Hedge funds and Private Equity - PES

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5. Our immediate proposals
In the past two decades we have seen an increasing uncoupling of the well-known relationship
between wage increases and productivity. Now productivity continues to grow without wages
keeping pace. This is an expression of the changes connected to the new developments on the
financial markets.
The increased subordination of real economic investments – to promote New Social Europe –
to the global financial markets, is underlining the need for proper regulation.
Even more fundamentally, the efforts of the European Union to strengthen the role of the social
partners is weakened through the shifting coalition of investors whose only reference is the financial
markets. Many leveraged buy-outs imply that there is no longer any interest in improvements
in production or services, increased sustainable productivity capacity, innovation and research,
long-term viability of markets, consumer needs etc. On the contrary: every investment is viewed
as a portfolio of financial assets, not a place of employment.
This situation has been developing slowly but steadily over decades, with private equity playing
an increasing role, certainly in Europe. Into this environment have now been injected enormous
funds offering rates of return unthinkable only recently. The buyout funds have grown so big and
so active that virtually all companies, no matter how big themselves, are effectively functioning in
a pre-bid environment. This not only means that they respond to the real threat of an actual
takeover bid by typically resorting to mass layoffs, wage reductions, extensions of working hours,
casualisation etc. to show shareholders that they are serious about “delivering value” but also
means that there is constant pressure on all firms to deliver greater profits, while investing less
in the future of the companies through expansion of the capital stock. The trend is most visible
in North America, but Europe follows the same curve, as a result of which the social model and
the financing of the long-term Lisbon-investments (ref. Lisbon-European Council 2000) are under
pressure. The drain on resources away from productive investment to reward purely financial
investors is one of the key elements in severing the link between wages, profits and productivity
and fostering the growth of social inequality.
Viewed from the standpoint of the “financialisation” of the economy as a whole, and the regulation
of “alternative investments” in particular, the goal of regulation should be to reverse this levy,
discourage the rising distribution of profits to purely financial actors and encourage long-term
investments which contribute to the growth and development of sustainable employment.
Private equity is acting as a financial magnet taking investment capital in exactly the opposite
direction. As such, it should clearly be identified as a menace to the European social model. This
analysis is borne out by the case studies and the analysis in Part II, which is a devastating portrait
of the impact of private equity and illustrates the ways in which private equity smashes the
wages/productivity link.
EU-wide regulation of alternative investment should orient itself towards balancing the in principle
desired financing of enterprises, in whatever form, between the three poles of free capital movement
– 1)investor protection and freedom to choose and pursue a career, 2) corporate governance
and 3) society’s interest in maintaining or increasing the value of enterprises over the long term.
Undesirable investment strategy, which aims at short-term leveraging of the investors’ own capital
as well as that of enterprises, should be hindered by European regulation.. So should very shortterm
investment with rapid ‘exit’, or the avoidance of standards of investor protection or which result