, BILANZ,  Enk Nolmans
27/07   Die Deutschland-Chefs der großen Fonds, WirtschaftsWoche
11/07   Helmut Maucher: «Wir degenerieren allmählich», Weltwoche, Ralph Pöhner
26 Sep 07   U.S. Aims to Limit Funds' Risk, Washington Post, Carrie Johnson, comment
11 Sep 07   KKR: the fortunes of more than the firm are at stake, Washington Post, David Cho
25 Aug 07   Carlyle Founder on Cheap Debt, Credit Crunch & New Buyout Landscape, WSJ, Henny Sender
21 Aug 07   For Wall Street's Math Brains, Miscalculations, Washington Post, Frank Ahrens
20 Aug 07   Herding Scapegoats: Who's to blame for current lending mess? Barrons, T.G.Donlan, Editorial
20 Aug 07   Easy Credit, Bubbles and Betrayals, NYT/IHT, Roger Cohen, edpage comment
20 Aug 07   Market turmoil and threats to the broader economy, NYT, Editorial
19 Aug 07   Watershed: excesses in lending and derivatives threaten system, NYT, Editorial
18 Aug 07   Hyman Minsky Long Argued Markets Were Crisis Prone, WSJ, Justin Lahart
16 Aug 07   Hold tight: a bumpy credit ride is onlyjust beginning, FT, Avinash Persaud
15 Aug 07   In a world of overconfidence, far makes a welcome return, FT, Martin Wolf
14 Aug 07   No longer dancing: How the music stopped for buy-out buccaneers, FT, James Politi et al.
14 Aug 07   Surviving a credit market meltdown, FT, Martin Arnold
13 Aug 07   Banking bail-out sows seeds of future crises, FT, Paul de Grauwe
13 Aug 07   21st Century Bank Run Version: Why the Blowup May Get Worse, Barrons, Randall W. Forsyth
13 Aug 07   Appropriately, the Bill Lands on Wall Street's Desk, Barrons, Andrew Bary
12 Aug 07   Tight Credit Could Stall Buyout Boom, Washington Post, David Cho and Thomas Heath
11 Aug 07   Bubble and Bust, Washington Post, editorial
11.Aug 07   Zusammenbruch des US-Immobilienmarktes, Deutschlandfunk, Presseschau
11 Aug 07   Central Banks Intervene to Calm Volatile Markets, NYT, VIKAS BAJAJ
11 Aug 07   Subprime Turmoil Catches Funds Off Guard, WSJ, ELEANOR LAISE
11 Aug 07   US$ 1 trillion/y black funds sinking "white economy"?, Iconoclast
11 Aug 07   Payback time: A case from the Californian Front, FT, J.E. Morgan, Letter to the Editor
10 Aug 07   Markets abhor the vacuum left by derivatives, FT, Frank Partnoy
10 Aug 07   New Order Ushers in A World of Instability, Washington Post, Steven Pearlstein
10 Aug 07   Very Scary Things, NYT, Paul Krugman
10 Aug 07   A New Kind of Bank Run Tests Old Safeguards, NYT, FLOYD NORRIS, News Analysis
9 Aug 07   Subprime bites, US investigators look for culprits, FT, Brook Masters et al.,ANALYSIS
9.Aug 07   Die Mutter aller Krisen: Der tickende Zusammenbruch, WOZ, Till Hein
4 Aug 07   Report Says S.E.C. Erred on Pequot, NYT, Gretchen Morgenson et al.
1 Aug 07   Rupert Murdoch's WSJ acquisition: Public Good versus Ponzi schemes, edpage draft, Anton Keller
Aug 07   The Firing of an SEC Attorney and the Pequot Investigation, US Senate Report
30 Jul 07   Trustees or vulgar fee-hunters? Bankers must relearn their craft, Financial Times, John Gapper
30.Jul 07   Wufflis Abgang: UBS in den USA über den Titsch gezogen, SonntagsZeitung, Arthur Rutishauser
29 juil 07   Union mondiale se dresse contre des éléphants financiers en argile, Le Temps, interview
26 Jul 07   'Locusts' enrich our society: Private Equity and Public Good, WSJE, Wilfried Prewo
25.Juli 07   HEDGE-FONDS: Unbehagen ja, aber harte Kritik fehlt, Handelszeitung, Synes Ernst
25.Jul 07   HEDGE FONDS-Debakel: Spitze der Verluste noch nicht in Sicht, Handelszeitung, Samuel Gerber
20 Jul 07   UBS falls from grace, Economist
19 Jul 07   The fair way to tax private equity, FT, editorial
18. Juil 07  Privatsphäre in Gefahr, NZZ, Kommentar
18.Juli 07   Glaubenssätze in der Vermögensverwaltung, NZZ, Roland Hengartner
17 Jul 07   UBS settles New York InsightOne suit over charging excessive fees, WSJ, Chad Bray et al.
16. Juli 07  Jens Ehrhardt: „Es ist die größte Blase, die es je gab“, FAZ, Catherine Hoffmann, Interview
15.Juli 07   UBS riskiert mehr in den USA, Sonntags-Zeitung, ARTHUR RUTISHAUSER
15 juil 07   Notes de frais des fonds de private equity: $8 mia, Agefi, Alexandre Sonnay
25 Jun 07   Raising Taxes on Private Equity, NYT, editorial
13 Jun 07   Scrutiny on Tax Rates That Fund Managers Pay, NYT, JENNY ANDERSON
12 Jun 07   There are the rich and the very rich. Now meet the private equity kings, Guardian, Andrew Clark
10 Jun 07   Time is running out for tax privateers, Observer, Ruth Sunderland, Comment
9 Jun 07   Unfair tax break for buy-out barons, Economist, leader
6 Jun 07   Buy-out bonanzas, Financial Times, editorial
5.Jun 07   Mehr - nicht weniger - Steuer-Verantwortung für Macro-Parasiten, Neue Zürcher Zeitung
5 juin 07   Moins taxés «qu'une femme de ménage»!, Le Temps, Myret Zaki
2 Jun 07   On Winners & Losers from Hedge Funds and Private Equity, Economist, Buttonwood
16 May 07   DaimlerChrysler adventure: From 38+ to $1.5 bn in 10 years, WP, Sholnn Freeman et al.
16 May 07   End of the DaimlerChrysler marriage: How to become so cheap so fast, NYT, editorial
15 May 07   DaimlerChrysler splitup: Cerberus's Sharp-Toothed Ways, Washington Post, Frank Ahrens
11 May 07   How families keep private equity 'locusts' at bay, Guardian, David Gow
Apr/May 07   $600-2000 mio boni for the 2/20 to 5/44 percent fee structure gurus, Trader Monthly
Apr 07   Large banks and private equity-sponsored leveraged buyouts in the EU, ECB
25 April 07  Social cost of private equity, The Guardian, Phillip Inman
20 Apr 07   Top Moneymakers: James Simons, Kenneth Griffin, and Edward Lampert, alphamagazine.com
13 Apr 07   Stakeholders Borrow To Pay Themselves Pre-Sale Dividends, WSJ, KATE KELLY
12 Apr 07   American hedge fund trader to earn £2.7m a day, Guardian, Andrew Clark
12 Apr 07   Dutch MPs: hedge funds & private equity plunder Holland, Telegraph, A. Evans-Pritchard
11 Apr 07   Private equity collapse on cards, says IMF, Telegraph, Edmund Conway ¦ IMF Report
5.Apr 07   Gebühren 2006: Hedge-Funds ($1500 Mia) 84 vs 80 für Anlagefonds (20000), NZZ, ra
4 Apr 07   The Money Binge, NYT, comments ¦ Masters of the New Universe, NYT, comments
4 Apr 07   After the Buyouts, Bankruptcy Lawyers ahoi!, NYT, PETER EDMONSTON, reader comments
24 Feb/27 Mar 07  Taming the new capitalism ¦ Let there be light, Guardian, leaders, reader comments
7 Mar 07   Private equity predicted to spark company collapses, Guardian, Phillip Inman
23/24 Feb 07  New gold rush ¦ Private equity plutocratic shadow, Guardian, W.Hutton, reader comments
24 Feb 07   One in five in private sector works for firms owned by controversial funds, Guardian, D.Teather
6 Feb 07   Barbarians or benefactors? The rise and rise of private equity, Guardian, Jill Treanor
26 Jan 07   'Buy it, strip it, flip it' acquisitions denounced by global union, Guardian, Larry Elliott
2007    Creating New Jobs and Value with Private Equity, A.T.Kearney Consultancy
14.Dez 06   CS & UBS füttern Heuschrecken mit CHF20 Mia Boni ¦ Wall Street dances on Titanic, Cash
8 Nov 06   $128 Bn Revenues, $37 Bn Bonuses & $23 Bn Salaries at 5 US Investment Banks, Bloomberg
28 Jun 06   1929 crash mechanism spinning again?, US Senate Judiciary Committee, Gary J. Aguirre
19 mar 98   Apprenti sorcier vs une Suisse éclairée: à l'origine du problème/solution, GHI, Anton Keller







The Guardian    January 26, 2007

Trade unions attack 'corporate greed' of private equity firms
'Buy it, strip it, flip it' acquisitions denounced by global union

Larry Elliott, economics editor

The growing influence of private equity companies was strongly attacked by global coalitions of trade unionists yesterday as they used the gathering of executives from some of the world's biggest companies to condemn "corporate greed".
Phillip Jennings, general secretary of the UNI global union - which has 15 million members in 150 countries - said organised labour had come to Davos with the intention of forcing the activities of private companies into the spotlight.

"They are like a global vacuum cleaner hoovering up assets any place, anywhere, any time and we want to bring them out of the shadows," Mr Jennings told a press conference. "They should no longer consider themselves untouchable."

He said unions intended to press the European Union and the G8 to force private companies to abide by established rules of corporate governance, adding that there would also be union pressure on pension funds financing the purchases of public companies by private concerns. "Unions need to be aware that the money they are paying into pension funds is feeding the beast that may devour them," Mr Jennings said.

A long period of growth coupled with low interest rates and rising stock markets has created the conditions for private entrepreneurs to borrow money for takeover bids. Private equity companies were responsible for one fifth of last year's $3.8 trillion (£1.9 trillion) worth of mergers and acquisitions, with supporters of the process saying it leads to more efficient and profitable companies.

Unions said yesterday, however, that private equity companies were "sweating assets" and that the rates of return expected by the new private entrepreneurs were incompatible either with good corporate governance or the fight against climate change. "The philosophy is buy it, strip it and flip it," Mr Jennings said. "It's all about value extraction and not value creation."

Richard Lambert, the director general of the CBI, said the private equity model could be "extremely efficient" but that the growing importance of private equity companies would inevitably lead to more public scrutiny of their activities.

"Private equity companies are now a significant part of the economy in the UK. Around 10% of people working in the private sector are employed by firms that are organised on a private equity basis. In the US [the private equity firm] Blackstone is one of the top 15 employers," he said. "These firms, which have been operating very much in the dark, are going to have to come out and discuss what they are doing. They have to engage with the public and shareholder groups in a more active way than in the past," he added.

The unions launched their attack on private equity at Davos in response to what they considered to be a downgrading of labour issues at this year's World Economic Forum. They feared a backlash by the corporations who finance the annual get-together following several years in which unions had successfully pushed their issues up the agenda.

John Evans, general secretary of the trade union body at the Organisation for Economic Cooperation and Development, said that in the US the ratio of chief executives' pay to that of the average production worker had risen from 30 to 1 in 1970 to 500 to 1.

"The share of corporate profits taken as personal compensation by the top five executives in the 1,500 largest US public companies has doubled - from 5% to more than 10% of total corporate profits over the past decade - to a total of more than $40bn a year. That leaves a lot less for reinvestment, for wage increases for ordinary workers, for shareholders, or to fund pension plan liabilities."

Pay for executives will be discussed at a lunch in Davos today, although none of the six speakers will be a trade unionist. Sharan Burrow, president of the International Trade Union Confederation, said corporate greed was the "gorilla in the room" at Davos and that business leaders needed to wake up to growing inequality.




The Guardian    January 29, 2007

Record year for private equity

Last year set another record for private equity, with the total value of European private equity-backed deals reaching €178bn (£117.5bn), a 41% increase on 2005. Candover, a pan-European buyout specialist, found that of the €56bn of private equity transactions completed in the last quarter of 2006, €55bn were buyouts.

The private equity boom continued to be boosted by larger deals, with 13 transactions in the final quarter worth more than €1bn. Together, these larger deals made up 70% of the value of the whole European private equity market in the fourth quarter.

Three of these 13 deals took place in the UK: the £1.6bn sale of United Biscuits to Blackstone and PAI Partners, the £1.15bn sale of Birds Eye to Permira and the £559m sale of Gondola Holdings (which runs the Pizza Express and Ask restaurants) to Cinven.

Colin Buffin, managing director of Candover, said: "This has been another remarkable 12 months for private equity, with more and more large scale buyouts driving the growth of the industry."

He remains confident that the private equity market will continue to thrive in 2007 on the back of a strong deal pipeline across Europe.

Email business.editor@guardianunlimited.co.uk




The Guardian    February 6, 2007

Barbarians or benefactors? The rise and rise of private equity
Poll: should private equity be more tightly regulated? yes: 87%, no: 13%

Jill Treanor and Terry Macalister

A possible £8bn bid by a trio of private equity houses for supermarket group J Sainsbury demonstrates just how bold and brave the fast-growing industry has become. If the deal succeeds - and there are plenty of obstacles to a takeover by private equity houses CVC, Blackstone and Kohlberg Kravis Roberts - the supermarket chain would follow United Biscuits, Birds Eye and Pizza Express parent Gondola into private hands.

Success would herald a landmark for the industry as it would be the biggest deal yet in Europe. Failure could prove to be the watershed moment for a business that has started to face critics, even from within the City.

Private equity - and its sister sector venture capital, both of which draw together funds from individuals and corporate investors - shot to prominence in the 1980s when KKR launched a hostile bid for RJR Nabisco - now immortalised in the book The Barbarians at the Gate. In the 1990s and 2000s the business gathered pace, helped by the dotcom boom and bust, but it really flew last year.

About 1.2 million people are employed by private equity firms. Data compiled by the BVCA, the British venture capital and private equity association, shows the business represents 7% of the total annual turnover of the UK financial services industry.

Yet the industry is uncomfortable with public scrutiny despite having lured some high-profile figures - such as U2 singer-cum-poverty fighter Bono, who is linked to Elevation Partners, and John Studzinski, the former HSBC banker, who has pitched up at private equity house Blackstone.

Private equity and venture capital also attracts a wide array of investors - pension funds and university endowments are among the biggest.

Precise figures about the size of investments can be difficult to come by but the INSEAD business school believes there could be up to $300bn (£150bn) "committed capital" in the hands of private equity and it is growing at 200% a year.

High risk
The investors are usually willing to put a small amount of their total funds into investments that are considered high risk but potentially high reward. They are high risk because of the amount of debt employed relative to the amount of equity, but once the debt is paid off, the profits can be huge.

It is the debt - and the idea that private equity firms run businesses for cash to pay that debt off - that is at the root of much of the controversy. But Christoph Zott, associate professor of entrepreneurship at INSEAD, says venture capitalists can bring financial experience and advice that can help a badly managed company. "Debt can be a very strong disciplining device, while taking a company private can shield it from the short-term pressures of public markets."

Other pressures of being listed on stock markets such as disclosing directors' pay and controls can be avoided.

Questions about the seemingly unstoppable business are coming not only from the trades unions worried about job losses but also from City big hitters and even regulators.

Michael Gordon, chief investment officer of Fidelity Investments, said: "What is starting to worry me is when talking to our clients - pension fund trustees - they are seeing private equity as some sort of panacea."

Clients such as pension fund trustees are moving into private equity believing it offers diversification to their investments. Mr Gordon believes it does not. Instead they are taking on higher risks because of the leverage and receiving less information about their investment than they would from listed stocks. They also pay higher fees.

City investors, which fell over themselves to encourage boards to accept bids by private equity firms, are beginning to urge more caution from sitting management teams. Signet and HMV have both been the target of mooted private equity approaches but, so far, bids have not materialised. Estate agency Countrywide survived one private equity takeover attempt last month but yesterday received another.

Laden with debt
Companies that have been listed on the stock market, bought by private equity and then relisted - notably Debenhams - have also done little to win the confidence of investors. Debenhams was taken private in 2003 only to come back to the stock market barely two years later - with a market value greater than it was sold for and laden with debt. Mr Gordon notes this will be one way to measure the success of any Sainsbury's bid. "The Sainsbury's bid will succeed if investors sell to them and then buy the asset back when it comes back to the market," he said.

The UNI global union - which has 15 million members in 150 countries - used the recent Davos economic forum to condemn private equity companies for "corporate greed". Philip Jennings, UNI general secretary, said: "They are like a global vacuum cleaner hoovering up assets at any price, anywhere, any time and we want to bring them out of the shadows." The Transport & General Workers' Union warned yesterday about the potential Sainsbury's bid. Brian Revell, T&G national organiser for food and agriculture, said: "Such a takeover would be based on borrowed money followed by extracting as much wealth as possible from the company ... Private equity does not create wealth; they extract it for their shareholders." Mr Gordon has some sympathy. "Employees are a little further down the pecking order in private equity," he said.

Concerns have also been raised about the standard of corporate governance at private equity firms. Sir Derek Higgs has suggested they could comply with the corporate governance standards he devised for stock market listed companies. But the industry argues it is transparent and clear. The BVCA says investors in private equity funds provide "complete and comprehensive" information to their investors and its members also follow a code of conduct. This is a point taken up by a senior venture capitalist. "Our investors can ring us up at any time and ask how investments are going. Every half year they get official updates," the venture capitalist said. He says investors in private equity funds actually get more information than they would for stock market listed companies. Private equity firms can know personally all the investors in their funds - a few hundred, say, compared with the millions on the registers of the biggest stock market companies.

Job cuts
Some attempts by the industry to answer critics have backfired. The launch of the Private Equity Foundation, which is to make donations to children's charities, was picketed by unions upset at job cuts at venture capital-owned businesses Little Chef and Birds Eye. Others note that the increasing interest by the Financial Services Authority in the sector may also be helping to focus minds.

Hector Sants, managing director of wholesale markets at the FSA, last month met the heads of the biggest venture capital firms. The meetings came after the FSA's warning in November that it was "inevitable" that a large private equity-backed firm would default on its debt and that it was concerned there was potential for insider dealing in the industry.

By March 6, the industry and other interested parties are required to tell the FSA what they think. In the coming months, the industry will find out whether the FSA is satisfied that it has answers to the potential risks.

Going private: Debt is the key
The terms private equity and venture capital are used interchangeably in the City to describe deals that involve buying companies listed on the stock market and taking them into private hands. (In the US venture capital tends to be used to describe investment in early-stage and expanding companies.)

The deals are usually associated with high levels of borrowing - known as leverage - relative to the amount of equity in the business.

The BVCA, the British venture capital and private equity association, says most of the publicity the industry attracts is for a dozen or so of the big value deals on the stock market. Most private equity deals - those conducted by 80% of the members of the BVCA - are for £2m or less. Some do not involve stock market listed companies, as private equity-owned firms can keep changing hands in the private sector.

Even so, an obvious exit route for private equity owners is to float the business on the stock market. The BVCA says this is an important discipline in running the companies - they have to be managed well so they can be sold on.

The big difference between private equity and stock market listed companies is that the private equity firm is the only owner of the business - while investors in stock market listed companies only influence rather than control them.

Private equity investments are said to grow faster than stock market listed companies. Over the past 10 years, the best buyout funds have outperformed stock market indices. Some of this is due to the leverage and has prompted analysis by Citigroup into whether simply buying a stock and increasing the size of your investment by borrowing money can replicate private equity returns. The answer is sometimes.
 



Leader
The Guardian     February 24, 2007

Taming the new capitalism

    Whatever the rights and wrongs, the present controversy about buying companies using private equity has generated a rare public debate in which the protagonists are actually listening to each other. Such deals have already seen household names such as the AA and Little Chef taken over - with Sainsbury's mooted as the next target - and have naturally provoked opposition from unions fearing job losses. Instead of denying this, Michael Gordon, chief executive of Fidelity Investment, actually admitted that "employees are a little further down the pecking order in private equity". In yesterday's Financial Times two private-equity groups put their heads above the water. Permira, Europe's biggest - which owns New Look and the AA - pledged to provide more information about what it owned in response to criticism that private-equity firms were not required to make quarterly reports as publicly quoted companies are. Steven Rattner, co-founder of Quadrangle, while rigorously defending private equity as "a constructive force in making capitalism work" admitted that at the moment there was a "credit-fuelled bubble driving private-equity deals that would not happen in a normal credit market". To cap it all, Britain's biggest charity, the Wellcome Trust - also the biggest institutional owner of private-equity buyout funds in the UK - warned against changing the tax treatment of these funds, arguing that this would reduce the income the trust uses to maintain Britain as a world leader in biomedical research, thereby forcing it to redeploy more of its investments abroad. Some pension funds, also heavy investors in these funds, would agree.
    Anyone with memories of the "asset stripping" boom of the 1960s and 1970s may be unsurprised by the phenomenon. What is new is the scale of it. More money was raised through private equity in the first half of last year than through stock-market flotations. Private equity embraces everything from providing vital venture capital for new start-ups to short-term moves to strip companies of their property assets before selling these firms, laden with debt and without any of that concern for staff that has allowed some businesses, such as the John Lewis Partnership, to thrive.
    It is good that equity firms are responding to public concern. They have even produced a survey claiming that they generate jobs much faster than traditionally financed ones. That needs a lot more scrutiny before it is taken seriously. Even if it were true that they merely accelerate the destructive forces necessary to make economies more productive, it ought to be done in a more opaque and humane way. If they do not learn from the current debate and stop treating companies as if they were objects in a private game of Monopoly then they should be unsurprised if the government is forced by public opinion to curb their excesses.




The Guardian     February 24, 2007

Corporate buccaneers caught in a political storm
One in five in private sector works for firms owned by controversial funds

David Teather and Jill Treanor

Stephen Thompson started working as an AA patrolman in April 1985. It was, he says, his perfect job. On several occasions he was named patrolman of the year in his region. But 20 years to the day after joining, he left with a payout of just £18,000. His marriage has since broken up from the stress. Thompson, now 46, has no doubt who to blame - the private equity owners of the AA who bought the business in 2004. "I'm very angry," he says. "All they are here for is for profit making. They ripped the guts out of the AA."

If critics are to be believed many more workers will share Mr Thompson's fate if the private equity juggernaut is not checked. In the past few weeks, this burgeoning but secretive industry has been catapulted out of the shadows and into the political spotlight. Private equity has become so powerful that a handful of firms own businesses that employ one in every five workers in the private sector in Britain. The firms are largely secretive, rarely give interviews and do not disclose who invests in their funds. The industry meanwhile has made a small number of people who manage the funds immensely rich. Sir Ronald Cohen, the Labour donor and adviser to chancellor Gordon Brown who founded private equity firm Apax, is said to be worth £250m. Damon Buffini, who grew up on a Leicester council estate and is now a managing partner at Permira, is estimated to be worth £100m.

Few people outside the business world would have heard of these companies just a short time ago. But now they find themselves the latest flashpoint in a broader debate on social divisions as City financiers bank billions of pounds in bonuses while ordinary workers struggle. Within months of buying the AA for £1.75bn, the private equity owners Permira and CVC Capital had cut 3,400 jobs. Permira, the largest private equity group in Europe, last year bought Birds Eye from Unilever and pledged to keep workers' employment terms for at least three years. Within five months it had closed a plant in Hull at
the cost of 600 jobs.

Unions have now forced the issue on to the agenda in the battle for the Labour leadership and on to the front pages. Workers at NCP, the UK's biggest car-parking group, picketed the offices of private equity owners 3i this week complaining of a pressure-cooker environment and failure to recognise the union. They were met by John McDonnell, a Labour MP and candidate for party leader. He said it was a "national scandal that the casino capitalists from global private equity groups are allowed to treat British workers and some of our biggest companies as nothing more than pawns in a game of
get-rich-quick".

Buffini broke cover yesterday and gave interviews to Radio 4 and the Financial Times in an effort to calm the growing political storm. "People don't quite understand what we do and the benefits we do bring to the economy," he said. "There is a positive story about productivity and job creation. Those messages have not gotten through."

Private equity has been described by The Economist as a "superior model of capitalism". It can generate huge rewards for its investors in a short period of time. One City dealer described it as akin to trading companies like secondhand cars. There are two kinds of private equity deals. The first, sometimes referred to as venture capital, involves investment in small start-up businesses. The second is the more contentious; the aim is to target businesses that may be badly run, undervalued or in need of an overhaul. Private equity firms buy the companies with money from rich individuals and financial institutions such as pension funds, alongside large debts. Private equity has flourished in Britain because firms can claim tax relief on interest payments on the debt used to buy the businesses; a loophole unions want to close. The aim is to sell the business again or float it on the stock market, typically within three to five years, at a profit.

The amount spent buying public companies in Britain last year reached a record £26.3bn. There have been so many buyouts that the combined value of companies on the stock market is shrinking. Other household names bought by private equity last year include United Biscuits, Matalan, Travelodge, John Laing, Associated British Ports and Phones4U. The US private equity firm Apollo this week bid £1bn for Countrywide, the UK's biggest estate agency.

And they are getting more ambitious. It emerged this month that a consortium of four private equity firms is running the slide rule over the supermarket group Sainsbury's. If the £10bn takeover were to happen, it would enter the history books as the largest private equity deal ever done in Europe. "It is about extracting as much as you can as quickly as you can," says Karel Williams at Manchester Business School. "It is part of a broader series of changes in capitalism.

These intermediary groups, like private equity and hedge fund managers, are able to enrich themselves in ways thought unimaginable a few years ago. "The ultimate question is whether this behaviour becomes normalised and accepted. This is a socio-cultural change. The culture of naked self-interest among private equity managers is characteristic of the elites in third world countries."

Senior managers are also getting a share of the spoils, raising questions about their decisions to sell out companies. "In the debate on private equity, it is important to recognise the potential conflict of interest for senior management," says Michael Gordon, chief investment officer at Fidelity, one of the biggest fund managers in the world. "They become highly incentivised to sell out to new owners."

Debenhams has become the text book case. CVC, Texas Pacific and Merrill Lynch Private Equity used £600m to buy the business in 2003. They increased the retailer's debt from £100m to £1.9bn and paid themselves a dividend of £1.2bn. They sold the freehold of the stores for £500m and leased them back. They then floated the business and took another £600m. In a little over two years, they made around three and a half times their investment. Debenhams now faces huge interest payments and rent on stores it once owned. Yesterday, its shares rose 10% on speculation that the private equity
industry may try to buy it back again - in a clear illustration of the need by private houses to find homes for their cash.

Anger at NCP has been stoked by reports that 3i is preparing to sell the business to another private equity group after just 18 months for a profit of £245m. Francis Fordjour is a parking attendant at NCP in Enfield, north London and has joined colleagues on strike. "Working conditions at NCP are horrible," he says. "All they are interested in is how many tickets you have issued."

Patrick Dunne, a 3i director, says the image of a ruthless owner wringing the business dry is far from the truth. "No one wants to buy a business that has been starved of investment or has a reputation for mistreating its workforce. "The other social issue that isn't mentioned is that millions of people benefit from private equity because their pensions are invested in these funds. There is, he says, no intention to "flip" NCP quickly, but adds that "we have a duty to our shareholders to consider any proposals".

Permira is equally dismissive of the claims of unfair treatment by Thompson at the AA. "He left voluntarily with a generous financial package which followed a performance review in March 2005 when all patrolmen were reviewed," an AA spokesman said.

There are signs that the private equity fad might be running out of steam. Company shareholders and directors have begun to fight harder and demand higher prices for their businesses. Approaches for the likes of ITV, EMI and HMV failed. And the latest offer for Countrywide is a second attempt which may fail again.

Economists fear a downturn in the economy or higher interest rates could spell disaster. Companies that private equity firms have loaded with debt and liabilities like rent are much more vulnerable. We have been here before. Highly leveraged management buyouts became popular in the 1980s. They fell out of favour as the economy dived and a couple of high-profile companies defaulted on heavy debts.

The Financial Services Authority recently warned that the City should get ready for some "short sharp shocks". Former AA patrolman Thompson, might argue that the short, sharp shock has already been delivered.




The Guardian    February 24, 2007

Very private plutocrats leading new gold rush
Men behind the millions

Philip Yea - Chief executive, 3i Group

Philip Yea runs 3i, the only private equity firm in the FTSE 100. He joined the business in July 2004 while the company was still struggling with the legacy of a clutch of poor investments during the dotcom boom. He has shifted the business away from technology, invested more in fast growing markets overseas and sharply reduced the portfolio. By last year profits were back up at £855m, from £500m in the previous year. Before private equity, Mr Yea, 51, spent most of his career in the corporate world. He was with Guinness and then its latter day incarnation Diageo for 13 years, six of them as group finance director.
Guy Hands - Chief executive, Terra Firma

Hands is one of the highest profile financiers in the City, perhaps best known for a string of deals that made his then employer, the Japanese bank Nomura, Britain's biggest (and unlikeliest) pub landlord. Hands joined Nomura in 1994 and spent billions of the bank's money on a succession of less than glamorous assets including the former British Rail leasing company Angel Trains and 57,600 Ministry of Defence-owned homes. Hands, 46, set up Terra Firma in 2002. He has pledged £65m of his own money to the firm's next fund, which is looking to raise £3.5bn. Terra Firma owns the Odeon and UCI cinema chains in Britain.

Damon Buffini - Managing partner, Permira

Buffini, 43, has become the poster boy for the private equity industry and Permira Europe's biggest private equity firm. The son of a black American serviceman, Buffini was brought up by his mother on a Leicester housing estate. He went to grammar school, Cambridge University and Harvard before ending up at the investment bank Schroders and engineering the management buyout that created Permira. Some of the most stinging campaigns orchestrated by the GMB union against private equity have targeted him personally. The firm already owns household names such as the AA, Little Chef and New Look. Buffini's personal fortune is estimated at at least £100m.

Henry Kravis - Founding partner, Kohlberg Kravis Roberts

Arguably, Kravis is the founding father of the private equity business and the rightful owner of the sobriquet "big swinging dick". With his first cousin George Roberts and their mentor Jerome Kohlberg, he set up Kohlberg Kravis Roberts 1976. The deal for which they are best known is the record-breaking buyout of RJR Nabisco in 1989 which was immortalised in the book Barbarians at the Gate. Two decades on, KKR is still doing deals including buying toy retailer Toys "R" Us. Married three times, he has had three children including a son who died in a car crash aged 19.

Sir Ronald Cohen - Founder, Apax Partners

A grandee of the British venture capital business, Sir Ronald set up Apax in 1971 with three friends at the age of 26. Apax invested in firms including PPL Therapeutics, which cloned Dolly the sheep, and the computing group Autonomy as well as Virgin Radio and Waterstones. He retired from the business 18 months ago and is actively involved in the Middle East, directing funds to Palestinian businesses. He is a Labour donor and well known for parties at his home in Notting Hill. Born in Egypt, Sir Ronald arrived in Britain at the age of 11 unable to speak English. Today he is worth some £250m.

Philippe Costeletos - Head, European team, Texas Pacific

Philippe Costeletos is the venture capitalist who masterminded the buyout of Debenhams three years ago. Now relisted on the stock market, it is held up as the textbook "flip it and spin it" venture capital deal. When Debenhams was relisted, the retailer was laden with debt after the venture capitalists had taken their spoils. Texas Pacific also became a household name after it prompted a staff walkout at the airline catering firm Gate Gourmet and sacked the strikers. A native of Greece, he has been with Texas Pacific since 2003, joining from Investcorp where he was involved in a number of buyouts in Switzerland, Norway, the Netherlands and the UK.

Michael Smith - Chairman, CVC Capital Partners

Smith joined the firm in 1982 when it was part of Citigroup, the biggest banking group in the world. He became managing director in 1986 then led a management buyout of the business to create CVC, one of Europe's leading private equity groups. The firm has made billions buying and selling companies including Kwik-Fit and Debenhams. It managed to earn four times its original £137m investment in the Halfords bike and car chain. It is now moving aggressively into the Asia Pacific region. Smith, 54, avoids publicity. He has homes in Berkshire and Monaco and is married with two children.

Jon Moulton - Alchemy

Moulton is still best known for a deal he never did. Villified at the time as a "ruthless asset-stripper", Moulton had attempted to buy the MG part of MG Rover in 2000. He lost out to rival bidder Pheonix Partners, who promised to save all 6,000 jobs, rather than the fraction offered by Moulton. Rover collapsed anyway and Moulton has since described feeling "an awful shame" about the affair. Moulton was one of the first private equity specialists to give interviews and defend the industry. Before Alchemy he was in charge of buyouts at Apax and was once a player at Schroder Ventures, the business that has now become Permira. His wealth is estimated at £50m.


Comment
The Guardian   February 23, 2007

Private equity is casting a plutocratic shadow
over British business
Both main parties are in thrall to this damaging drive
to maximise short term profits and avoid corporate accountability

Will Hutton

    It is time to come to the defence of the public limited company, one of the great Enlightenment gifts to western civilisation. Increasingly capital, in the quest for higher returns to make vast personal fortunes, is going private to escape the demands of public accountability on stock markets. If uninterrupted, the long-term adverse consequences of this privatisation of capital for our economy, society and democracy will be profound.
    Even six months ago, very few outside the City or the readers of business pages had come across the idea of private equity. Today, as Sainsbury's is stalked by a club of four private equity firms allegedly plotting a £10bn bid and the GMB has ignited a campaign against job losses incurred in private equity restructurings by comically embarrassing one its leading lights - Damon Buffini, the boss of Permira - private equity is news. It is even becoming an issue in the contest for the deputy leadership of the Labour party.
    Quite right. Private equity is now the dominant element in the stock market. According to the Financial Services Authority, in the first six months of 2006 private equity firms raised £11.2bn in capital on the London Stock Exchange. Ordinary firms raised £10.4bn. So many public companies are being taken over by private equity companies, or retiring their own shares to head off the risk, that the London stock market, despite rising average share prices, shrank by nearly £50bn in the same period. More than 2.5 million people in Britain work for private equity companies.
The story, as recounted by consensus opinion from the shadow chancellor, George Osborne, to the CBI, and eagerly rehearsed by the private equity industry itself, is that the emergence of more than 700 private equity companies deploying saving and borrowing power of more than £1 trillion is crucial to wealth generation. By taking public companies out of the public arena of accountability, regular reporting and scrutiny, they can instead enjoy the benefits of engaged, committed ownership.
    Too many companies, they allege, are just not trying hard enough to maximise their profits, indulged by disinterested pension fund and insurance company shareholders. They need the managerial alchemy of private equity investors who, aiming to make "life-transforming" money for themselves, will give them the necessary managerial and strategic shock treatment.
    One truth about private equity shines out: the extravagant management fees and annual "carry" (the share in profits) certainly means life-changing fortunes. Researchers at Manchester University's ESRC Centre for Socio-Cultural Change recently got hold of the internal management accounts of one fund with up to £8bn of funds under management. After five years 30 full partners expected to make between £25m and £50m each.
    The rest of the industry's claims about creating jobs, investment and exports do not bear close scrutiny. Much of the alleged managerial alchemy is no more than old-fashioned financial engineering - that is, leveraging up returns by incurring lots of debt. One study by Citigroup showed that if pension funds and insurance firms had borrowed money themselves and invested in a basket of companies in which private equity groups invested, they would have made higher returns than even the best-performing private equity firms.
    Mortgaging the future to capture gains for personal enrichment in the present is easy - as one chief executive of a well-known public company told me recently, the task of the good manager is to resist it. Managers have to balance the interests of today's shareholders with tomorrow's shareholders. Private equity drives a coach and horses through the proposition. And as Paul Myners, the former chairman of Marks & Spencer and chairman of Guardian Media Group, has remarked: "The one party that is not rewarded is the employees, who generally speaking suffer an erosion of job security and a loss of benefits."
    The catalogue of firms thus financially engineered is endless. A consortium bought the car rental company Hertz in 2005, packaged up the car fleet in blocks of tradeable assets that could be bought and sold by banks, and sold the weakened company back to the stock market. Others have bought media outfits such as PanamSat in the US or EirCom in Ireland - not to develop a free media that holds truth to power but, as Columbia University's Eli Noam argues, to weaken that capacity while remaining unaccountable owners themselves.
    In Britain Debenhams was bought, its stores sold off to be leased back by the enfeebled company, which was then sold back to the stock market. And other public companies, including ICI, Amec and EMI, are being stalked, and adjusting their strategies accordingly. The shadow of private equity falls everywhere, making the gamut of British business hyper short-termist.
    This is not pro- but anti-wealth-creation. In this respect the attitude of private equity closely mimics that of the Chinese communist party. Both conceive of companies as networks of contracts between capital and labour that generate revenue streams to be manipulated by whoever has central control for personal or political advantage. Neither has any conception of companies as Enlightenment institutions that incorporate real-life human beings into a joint enterprise, in which being publicly scrutinised and held to account helps managers make better decisions. The foundation of a durable business, as James Collin and Jerry Porras argued in their famous book, Built to Last, requires vision, values, leadership and purpose around an organisation's "reason to be" - the antithesis of everything private equity stands for.
    So if we want such companies, shareholders have to give managers room for manoeuvre and back long-term business strategies. But British shareholders are not required by law to take their ownership responsibilities seriously (it would be a "burden on business"). Nor are British companies required to give them the range and quality of information that might help them. As a result, British shareholders are extraordinarily neglectful of their ownership responsibilities.
    Pension funds and insurance companies are myopic and short-term enough, but because takeover is so easy in Britain private equity has been able to carry short-termism to new extremes. This is said to raise productivity and performance. I would argue the opposite. The chief reason British business remains at the bottom of the international league tables for innovation, research and development, and productivity growth is because of too much takeover and too much private equity. Innovation lowers short-term profits.
    The answer is obvious. Private equity cannot be outlawed; in any case it can do a good job. Rather, the perverse incentives in Britain that favour takeover need to be removed. We need to defend the public company and create conditions in which it can prosper. But who is going to do that? Not the Conservative party, in thrall to private equity, and not, judging by its legislative record, the government. Our politicians are confused. There is more to wealth creation than constructing a plutocracy of private equity partners.

· Will Hutton is chief executive of the Work Foundation and author of The Writing on the Wall.
will.hutton@observer.co.uk
 

Comments

Koolio    February 23, 2007 6:06 AM
    Having railed against stock market capitalism, I find it interesting to see Will Hutton defending the companies listed on the stock market.
    It takes two to tango, in order to buy the companies, institutional investors like pension funds and insurance companies, who tend to own most of the shares, have to be willing to sell.
    Taking Sainsburys, the shares were trading at 400p before the possible buyers were flushed out, now the shares are valued at over 500p and any expected offer is likely to come in north of 550p. So if a take-private deal can prove the market - all those traders, fund managers and city analysts - wrong, and pay 25% more than the market price, let them put their money on the table. In some cases, as with Marks & Spencer and plenty of others, investors will reject offers and back the incumbent management.
    Hutton says that "if pension funds and insurance firms had borrowed money themselves and invested in a basket of companies in which private equity groups invested, they would have made higher returns than even the best-performing private equity firms." Yes, but they didn't do this. Is Will Hutton calling for pension funds companies to load themselves up with debt?
    The debate about the wealth of the partners involved is really a separate matter. There are many others in the City from traders to hedge fund partners who are making a lot more money. I suppose I can see how talk of these big salaries is useful for the Labour Party's internal politics but listing people's wages is only good for demagogy and cheap newspaper headlines.
    Finally, all this is a topical subject but it'll blow over. No one has yet to even make an indicative offer to the board of Sainsburys. Right now, money is very cheap at the moment and the stock market has been rising, two conditions ideal for private equity houses. As the credit cycle is perhaps turning now, things should look different in a year's time and those private equity might rhyme with negative equity.
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steerforth    February 23, 2007 6:28 AM
Will        Private equity has enjoyed very good returns on capital in the last 4 years for the simple reason that they
have been operating in an environment of low interest rates and rising stock markets. They have benefited in
exactly the same way as people who were lucky enough to have purchased houses utilising low mortgage rates. Any
time a private equity company buys a quoted company and tries to develope it for a profit it is engaging in a
high risk activity as it uses its own capital and a large amount of debt.
    You seem to be a little naive in your glowing description of public companies and how they came from the enlightenment
era. Public companies have never been properly accountable to their shareholders since the directors have always
been able to use proxy votes to act in their own interest which is often not aligned with the shareholders. The incentives to act for short term profitablity is just as strong for options holding directors as it is for the private equity companies.
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fortyniner    February 23, 2007 6:32 AM
    Looks like we have a new version of "selling off the family silver". Only this time, it is the private sector which is the target. In the old days, this sort of activity was called "asset stripping" and "the unacceptable face of capitalism". But in a society where money has become "god" those who makes loads of it are worshipped as "gods".
    But as the Native Americans would say "you can't eat money". We have been warned.
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TimWorstall    February 23, 2007 9:15 AM
    A quick question for Will Hutton if he's ever going to demean himself by getting down and talking to us plebs in the comments.
    Your argument is that there is something vastly better about companies being public than there is in their being private.
    Excellent, so when is The Guardian being floated?
    Of doesn't it work like that? I'm sure I saw pieces a year or two back, around the time of the changeover to the Berliner format, stating that it was in fact the paper's private ownership which enabled it to make the huge investment required, freed from the short termism of the public equity markets.
    Do as I say, not as I do perhaps, from one of the trustees of the Scott Trust, who own The Guardian?
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englandismdotcom    February 23, 2007 9:28 AM
    Go to Guardian Unlimited and peruse 'neo-liberal' McGreevy's stalwart defence of private equity houses:
"I believe that private equity houses and activist fund managers of all kinds, including hedge funds, play a much more valuable role than any government or regulator in propelling the liquidity of our capital markets, in reducing the cost of capital, in driving forward Europe's growth and in equipping European industry to survive and compete in the more challenging global markets we now face."
    And, then if you missed it, go to Radio 4 Today and listen to the interview with Damon Buffini of Permira.
    A more 'neo-liberal' champion it would be hard to find given his background and rise from the 'underclass' but still this does not prevent the TUC from launching an animal rights style campaign of personally targeted public vilification.
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GJTORY    February 23, 2007 9:32 AM
    It is worth pointing out, Mr Hutton, that in order for the these private equity partners to earn the £25m - £50m you write of, if they get a 20% share of profits as carry, they would have to generate returns of about 20% per year for those 5 years on £8bn.
    That is a pretty good return by anyone's standards. If they generate it, why should they not be paid?
    fortyniner - private equity funds plan on selling the 'family silver' back to you after 5 years - and in considerably better shape than when they bought it, for more money.
    But no one forces the buyers of those companies to buy them. They only do so if they think it is a good deal. Therefore private equity is incentivised to deliver healthy companies. Short termisim does not prevail in private equity. That is a myth peddled by unions.
    What is more, Koolio is right (IMO). Currently there are a lot of private equity funds with a lot of money to spend because it is easy to raise funds. With higher interest rates or a recession this will cease to be the case and private equity may go back to being the niche investment style that it used to be.
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eleuthera    February 23, 2007 9:46 AM
    Hutton lauds the public listed company as "a great Enlightenment gift to Western civilisation". The reason for his enthusiasm? "Being publicly scrutinised and held to account helps managers make better decisions."
    What he fails to understand is that, in relation to public companies, mechanisms of accountability have had to be developed because of the separation of ownership and control. Since ownership of the company rests with a diverse population of shareholders (often pension funds and insurance companies), whereas control rests with the board of directors, accountability mechanisms have been developed to allow the owners (shareholders) to keep an eye on what the directors are doing with their property (the company).
    Where a private equity firm purchases a company and takes it off the stock market, ownership and control are much more closely aligned. The population of shareholders is far less diverse, reduced to a population of one or two (or, in the unusual case of the Sainsbury's bid, four). This concentration of ownership means that formal accountability mechanisms (quarterly reports, regulatory announcements, etc.) become far less important; the owners are actively engaged in supervision and management of the business.
    What Hutton has overlooked is that these accountability mechanisms are not an end in themselves; they were designed as a solution to the problem of a diverse and therefore disenfranchised shareholder base. A privately owned company does not suffer this underlying problem, therefore the formal accountability Hutton desires is not relevant.
    A couple of weeks ago, Hutton wrote similar a peice in the Observer
http://www.guardian.co.uk/commentisfree/story/0,,2010611,00.html
which laughably sought to link the Sainsbury's bid with the Bernard Matthews contamination. He asserted (with absolutely no justification at all) that managers of companies owned by private equity firms would be more likely to turn a blind eye to breaches of health and safety laws.
    This analysis is at best lazy if not mendacious. It shows little understanding of the nature, purpose or function of private equity in the economy. Observer and Guardian have far better economic and business writers on their staff (Larry Elliot, William Keegan, Richard Wachman). Why do these papaers continue to publish such undistinguished thoughts from a writer who has repeatedly been found wanting? Oh yes, that seat on the Scott Trust....
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Accor    February 23, 2007 9:55 AM
    Notwithstanding the arguments above, Hutton is arguing that Britain is less innovative because it is tied down by short-termism and PE. If this were true, wouldn't the United States, which has a significantly more advanced PE culture, be saddled with the same problem? Under Hutton's reasoning, the US should be the least innovative and productive nation, rather than consistently one of the most. Could it be that Hutton's desire to make a political point has interfered with his analysis?
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Trilobyte    February 23, 2007 10:48 AM
    I'm inclined to agree that Private equity largely appears to be geared to cherry picking the profitable parts of a business for the short term benefit of a very few people, but I need convincing that public listed companies are paragons of probity and virtue just because they are accountable to the stockmarket and have to publish accounts-Enron, Parmalat, MCI, BAE anyone?
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Margin    February 23, 2007 11:01 AM
    It should also be pointed out that a factor in the rise of private equity is not the cheap debt they use to buy firms, but the fact that so many firms have failed to take up the advantage of cheap debt to improve their business.
    When debt is cheap public companies should be in a good position to take out debt to expand their business or invest in cost reducing technology. That might mean building new stores at home or abroad for a supermarket. Or it could mean installing new robotics equipment in a factory.
    The rise of private equity clearly suggests that not only are a lot of public listed firms being badly run, but that there are major opportunities for expansion out there being missed by UK firms.
    The UK’s biggest economic weakness is the low standard of managers in its firms. They lack ambition. They lack vision. And they lack the will to act.
    So if private equity is widening the influence of the very best managers in the world, that must surely help Britain?
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CityBoy2006    February 23, 2007 11:14 AM
    Some good posts debunking the frankly poor arguments put forward that somehow PE is a house of cards waiting to tumble and is somehow screwing the workers / pension funds / society etc as it does it.
    PE works by identifying underperforming companies and unlocking efficiencies that the incumbent management either lacked the vision to do, or as is more usually the case, were too constrained by governance, board inaction and lobbying by interest groups such as unions. PE often returns these companies to the market or sells them on to other PE groups (see the recently proposed NCP deal). If these companies had been gutted and were being returned to market as basket cases don’t you think that the institutional investors, PE buyers etc would realise this and not touch the stock?
    PE takes on risk (often the partners doing so personally) and speculate where others can’t. But it is a typical labour left response to a perceived problem, not if they can do it, why not other bright guys? Rather if the majority can’t do it lets stop those that can.
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Ieuan    February 23, 2007 11:28 AM
    eleuthera said: "accountability mechanisms are not an end in themselves; they were designed as a solution to the problem of a diverse and therefore disenfranchised shareholder base. A privately owned company does not suffer this underlying problem".
    Surely what Hutton is saying is that 'a diverse......shareholder base' is not a problem, in fact it is a benefit (as said also Maggie Thatcher, remember that we were 'all' going to be shareholders, owning British business as 'stakeholders'). Disenfranchisement is a problem, but needs other methods to solve it, scrapping the diverse shareholder base to get rid of the disenfranchisement really would be throwing the baby out with the bathwater.
    A couple of decades ago the behaviour of the private equity firms would have been simply called 'asset stripping' (as has been pointed out before). This was roundly condemned and steps were taken to prevent it. But, as always, those who make money out of money (rather than by doing anything productive) found a way to get round any restrictions and go on looting the work and creations of others for their own short term benefit.
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Cameron1    February 23, 2007 11:45 AM
    Since when did Private Equity become responsible for the following: "The one party that is not rewarded is the employees, who generally speaking suffer an erosion of job security and a loss of benefits."? Final salary pension schemes have become hen's teeth without the so-called malign influence of private equity. I agree with eleuthera that much of your analysis is recycled horseshit. Private equity has succeeded in transforming some of the UK's worst commercial laggards: Travelodge anyone? Don't forget that for Debenham's to be re-floated, institutions clearly wanted to buy it back which they did. Why? Because it was still worth buying and it floated successfully. The underperformance of many plc's is in fact due to reticent pension funds who have themselves become too bureaucratic and obsessed with computer models to take an active interest in their holdings and reprimand poor managers. I am afraid you're just a johnny come lately in joining the already overcrowded train of private equity bashers. PS if you wish to produce convincing analysis, you have to at least skim over both sides of the story to form an argument.
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recklessinspector    February 23, 2007 11:47 AM
    Will Hutton seems to be arguing for more responsibly monitored public companies as the solution to the alleged 'problem' of private equity. However, I would tend to look at things from the other way round: isn't private equity actually an imperfect and problematic solution to the long-standing accountability problems that continue to plague our listed company sector.
    The US Enron fiasco and dotcom bubble problems showed that, despite the expertise of institutional investors and stock analysts, such parties are always at an informational disadvantage relative to managerial 'insiders'. In any event, the inherent liquidity of public capital markets means that they are naturally limited as a source of long-term, large-scale or high-risk investment capital (as Mr Hutton himself argued in his excellent work 'The State We're In'). This no doubt partly explains the current popularity of public infrastructure businesses in the eyes of private equity funds, whose more concentrated ownership and incentive structures arguably make them better placed to support extensive investment projects carrying considerable economic and/or political risk.
    Furtheremore, despite the best intentions of policy-makers, recent regulatory initiatives such as the Combined Code on Corporate Governance have only served to burden UK listed company boardrooms with American-esque independence and sub-committee structures, without any obvious benefits in terms of either improved informational flows to shareholders or more responsible share pricing practices. So, whilst private equity is undoubtedly a highly problematic institution, let's not allow it to blinker us from the more fundamental accountability and incentive problems that it is (albeit indirectly) trying to solve.
    And, as a final matter, I fear that by making the wholesale assumption that private equity investors are a bunch of short-termist asset strippers, influential commentators from the left (such as Mr Hutton) risk being excluded a voice in the debate about the future of this highly complex investment phenomenon. For instance, regardless of one's opinion on the wider merits of private equity transactions, is it wise that BAA, the operator of seven British airports including Heathrow, should be burdened with multi-billion pound debt liabilities on top of a huge government-agreed investment schedule? More worryingly, what would happen if a major private equity-funded instution like BAA or Thames Water went bankrupt due to a change in the credit environment? Would the government sit back and allow this to happen, or would we, the taxpayers, be force to step in and act as a creditor of last resort?
    However, these are specific consequences of private equity infrastructure investments that need to be investigated urgently, and I feel that by simply denouncing the institution of private equity as a whole, we are only helping to mask these extremely serious but specific risks to Britain's economy and society as a whole. So, for the sake of Britain's future, the left urgently needs a voice in the private equity debate. And, by making broad-brush negative conclusions about what is both a highly valuable but also highly risky feature of our current corporate governance landscale, I feel that we only risk discrediting the case for considered regulatory reform.
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Gumbo    February 23, 2007 12:05 PM
    The article completely glosses over the fact that when these supposedly crippled companies are sold back onto the stock market, they attract perfectly willing investors to buy them. Implicit in this is that Hutton believes that somehow the entire market is being somehow mislead and that perhaps only he has spotted that the company is a shell now.
    Or on the other hand he could be talking rubbish. Companies relisted after PE firms have been owners actually outperform the market. Those buying these companies - ie the future shareholders - get a good deal. What's more the consumer gets a great deal too, because PE firms are relentless on cutting off dead wood and improving efficiency. In some cases they do heavily gear the company, but basically any reasonably solid non-cyclical company probably ought to be heavily geared anyway. What's more, PE firms are less reliant on borrowing to achieve their aims than they are on getting the right management in place and setting up good incentives.
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PeterHCT    February 23, 2007 12:11 PM
    Will Hutton - "The answer is obvious. Private equity cannot be outlawed; in any case it can do a good job....defend the public company"
    GJTORY - "it is easy to raise funds. With higher interest rates or a recession this will cease to be the case and private equity may go back to being the niche investment style that it used to be."
    Well, we are getting higher interest rates. Need to check the source, but read since 9/11 money supply grew at perhaps twice what might have been justified by growth+inflation, if that is the correct equation. So lots of cash sloshing about to be lent, hence silly property prices [1], availablity for privateering equity, etc.
    As far as I can follow it, the maxim nowadays is that interests rates are a tool for the Bank of England to control inflation. All jolly fine as far as that goes, but interest is basically a price. Market forces eventually dictate prices.
    There are mutterings that inflation is more than not the Governments quoted rate against which the Bank's performance is measured.
    There are doubts on the extent to which PFI has obscured HMG's borrowing position.
    Oh, wars and rumours of wars. Iran?
    What if - or indeed when - this lot comes unstuck? Not neatly and gradually, as economists like to forecast, but abruptly with an 'Oh, shit' factor as tends to happen in the imperfect real world??
    Just how robust are these private equity firms' calculations on debt and interest cover? One publicised disaster, and it might all look a bit silly.
    I'd like to think I'm being over-pessimistic, but I really can't convince myself that it's anything more than healthy scepticism.
    [1]FSA "We believe that, at this point in time and reflecting current market conditions, an average reduction of 40% in property sales price forms an appropriate reference point when assessing downturn LGD for mortgage portfolios."
    http://www.fsa.gov.uk/pubs/international/mortgage_LGD.pdf
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Agog    February 23, 2007 12:55 PM
    More British anti-business sentiment. What is this country going to fall back on when the finance industry goes into a spin?
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North2South    February 23, 2007 1:07 PM
    Despite economists' assumption that firms maximise profits, in reality many (most?) firms could operate more efficiently - they just need a kick up the backside to do so. Often, that comes through competition from a new entrant to the industry, or from a sudden and sharp rise in one of their costs (eg energy). In this case, it comes from the fact that low interest rates and sophisticated financial markets raise the threat of leveraged buy-outs and repackaging of financial agreements. If it increases the efficiency of production, it is no bad thing. And other posters are right to say it won't last forever.
    In my view, more of a concern is when profits are made by removing rights from the workforce. If private equity firms are able to make large amounts of cash by stripping workers of security and entitlements, that is an unhealthy situation for society, and adds to the perception that British capitalism is working wholly to the advantage of the wealthy and to the disadvantage of the poor. But the minimum wage and other measures to strengthen workers' rights is the way to tackle that - not to favour some kinds of ownership over others.
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duroi    February 23, 2007 1:10 PM
    May I request the Guardian to ensure that all columnists who write about economic issues have passed an Economics 101 exam?
    Even The Sun's agony aunt columnists would blush before writing such drivel as "balance the interests of today's shareholders with tomorrow's shareholders"
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Tzimisces    February 23, 2007 1:21 PM
    Good article- not sure about some of the comments.
    First of all, the point is not about the distinction between private and public limited companies. The point is about private equity companies' behaviour. This is why Tim Worstall's comment is irrelevant. The Scott Trust are not asset- strippers, private equity companies can be.
    Secondly, constructing fantasy pictures about how firms should behave (eleuthera, GJTORY) is bad economics. Managers who own a firm are just as capable of behaving badly if they are effectively in debt to banks or investors. Their incentives are skewed away from long term investment to short- term debt repayment. THis is what is actually happening. Economics has long ago moved away from fantastical, fully informed, hyperrational profit maximisation as an assumption.
    Finally, (GJTORY and eleuthera again), Will Hutton is taking a Social Welfare viewpoint of the economy. He thinks that these companies are behaving pathologically and are harming the economy and overall social welfare. Simply assuming that profit- making is always socially enhancing or that the divide between owners and managers is the only problem is ridiculous.
    Will Hutton has taken a perfectly sound position. Is there any serious criticism out there?
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rightwinggit    February 23, 2007 1:47 PM
    Why Doesn't WH just come out and say that the only people who should own the means of production are the workers.
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Noah88    February 23, 2007 1:50 PM
    If it's so easy, why doesn't the GMB and the TUC run their pension funds as a private equity scheme and earn these magnificent returns for their members?
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emillee    February 23, 2007 2:45 PM
    Will - If you want to have a go at private equity the place to start is those lovely PFI contracts that Brown donors like Sir Richard Cohen are mopping up. Fixed, 30 year investment terms (unheard of) plus tax-free profits.... Basically robbing taxpayer Peter to pay Labour donor Paul. If only I had a look-in, but I'm not a Labour donor so I haven't got a hope in hell.
    As for public companies being more moral and accountable, I just can't see it - if anything the profit motive is stronger because of the increased scrutiny. And there were plenty of excellent posts by other bloggers which you've obviously decided to ignore on that point.
    And the pensions disaster - I think we can partly thank Gordon for plundering the private pensions for that as well.
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chrish    February 23, 2007 2:48 PM
    The success of private equity companies in buying companies from the equity market, selling assets and increasing debt and them selling them back on to the market does raise questions, as to whether the equity market gives eenough emphasis on the quality of a company's earning and assets.
    I do accept that it is not that easy and the post above (eleuthera February 23, 2007 9:46 AM) does provide some reasons why private equity can make money, but the mispricing of companies by the equity market must play some part as well. Valuations are often to geared towards financial ratios such as PE and EV/Ebitda measures rather than more closely examining the company as a whole and hidden assets. The current trend towards sale and lease back of property and other assets is surely a case in point.
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melo    February 23, 2007 2:49 PM
    So when there are no British companies left and all the work has been outsourced to India and the private equity fund managers have gone to live in a more civilised country abroad (the majority of them being foreign anyway), what will the Government do then?
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mhenri   February 23, 2007 3:01 PM
    Interesting, and in places not unpersuasive argument. Pity then, that Mr Hutton feels compelled to 'strengthen' it by dragging an entirely irrelevant red herring - that of those wicked and wickedly stupid 'Chinese Communists' who like private equity capitalists don't understand the great benefits of the publicly-owned corporation - across our path. Was Mr Hutton afraid that a discussion of the workings of the City in London wouldn't stand on its own without the Chinese spectre ? He reminds of those politicians who find it necessary to drag the name of Hitler into every discussion of the policies of adversaries.... Henri    Offensive? Unsuitable? Email us

mhenri    February 23, 2007 3:04 PM
    Interesting, and in places not unpersuasive argument. Pity then, that Mr Hutton feels compelled to 'strengthen' it by dragging an entirely irrelevant red herring - that of those wicked and wickedly stupid 'Chinese Communists' who like private equity capitalists don't understand the great benefits of the publicly-owned corporation - across our path. Was Mr Hutton afraid that a discussion of the workings of the City in London wouldn't stand on its own without the Chinese spectre ? He reminds of those politicians who find it necessary to drag the name of Hitler into every discussion of the policies of adversaries.... Henri
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radished    February 23, 2007 3:40 PM
    "Observer and Guardian have far better economic and business writers on their staff (Larry Elliot, William Keegan, Richard Wachman)."
    Nothwithstanding the shoot the messenger criticism Hutton comes in for we should most definitely have more from Larry Eliot
    "Yet, according to Nesta, Britain still seems to be doing just fine and "has one of the strongest economies in Europe". This, says Nesta, is a paradox. If innovation is so important, how come the UK has been growing robustly? Its answer is simple: the data is misleading. "The resolution of this paradox lies in the way in which innovation has typically been measured."
    Well, that might be one explanation. Another might be that growth in Britain has been boosted by a substantial expansion of the public sector. Another might be that a colossal boom in the property market has allowed consumers to borrow against their main asset and so live beyond their means for a prolonged period.
    The lack of rigour in this analysis of Britain's recent macro-economic performance hardly inspires confidence. If the traditional measures of R&D do not really reflect the dynamism and creativity of the UK, why is that over the past 15 years Britain's trade balance has dived deeper and deeper into the red while those countries that score well on R&D and product innovation - Sweden and Finland, for example - run healthy trade surpluses? The suspicion that Nesta, a body funded by the national lottery, is scratching around for some good news only deepens when it lists examples of Britain's hidden innovation. These include creating the National Cycle Network, regulations and incentives to improve social housing, networking among NHS scientists that has resulted in new genetic tests, and "aggressive" tax planning.