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Private equity funds hold investments that are not listed on a public stock market. PE funds attract investors like pension funds, but also borrow high-risk money (junk-rated loans) to buy out companies, loading them with debt. They usually control management and, on acquiring a company, often bring in a new team of managers. During the few years they keep a company, PE funds seek to maximise profits and to pump up the company’s value for resale, merger or liquidation – often with scant regard for labour rights, jobs and conditions. Without trade union pressure, even a strong CSR culture is unlikely to survive.



The United States Congress is to hold hearings on the private equity ownership of nursing homes. The announcement came on 23 October, the final day of a nursing home workers’ and older people’s week-long caravan, in which hundreds of workers and their supporters travelled from the Ohio headquarters of HCR Manor Care, the US’s largest nursing home chain, to the Washington, DC headquarters of global buyout giant Carlyle Group. Carlyle is to buy the nursing home chain later this year in the largest ever private equity takeover in nursing home services. SEIU, the 1.9 million-member services union, is organising the campaign, which culminated in a rally in Washington, DC. Earlier this month, SEIU sent letters to four Congressional committees urging them to hold hearings, consider new legislative reforms related to private equity ownership of nursing homes, and otherwise hold private equity firms accountable for the care, staffing, and conditions at nursing homes they own. "The buyout industry has quietly grown in power and influence without having to answer questions about its impact on people’s lives," wrote SEIU Executive Vice President Gerry Hudson. Political concerns are also growing on the state level, where the Carlyle Group is seeking approval from regulators in order to complete its $6.3 billion Manor Care deal. For more info and updates on this campaign, visit www.seiu.org.



India is experiencing a surge in private equity investment. PE funds have invested $8.9 billion in India in the year to end September, according to Venture Intelligence, an Indian research service. And the trend has been upwards, with $3.5 billion in the third quarter, up from $3.2 billion in the second and $2.2 billion in the first quarter. The total $8.9 billion invested in the first three quarters of 2007 already exceeds the $7.5 billion invested during the whole of 2006. In the second quarter, the IT and IT-enabled services industry remained the favourite among PE investors, with 25 deals. The banking and financial services industry came second, with 15 deals. Other industries that attracted significant PE interest during the quarter included healthcare and life sciences, engineering and construction, and shipping and logistics. Moving from money invested to funds raised, PE firms in India are expected to receive $13.5 billion during 2007, said Evalueserve in an 11 October press release. Evalueserve, a multinational research service, noted that the figure placed India among the top seven fund-raising countries in the world and that the annual figure could rise to almost $20 billion in 2010. Evalueserve reports that, beyond tech-intensive sectors that drove much of the earlier investment, PE firms are now investing in areas such as financial services, healthcare, retail, tourism and entertainment. Evalueserve has published “An Indispensable Guide to Equity Investment in India” and cautions that a solid understanding of the unique Indian market and some behavioural adjustments will be required from players who are new to India. According to research by Thomson Financial, over the past 15 years, the largest PE investors have been New York-based Warburg Pincus and Blackstone, Washington DC-based Carlyle, and Mumbai-based ICICI Venture Funds. Big investments have recently been made also by Dubai International Capital, the international investment arm of government-owned Dubai Holdings, and by Temasek, a fund owned by the government of Singapore. Among the causes of the upsurge in PE interest in India: the current economic boom, especially in the real estate market; the actual and planned liberalisation of sectors such as finance and retail; greater openness among the younger generation of family business owners; heavy government infrastructure investment, including public-private partnerships and the introduction of user fees (toll roads); the small amounts needed per investment, given lower Indian labour costs. An editorial in The Economic Times (10 Oct ’07) notes that, in contrast to other countries, PE investment has not attracted controversy and opposition. It attributes greater Indian acceptance to a practice of leaving incumbent management in control, as PE funds have tended to take minority stakes in companies instead of buying them out. Also, PE funds have not been involved in job cuts and restructuring, but rather in providing growth capital in sectors where jobs are being created. It remains to be seen whether this benign climate continues, as in some recent deals PE funds, including Blackstone, have assumed management control, and PE investment is entering areas that may experience labour and social disruption, such as financial and distribution services. The Reserve Bank of India appears to believe that the strong inflow of private equity could contribute to financial volatility. Shocks that would be independent of economic fundamentals cannot be ruled out, warned its Governor. Evalueserve Press Release, 11 Oct ’07; Thomson Financial via abcmoney, 16 Oct ’07; Sify.com, 12 Oct ’07; The Economic Times, 3 & 10 Oct ’07; Y V Reddy, Governor Reserve Bank of India, 8 Oct ’07.



UK finance minister Alistair Darling has introduced tax measures “to ensure that those working in private equity pay a fairer share”. In his pre-budget report, he said: “The scale of private equity buy-outs has increased over recent years, although recent sharp moves in credit markets may alter the frequency of large-scale deals in the short term.” Unions and others have denounced a system in which PE executives become multi-millionaires by buying companies using debt and investors' money, and selling the companies at a profit a few years later. Executives pay income tax on their basic pay and bonuses. But most of their income comes from the 20% slice of profit they typically make from selling a company. This is taxed as a capital gain at the much lower rate of 10%, as long as they have held the company for two years. From April, this profit will be taxed at 18% in “a system that is more sustainable, straightforward for taxpayers and internationally competitive”. Some unions have criticised the new rate as still being much too low, and possible unintended adverse consequences for other businesses have come under attack. In a separate but related move, Mr Darling announced measures to address loopholes in the taxation of non-domiciles. The non-domicile rule allows some UK residents to cite some other country as their real domicile and then pay UK tax on their earnings in the rest of the world only if they "remit" the money to the UK. The rule is used by some of the country’s wealthiest people: Greek shipping magnates, Saudi princes, American corporate heirs, Mohamed Al Fayed, the controversial owner of Harrods, Lakshmi Mittal, the Indian steel magnate and an assortment of foreign business executives. The Government will also continue to monitor rules concerning the tax deduction of interest paid on debt incurred in highly leveraged private equity transactions. Moreover, “The Government remains interested in wider aspects of the ways in which those involved in the private equity and other industries are rewarded.” On transparency, Mr Darling’s report welcomes the PE industry’s intention to develop a voluntary code. “The Government looks forward to the outcome of this work and to the development of a code that has strong industry buy-in; that results in meaningful disclosure of a breadth and depth to carry credibility with wider stakeholders, especially in relation to employee impacts; and that sets in place an effective monitoring framework with sufficient independence to command acceptance.” TUC General Secretary, Brendan Barber, said: “We also warmly welcome the Chancellor's recognition of the tax loopholes enjoyed by the super-rich through both private equity and non-dom status - an issue that unions have put firmly on the agenda. But the Chancellor has only started the process of closing the loopholes today.” Chancellor of the Exchequer, Pre-Budget Report and Comprehensive Spending Review, Oct ’07; TUC, 9 Oct ’07; BBC NEWS, 9 Oct ’07; Global Pensions, 10 Oct ’07; The Guardian, 11 April 2002.



The US Senate won't act this year on legislation that would have increased taxes on the earnings of private-equity and hedge-fund managers, according to 9-10 October news reports. Senate Majority Leader Harry Reid, Democrat-Nevada, told members of the industry and others that a packed legislative calendar made it unlikely the Senate would have time to take up the legislation. A fund manager usually receives a management fee equal to 2% of a fund's assets plus 20% of a fund's profits. The management fee is taxed as ordinary income. But the profit share, known as "carried interest," is taxed at the capital gains rate of 15%. That is less than half the 35% top rate paid on ordinary income. A leading legislative proposal, which originated in the House of Representatives, would tax carried interest as ordinary income. But “with little hope for Senate concurrence, a House-passed measure on the subject would have only symbolic value,” says a Washington Post reporter. Private-equity firms have engaged in a massive lobbying campaign designed to head off legislation that would change the tax treatment. They have spent at least $6.5 million this year on lobbying efforts, a big increase over previous years, according to the Center for Responsive Politics, as reported by the Los Angeles Times. Bush administration officials have indicated that they would oppose a tax increase on carried interest. Democratic presidential candidates, including Senators Hillary Rodham Clinton and Barack Obama, have said that super-rich investors should not enjoy lower tax rates than ordinary workers. In the UK, the government has decided to increase capital gains tax to 18%, just three percentage points above the current US rate (see story above). MarketWatch, 9 Oct ’07; washingtonpost.com, 9 Oct ’07; latimes.com, 10 Oct ’07.



Total world private equity fundraising is at a two-year low, according to UK-based Private Equity Intelligence. Private equity fundraising in the three months to end September slowed to 136 funds raising $91 billion, the lowest amount in two years. That third quarter figure, while still large, is nearly 50% below the $177 billion raised in the record-breaking second quarter. The number of funds closing (completing fundraising) dropped about 30%, indicating PE funds are having a harder time reaching their goals. It’s a situation where more and more private equity firms are fighting for less investors’ money. The bright spot in the new report is the success of venture funds, which saw aggregate commitments increase 56% over the previous quarter to $19.2 billion through 41 funds. About one-third of the total amount raised in the third quarter was for buyouts, which nevertheless experienced the biggest drop in capital commitments, to less than half what they raised in the second quarter. More than half the $31 billion raised by 37 buyout funds was for European-focused funds, with 45% for the US and 3% for the rest of the world. The $19.5 billion that 26 real estate funds raised is almost a 50% drop from the second quarter. Four distressed debt and special situations funds raised a combined $6.6 billion in the third quarter. Observers said the third quarter figures confirmed that private equity firms were likely to struggle to raise as much money as planned in the coming months. Institutional Investor, 22 Oct ’07; New York Times, 23 Oct ’07; Globe and Mail, 20 Oct ’07; Reuters, 20 Oct ’07.



2007 is expected to be a record year in private equity fundraising for emerging markets. 107 private equity funds focused on investing in the emerging markets of Asia, Europe, Latin America, the Middle East and Africa raised $21.5 billion in capital commitments in the first half of 2007, reported the Emerging Markets Private Equity Association (EMPEA) on 19 September. That compares well to the $33.2 billion raised by 162 funds during the whole of 2006. Washington DC-based EMPEA (http://www.empea.net) is a global industry association that promotes “a more favorable climate for private equity investing in emerging markets”. EMPEA’s 167 members collectively hold $400 billion in assets under management. “The pace of fundraising in the first six months of this year is evidence that investor interest in these markets is still growing,” said Sarah Alexander, EMPEA’s president. “These half-year figures are impressive, and we expect 2007 to be another record-breaking year for EM PE fundraising.” EMPEA estimated that at least an additional $7.7 billion was raised for EM PE funds in July and August, bringing the total to over $29 billion by mid-September. A global squeeze on credit hadn't appeared to dent fund-raising for emerging markets funds, said Jennifer Choi, director of research at EMPEA. Funds focused on Asia raised $11.6 billion from January to June, over half the total. Latin American & Caribbean funds raised $1.4 billion in the first six months of 2007. With the addition of two $1 billion-plus funds completed in July, funds in the region were poised to match the fundraising of the 1990s. Funds focused on the Sub-Saharan African region raised $592 million through June 2007, and there were two large closes (completions) by pan-African funds in July—one for $1.3 billion and another for $523 million. Russia and CIS funds accounted for $2.1 billion of the total $3.6 billion fundraising commitments for the Central and Eastern European region in the first half of 2007. EMPEA press release, 19 Sep ‘07; Reuters, 19 Sep ‘07.