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Speech by Philip J. Jennings at the World Economic Forum



2006 saw record merger activity. Over a quarter of all deals involved private equity.

Private equity companies are raising record funds. They are awarding themselves record bonuses.

I am not a private equity deal-making insider. I represent millions of workers – who see private equity as the new face of global capitalism. It has not always been good news and many of them have been impacted.

Private equity is fueling insecurity but is insensitive to this, to people, to communities. Private equity is bending rules in a way that will provoke a backlash.

My task today is to challenge private equity.

Based on my encounters with unions who have seen private equity deals in the raw, I want to identify five areas of concern with private equity funds.





1. You are not in these deals for the long term.

Your philosophy: buy it, strip it and flip it.

These deals are not about innovation but about buying at a good price and selling at a handsome profit.

It is no longer true that you hold onto an investment for several years to try and make the business more efficient and then cash out.

To many, it now looks like the priority is to pay yourselves hefty fees, hefty dividends and look to cash out when it suits you.

What your challengers are saying is that private equity is really about leveraged legal looting of a business.

You are an oligopolistic deal club that is about making a financial bet, not good strategic decision-making.

Yes, pension funds have made returns from their investment in you – but how sustainable is this?



2. You are crippling the companies you buy with too much debt.

Debt levels are dangerously and unprecedently high. As one commentator said, “There is no question that there is a big black cloud hanging over the industry.”

This results in exaggerated responses by the management of the companies concerned. Their priority: settle the debt. Your priority: take more debt to pay fees and dividends.

It is like a slasher movie. You slash jobs, health, pensions, working conditions. This in turn impacts communities, services and customers, for whom you care little. The “deal” takes precedence.

At a time when we are looking for companies to be more transparent, you are taking corporate governance underground. Does this mean you have abandoned any sense of broader responsibilities?



3. What happens when the so-called “goldilocks economy” changes?

Who owns the risk?

With these complicated financial instruments, what happens when the company fails? Are you still in the investment for the long term?

How loyal will you be when companies cannot meet their debt repayments?

We are in uncharted waters. What happens when you hit the reef?

This is going to come back and haunt markets when the economy sours.



4. Why can’t you level with the public?

I read that “you can’t understand private equity if you don’t understand the fees. It’s all about the fees – more specifically performance fees.”

You have found a new mechanism to become fabulously wealthy.

You are leaving ordinary working people – the middle classes – behind. Their earnings have stagnated, whilst yours are in the stratosphere.

To many, it looks like you have lost your moral compass.

You keep up pressure to fuel the deals, to fuel the fees and drive up your already bloated earnings.



5. You face extraordinary ethical concerns.

We are worried about market abuse and conflicts of interest. It was not a Global Union that penned the article in Business Week titled “Gluttons at the Gate” and which stated that private equity firms are using slick new tricks to gorge on corporate assets.

You tell the world you are getting around regulation, avoiding good corporate governance practices. Well this raises suspicions everywhere. This arrogant rejection of corporate social responsibility is encouraging regulators everywhere to take a closer look.

Can you allay our worries about collusion between private equity funds in fixing a deal?

We are concerned about conflicts of interest between the private equity fund, the investment bank and the corporate prey in question. It all looks like rich man’s incest.

Private equity is the source of fees to investment banks; investment banks are the source of capital to private equity, the same investment bank is advising the company in question. The possibilities of a conflict of interest are high. Who cares about the original shareholders?

Can you put your hands on your heart and say there is no danger of market abuse between managers in the MBO and their shareholders?

The managers have a fiduciary duty to shareholders first of all. Yet they are approached by private equity and become the sponsors of the deal.

This looks like organized looting, not enlightened business practices.

Some commentators have suggested that MBOs in principle are a fundamental conflict of interest and probably should be banned or at least made more transparent.

Should the managers involved not be obliged to make their strategies publicly available?

Don’t you think that regulators should ban MBOs?

How concerned are you that the world is waking up to the world of private equity?

How concerned are you about the Department of Justice enquiry, SEC concerns, and that class action lawyers smell blood in the water?



In conclusion, a Goldman Sachs’ spokesperson observed that many of the deals were “borderline stupid”.

A senior banker observed that “it will all end in tears”.

In time, you will be faced by what one central banker referred to as “less forgiving circumstances”.

This reminds me of Mr. Greenspan’s observation in 1996 of “irrational exuberance”. Three years later the dot-com bust arrived.

Are we three years or less from disaster?

With market abuse, conflicts of interest, quick flips, high leverage and extraordinary riches being earned – Houston, we have a problem!

And to end at the beginning, it is my members who pay contributions to pension funds who fuel the private equity fire.

Do we have the potential for systemic risk? And if the house does go up in flames, then it will be the workers who work for their portfolio companies and the pension funds who have provided the capital who end up paying the price.