News

How buyout barons get billions —

Private Equity: Bigger and bigger

More and more key employers around the world are getting bought up and sold off by a new kind of firm that takes pride in its lack of transparency, ability to rack up debt, and skill at exploiting the tax code.

Private equity firms, or leveraged buyout firms, use investment money from university endowments, wealthy individuals, and pension funds to buy public companies and take them private, taking them off the stock market and away from public scrutiny.

The volume of private equity deals has grown 600% in the last five years. In 2006, private equity funds spent US$725 billion buying out companies. Now, they can potentially mobilize more than US$2 trillion – enough to buy McDonalds 38 times over.

These private equity companies have gained huge power while avoiding public attention and accountability. It’s time for that to change.

KKR, for example, is one of the oldest and biggest private equity firms, and owns well-known companies such as Toys R Us, Nielsen, and Alliance Boots. KKR-owned companies operate from Beijing to Johannesburg, from Caracas to Bangkok. Through its portfolio companies, KKR is effectively the second largest U.S.-based private employer in the world after Wal-Mart.



Bad decisions for workers, communities, and consumers

Using vast amounts of debt, private equity firms can produce enormous returns on deals. They buy companies with the express purpose of selling them again, making as much profit as quickly as they can while they own them. This can – and often does – mean selling off assets or laying off workers. This leads to decisions that are bad for workers, communities, and even consumers.

For example, when a coalition of PE investors, including KKR, took over German telecom company Tenovis in 2000, they reportedly laid off 2500 of the 8000 workers – and forced some workers to accept a 12.5% paycut in exchange for the right to keep working.

After KKR and another PE consortium acquired the Dutch company Nielsen, the company announced layoffs of nearly one in 10 of employees. – and, according to financial statements, the company froze its U.S. defined benefit pension plan so U.S. employees stopped accruing benefits.

Huge profits—low taxes

Meanwhile, their top executives extract huge profts from deals. The personal fortune of Henry Kravis of KKR more than doubled in one year – from $2.6 billion in 2006 to $5.5 billion in 2007.

Much of the money that goes into the pockets of buyout billionaires like Henry Kravis is money that could be used by the government to build roads and pay teachers – if it weren’t for loopholes in the tax code. Private equity companies work by taking out huge amounts of debt in order to buy companies. In the U.S. and in many other countries, they can deduct their debt servicing costs from their taxes. This means that companies that previously paid significant taxes suddenly stop when they are acquired by private equity. This costs governments around the world billions of dollars annually. Meanwhile, due to tax loopholes in the U.S. and some other countries, individuals like Kravis pay lower tax rates on their huge profits than many teachers or nurses pay.

In some countries, like the UK, Germany, and Denmark, unions and other organizations have started working to make sure that private equity companies pay their fair share.



What can we do?

According to the Wall Street Journal, even Wall Street’s leading legal minds say that the buyout boom was fueled fundamentally by “executive greed.” (WSJ, 4/1/07). More and more observers are calling attention to the obscene wealth and the total lack of transparency of private equity funds. The billionaires are getting to make all decisions – and they’re shifting money into their own bank accounts and away from the public good, workers, and communities. Unions, community organizations, environmentalists, consumer groups, and others are coming together to let private equity companies know that they can no longer escape the scrutiny they deserve. SEIU and our partners around the world are calling on KKR and on the other private equity buyout billionaires to adopt and put into practice the following basic principles:

The buyout industry should play by the same set of rules as everyone else.

Workers should have a voice in the deals and benefit from their outcome.

Community stakeholders should have a voice in the deals and benefit from their outcome.



Join us by taking action on july 17!

On July 17, 2008, workers and activists around the world will raise their voices together for change.

Go to www.july17action.org for more information on how to participate in your city.