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John Monks FT Editorial: Europe should not give in to casino capitalists

By John Monks, ETUC General Secretary



Six months ago, I was asked to give the Aneurin Bevan Memorial Lecture at the British House of Commons on the future of socialism. I replied that I would prefer to give the lecture on the challenge of the new capitalism.



Preparing the lecture gave me the chance to assess the formidable rise of financial capitalism and its provisional wing, the hedge funds and private equity - among the wildest animals in the jungle.



Since that lecture, the issue has exploded from the inside pages of the Financial Times Companies and Markets section on to the front pages of the tabloids. I cannot claim personal credit for any of that. But the developing activities of private equity in particular have caught the eye of the public. Union campaigns against Permira, the attempted (failed) takeover of J Sainsbury, the (successful) takeover of Boots and now of Chrysler have alerted us all to the scale of these operations. A year ago, how many of us knew much about them? How many of us knew that one in six employees in the British private sector would be working for private-equity owners?



In my lecture, I termed it the "new capitalism". In truth, private equity has been around a long time, and hedge funds since the 1980s. But what is new is its scale. Unimpeded free movement of capital throughout the EU and most of the world means it is flowing to the areas which earn the highest, quickest returns - and thus to the hedge funds and private equity.



Many politicians initially shared our concern, but in the face of an expert public relations and lobbying campaign, most of the governments of the industrialised world have given up, in fear of these businesses emigrating. So the Group of Eight finance ministers saw the need only to research what is going on in what both Jean-Claude Trichet, president of the European Central Bank, and Angela Merkel, German Chancellor, have termed the "black box" in financial markets. They are also, apparently, seeking some rather vague voluntary code of practice.



The Organisation for Economic Cooperation and Development is defending private equity, and the European Commission shows no sign of action either. Internal Market Commissioner Charlie McCreevy is championing hedge funds and opposing any regulation. The Confederation of British Industry, emboldened by government spinelessness, has even gone so far as to say that rather than eliminate the tax advantage of private equity, the same advantages should apply throughout the corporate sector. The result would be a further weakening of the tax base by reducing companies' share in it.



It is surprising that the US Congress is more interested in controlling these new financial structures, and the House of Representatives' Financial Services Committee is in pursuit of them. The German Government also seems ready to press the issue.



Private equity and hedge fund bosses themselves prefer to wonder what all the fuss is about. They claim that it is all a matter of being misunderstood, and that better public relations (in other words, spin) will put this right. Ms Merkel's deputy Franz Müntefering once described hedge funds as "locusts", and I am inclined to support his view.



Private equity firms aim to maximise profits for their investors - typically demanding a return of around 20 per cent within three to seven years - by buying up companies, stripping assets, and outsourcing services. Fund managers grow rich while (good) jobs are lost and established companies destroyed. As Paul Myners, the former chairman of Marks and Spencer, remarked: "The one party that is not rewarded is the employees, who generally suffer an erosion of job security and a loss of benefits."



Buy-outs are highly leveraged: debt financed, with the purchased firm becoming responsible for servicing those debts. As the degree of leverage climbs, so does the risk of spectacular failures, and the victims are not only workers but also potentially millions of pension fund investors.



What makes these debt-funded acquisitions so attractive is that in many countries the interest can be offset against tax, and this means public money is subsidising the profiteers.



Private equity groups are notoriously secretive, and once companies are bought up and taken off the stock market they no longer have the same reporting obligations to shareholders. Information and consultation with workers is one of the first casualties.



Over the past 15 years, nearly 700 private equity companies have started up in Britain and the US, and in the UK already employ some 2.8m workers, equivalent to 19 per cent of the private-sector workforce. But this is not solely an Anglo-Saxon phenomenon. The new capitalism is a symptom of globalisation, and requires a coordinated response. The new International Trade Union Confederation is launching a campaign to regulate hedge funds and private equity investment, and end the exploitation of tax breaks.



Perhaps we should stop according financial services a privileged place in the economy and giving overexposure to the locusts. Despite the pressures, the old capitalism is not dead. It needs help, not laissez-faire neglect. We should also examine how capital markets fund research and development and innovation, if indeed they do. And we should expose - and fiercely prosecute - corporate wrongdoing.



We must use the European dimension to the full. A region of 490 million people, with decent welfare states, public spending averaging around 40 per cent of GDP and the world's strongest unions can take on the casino capitalists, and promote respect for those who accomplish real things in improving our society.



As ever, the problems are clearer than the answers. But our future - the world's future - is too important to place in the hands of the new capitalists.



*John Monks is general secretary of the European Trade Union Federation and a former general secretary of the UK's Trades Union Congress.



Response: Private equity is fully regulated and benefits the pension funds of millions



Sir, The debate for and against private equity is not helped by rants such as John Monks' piece "Europe should not give in to casino capitalists" (Future of Europe, FT Special Report, June 4). His prejudice is evident from the outset in his reference to private equity and hedge funds as being "among the wildest animals in the jungle". He would do better to present cogent arguments based on evidence.



In suggesting that European Union governments have "given up" the fight against private equity and hedge funds, Mr Monks undermines his own case. Governments do not "give up" where there are sound arguments for action, and it is right and proper that any regulation or government action should be preceded by research to improve understanding and ascertain the impact of any action. The timing of this article is no surprise, coming as it does just when many leading international institutions have recently reviewed and come out in support of private equity. Just to set the record straight, private equity is fully regulated within each of the 27 European member states.



Private equity is indeed able to focus on much larger companies than in the past. However, that does not present the whole picture. The industry has been consistently investing in more than 7,000 companies a year for the past five years or more, and more than 90 per cent of these companies have fewer than 500 employees. Mr Monks does not seem to have noticed this.



Evidence of the benefits of private equity has long been publicly available. A recent compilation prepared at EVCA found 60 research reports that all point to the economic benefits of private equity. Private equity is here to stay and that is to the benefit of the competitiveness of Europe at all levels.



Many of the institutions invested in private equity funds producing the highest returns are pension funds and those returns so derided by Mr Monks benefit millions of ordinary people, including many, if not most, of the members of the Trades Union Congress. Would he rather pension funds flowed into lossmaking assets?



It is ironic that someone who criticises - unjustifiably - private equity practitioners' reliance on "spin" in his article uses precisely this method to put forward his own views.



Javier Echarri,

Secretary General, European Private Equity and Venture Capital Association,

B-1930 Brussels, Belgium"



Full story (Financial Times, Jun. 4): http://www.ft.com/cms/a/92d94ba6-24e4-11d8-81c6-08209b00dd01,id=070604000805,print=yes.html

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Full story (Financial Times, Jun. 7): http://www.ft.com/cms/s/0f475592-1493-11dc-88cb-000b5df10621,dwp_uuid=dafed534-3001-11da-ba9f-00000e2511c8,print=yes.htm

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