JERMAIN DEFOE Thinking On His Feet - Mayfair Times

32 The Allied Irish Bank (GB)/Mayfair Times Business Forum
33
business
ARE PRIVATE EQUITY COMPANIES
“CASINO CAPITALISTS”, AS SOME
TRADE UNIONISTS CLAIM, OR
ARE THEY THE SECRET TO
UNLOCKING VALUE IN BRITAIN’S
TIRED AND FLABBY PUBLIC
COMPANIES AS WELL AS A
POTENTIAL NEW SOURCE OF
FINANCE FOR THE PUBLIC
SECTOR?
AT THE FOURTH ALLIED IRISH
BANK (GB)/MAYFAIR TIMES
BUSINESS LUNCH AT THE
MILLENNIUM HOTEL IN
GROSVENOR SQUARE, EXPERTS
FROM THE PRIVATE EQUITY
SECTOR DEBATED THE ISSUES
WITH A GROUP OF INVITED
GUESTS AS SOME OF BRITAIN’S
BEST-KNOWN COMPANIES –
INCLUDING BOOTS AND
SAINSBURY – EMERGED AS
POTENTIAL TAKEOVER TARGETS
A
moving
target
The term PRIVATE EQUITY relates to
private equity funds: tax-efficient
investment vehicles with a limited life,
most often of 10 years. Necessarily, then,
they are buy-to-sell investors usually
employing high-powered expert
managers who buy businesses, manage
them hard and sell them on. A fund’s
managers make their money in two ways:
they charge investors a management fee,
and take a percentage of net profits on
future sales. Private equity funds have
been around for a long time. KKR, the
company involved in the Alliance Boots
bid, was formed 30 years ago.
Businesses that have been owned, or are
still owned, by private equity funds include
Google, New Look, Toys R Us and
Debenhams. Critics have accused firms of
borrowing too much and saddling
businesses with debt as a result. Unions
have accused them of asset stripping.
Even the Financial Services Authority has
observed that a large number of publicly
quoted companies slipping into private
hands could reduce capital market
efficiency. Supporters argue that listed
companies have become over-cautious
and over-scrutinised in the wake of the
dot.com collapse, and that private equity
can shake value out of timidly managed
businesses.
Jennifer Harris pulled no punches in her introduction to the
private equity debate.
“There doesn’t seem to be a day that passes without either
the media or the unions launching a fresh assault on the private
equity industry,” she said. “Private equity doesn’t seem very
private any more, and the unions would argue that it’s not
particularly equitable either.
“So, my first question to you would be: who is telling the
truth? Are you really just about buying viable businesses and
hollowing them out to satisfy your greed, or are you about
bringing dynamic business models into play for the betterment of
British society as a whole?”
Bryan Vaniman suggested the very fact that private equity was
private – and therefore not exposed to public scrutiny – had led
to a whole series of misconceptions about what private equity did
and the value it helps create.
The truth is that, whether a private equity company provides
venture capital to a business or aims for a high-profile buy-out, its
job is to create value. “If we haven’t established that platform for
future growth, we’re not going to be able to generate returns for
ourselves. It’s a message that just needs to be delivered more
effectively.”
Jonathan Lass said that much of the current media coverage
is ill-informed. Asked whether the media coverage mattered,
Vaniman said he didn’t lose sleep over it. Media coverage, fuelled
by inaccurate preconceptions, tended to focus on the short term.
But in the real world it may be necessary to deal with those
short-term issues that are inhibiting growth in order to create a
business that is more profitable, a business that can invest and
grow on its own account.
Julian Wheatland suggested that private equity was actually
addressing an inefficiency in the public markets. Jonathan Lass
had pointed out that private companies are not under the same
pressure to deliver results on a quarterly or half-yearly basis that
public companies are, and Wheatland observed that “sometimes
it’s hard for public companies to drive efficiency in the business,
which is the basis of capitalism”.
The question that was being lost in the media clamour, he
said, was this: who is the value being created for?
“The value is being created – in exactly the same way as it is
in the public markets – for the pension funds and the insurance
companies, which are investing in these funds,” he said. “And,
yes, there are a few individuals managing [those funds] that are
doing nicely, but there are a lot of pension funds that are doing
very nicely as well and without an incentive nobody’s going to
bother. It’s simply not going to be worthwhile.”
Lass observed that there are trade unions whose own
pension funds have invested in private equity companies to
enhance returns. “Those sort of facts need to get out into the
public domain,” he said. “I think that’s very important.”