Hedge funds and Private Equity - PES

4. Conclusion: New Social Europe and the financial
markets – increasing contradictions!
In summarising our analyses in Part I, it is essential to understand that “the alternative investment
industry” in the financial markets is not a phenomenon of marginal importance or just
another time-limited “bubble” of interests, which will go away sooner or later.
The HF and PE funds are dominant and fast growing actors in the European and global capital
markets.
Until recently, PE and HF only had real influence in the UK and Irish financial markets, as well as
Luxembourg and Lichtenstein. This has changed fundamentally in the past ten years. The direction
is clear. The big international funds, especially those based in the USA and the UK, have
now really engaged in Europe, acquiring an increasing number of ever larger companies and
projects on our continent.
The figures speak for themselves: in the period 2002-2005 the PE funds invested 165 billion
Euros in companies in Europe. In the single year of 2006, the target volume was 270 bn Euros.
In 2007 the PE industry is planning for 580 take-overs worth of 380 bn Euros. Given that the
average leverage compared to acquisition price is 75%, we can estimate the total volume of
potential buy-out capacity at around 1,500 bn Euros.
All the nuances of our analysis in part I suggest that the trends and developments of PE and HF
have very clear common characteristics and implications.
The rapid growth of the hedge fund industry is also raising important questions about systemic
risks ie. the risk of destabilisation of the financial markets, market abuse, i.e. potential market
price manipulation and insider trading, and misbehaviour in shareholder activism.
Hedge funds have shown impressive growth to become a very important alternative investment
instrument – for good and, unfortunately, also for bad – not only the risk of their destabilising the
financial markets but also that its interests conflict with corporate business’s need for long-term
investment in the global economic competition. The international character of hedge fund
industry and its de facto unregulated activities, challenge our societies and authorities.
The possible implications of hedge funds for financial stability are not only a problem for the
hedge funds. If its risks are realised the consequences will be dire for corporate industries,
employment, and other investment, well as pensioners’ savings.
The PE industry, especially LBO funds, poses a number of serious questions to Europeans, their
real economies and national policy makers. LBO activities have worrying implications for job
creation, companies’ investments in training and education of the labour force, innovation, and
corporate governance. They also have disturbing implications for public finances, the evolution
of stock markets and protection of wage earners money in pension funds. Of equal concern are
extreme management fees and the LBOs’ aggression towards target managements.
All in all, there is a straightforward argument for reducing the risks and negative implications
associated with the increasing role of HF and PE funds in the financial system. There has always
been a good case for regulating banks and investment banks and other financial actors – why
should hedge funds and private equity be any exception?
Part I – Hedge funds and private equity funds – how they work
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