Private Equity crash on the horizon?
UNI Global Union General Secretary Philip Jennings gave his warning two weeks ago at the SuperReturn conference in Berlin, the largest global gathering of private equity companies.
2013 opened with two mega private equity deals which captured the headlines concerning Heinz and Dell. The buyouts were valued at over $25 billion dollars each, buyouts on this scale have not been seen since the boom period 2005-2007.
Today the private equity financial clout is $3 trillion dollars. $2 trillion is the value of companies in ownership with $1 trillion ready to invest.
UNI Global Union has been critical of the private equity model and in his speech to SuperReturn Jennings outlined 10 fault-lines to temper the hubris that tends to accompany the private equity model. (Read Jenning's full speech by clicking on the Related Files tab at top of page)
The chickens are coming home to roost, he said. The buyout boom was fuelled by cheap bank debt. That debt was piled on the bought out companies who are now faced with a debt mountain at a time of economic recession. 72% of the deals made in the fevered boom of 2005-2007 are yet to be exited. In Europe thousands of businesses and millions of jobs are at stake.
The Bank of England warning should be taken seriously. The Bank said the need over the next year to refinance firms subject to heavily leveraged buyouts posed a systemic threat.
The Bank went on to say, “Many of these buyouts, especially the larger ones, were highly leveraged and the increased indebtedness of such companies pose a risk to the stability of the financial system – a risk that is compounded by the need for companies to refinance debt maturing over the next few years in an environment of much tighter credit conditions.”
Jennings said when we raise the alarm we are accused of scare mongering, the Bank of England has given substance to our concerns over the fragility of private equity owned companies and the excesses to which it is prone. The Bank of England’s warning is part of a gathering storm of concern over private equity on both sides of the Atlantic: a Boston Federal Court judge has refused to dismiss a lawsuit accusing private equity firms of colluding to lower the prices of deals during the buyout boom.