Hedge funds and Private Equity - PES

Private equity – especially in the form of LBO – takes more and more clearly the form of a
rearrangement of claims, which allow value capture and value extraction for a relatively small
number of fund managers. The LBO industry emphasises the social benefits of private equity as
well as the returns to investors from increasing leverage. But the real effects, as seen in many
case studies, are rather helping to “normalise” a culture of value extractions (see study by
CRESC, the University of Manchester, February 2007 that increasingly views companies as
bundles of assets and liabilities to be traded.
The small elite of LBO managers are guaranteed extremely high fees and moreover they will be
taken out not as income, but as capital gains. This has huge tax advantages when the rate of
income tax is high as in the UK – 40%. The Financial Times reports rumours that leading British
LBO partners pay taxes of no more than 4-5% on multi-million incomes.
These facts threaten coherence and co-responsibility among stakeholders and social partners in
our societies. Given these extremely high fees, how can we seriously ask employees and wage
earners to show responsibility for society as a whole during trade union are negotiations?
Fees and performance remuneration could take up to 50% of the cash-flow of a target company.
This is giving rise to extremely high earnings. partners normally take 20% of the total yields (the
so-called “carry”). One of the leading managers within the PE industry, Nicolas Ferguson, estimates
that the PE managers in the period 1996-2006 have altogether picked up a yield/fee of
around $430 bn.
This is creating new trends of inequality in our societies and threatening the coherence and coresponsibility.
No one can defend such huge yields to such a small group.
It creates a moral dilemma: how can we argue for coherence and co-responsibility among all
groups in our social Europe when fund mangers can make more money in an afternoon than
ordinary workers can earn in several years?
This question is doubly important because it is cohesion and co-responsibility form the glue
keeping together our societies in the global economy.
Part II – Six concerns about our European social market economy
147