Hedge funds and Private Equity - PES

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7. The need for change to ensure a sustainable
New Social Europe
Companies are becoming crucial reaching our Lisbon goal of a European knowledge-economy
(decided by the European Council in year 2000), and the new step forward in Europe’s tackling
of energy and climate change (as decided in by the European Council in March 2007). We all
have a fundamental responsibility to contribute – to ensure that the enormous cashflows in our
financial markets are allocated in an optimal way to assure a stable financing of the long-term
investment in companies. But there seems to be a clash of interests – especially in relation to the
LBOs and HF short-term ambitions
The economic viability of private companies is affected by private equity- and hedge fund
ownership in several aspects. In many cases transparency is lacking and public information is
lost, especially when a private equity fund de-lists the target company from the stock exchange.
This lost information is needed both for the market to function optimally and for society as a
whole. Growth is another area where private equity ownership doesn’t seem to have any particular
positive effect on the target company, contrary to the claim of the industry. As described,
numerous factors like general macro economic conditions and the economic situation of the
company before the take-over influence the future growth of a company. At present we are not
aware of any serious study showing that private equity ownership alone improves the growth of
the target company. Finally long-term investments are greatly in jeopardy, when the strategy of
most LBOs is to withdraw huge amount of liquidity from the company. Through this exercise the
company becomes deeply indebted, and from this point, it is unlikely that the company will make
long-term investment – both because LBO operates with a short-term strategy and because the
target company can no longer afford it.
The social living and working conditions in terms of employment levels, wages and training is
also very much affected by private equity ownership. As already described it is very difficult to
isolate the factor that influences growth in a company. This problem also applies to the factor
that triggers job creation. Some studies show that private equity ownership results in job
creation. But so far no serious evidence has been shown to confirm this statement. Several case
studies in this report show both positive and negative effects on jobs. More clearly defined,
though, is the assessment of the working conditions. PE investors very often quickly begin to
downgrade working conditions after entry in order to achieve greater productivity and efficiency.
In several of the case studies, new owners have withdrawn from social dialogue and even, in
some instances, failed to respect existing collective agreements. Alternative investment funds
have no or little experience in dealing with organised labour unions or employee representatives.
They often fail to live up to even the most basic requirements on information and consultation
and restructuring.
The public sector and the universal provision of services of general interest has been dealt
with in a very specific way here by focusing on specific types of companies: those which provide
services of general interest. These kinds of services are crucial for our societies and not just for
the single consumer and this is why most of these service providers were historically stateowned.
However during the last 10-15 years many companies have been privatised partly or
wholly to stimulate competition in national markets and to develop European common markets.
In recent years the private equity funds have entered some traditional public utility industries,
because private equity funds find their characteristics, like significant stable cash flows and a
significant degree of monopoly power in the primary market(s), very attractive. In the sector of
services of general interest the effects of private equity fund buyouts and restructuring on infrastructure
operators are magnified. The most severe impact is on the capability to efficiently