Hedge funds and Private Equity - PES

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in the sustainable development of the enterprise and innovation or human resource management
and training. Should interest rates rise there would be a risk that the debt could no longer be
serviced, bringing the target enterprise to the edge of bankruptcy.
Decent work and workers participation
It is often alleged in the business news that PE funds have triggered considerable corporate
growth and created many new jobs. However, this report’s experts are not aware of any serious
academic findings that support this position. The academic studies carried out are based on
scientifically assailable methods. Similarly, they do not in all cases separate organic growth from
cases of mergers or changes in the macro-economic environment in different periods of time.
The case studies in this report show some negative effects on jobs. The example of the German
company Grohe, is one. Even in a relatively good market situation and a stable company – for
example, KKR’s involvement in NCU Arrow Engines in Germany – PE funds immediately look
for job cuts. The focus of the new LBO managers is commonly on the core business, resulting
in the sale of all other saleable group asset.
In most of the case studies, PE investors have very quickly pursued the aim of reducing wage
costs. The more critical the position of the target enterprise because of high levels of debt, the
stronger are the attempts to cut wages. In the vast majority of existing examples, new owners
have withdrawn from social dialogue and in some cases failed to honour existing collective agreements.
Europe already faces growing skills and training shortages. The European Commission
has already highlighted certain areas where shortages of skills are of the most concern, notably
ICT. However, short-term approaches from equity funds threaten workers’ commitment to their
companies and their willingness to upgrade their company-specific skills.
Employee code determination is a form of rights in which employees have role in the management
of the company. In some EU member states employees have virtually no role at all of that
kind. In other member states, like Germany, code determination plays an important role. In the
cases of PE investments studied in Germany, the work councils interviewed consistently pointed
out that the atmosphere between them and the management had become frostier owing to the
‘financial’ investors moving in. It appears that a great many LBOs do not see themselves as longterm-oriented
strategic investors. As such, they have little interest in the relationship with
stakeholders such as employee representatives. We believe that their approach conflicts with
the idea that the possession of companies involves both rights and duties – including duties
towards employees.
Public sector and universal provision of services
Recently the LBO funds have entered some traditional, public utility industries providing basic
infrastructure services for the economy, in particularly airports and telecommunication. There is
much to suggest that infrastructure operators in Europe will be high priority targets for HFs and
PEs over the next few years. Private equity funds have increased their investments tenfold in
state-owned companies in recent years. From a PE point of view, infrastructure operation
takeovers are attractive due to the relatively small risks and the potential for enormous financial
gains. Most infrastructure managers, according to our case studies, seem likely to be receptive
to bids given their custodial management style, the diversity and relative passivity of the public
stock ownership, and the possibilities of large personal gains for the management.