News

Private Equity in Brief – 4 April 2007



Private equity funds hold investments in companies 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. Even a strong CSR culture is unlikely to survive.



Canada’s largest union of telephone and media workers will take “any and all” steps necessary to block the sale of Bell Canada Enterprises to foreign investors. Dave Coles, President of the 150,000-member Communications, Energy and Paperworkers Union of Canada (CEP), said 29 March that a takeover of BCE Inc. by US interests would be “a direct threat to thousands of jobs, to Canadian economic sovereignty and to our cultural heritage”. Montreal-based BCE is Canada's largest telecoms company. Mr Coles was reacting to a report in the Canadian Globe and Mail newspaper that BCE had received a takeover approach from the PE firm Kohlberg Kravis Roberts & Co. (KKR). It would make BCE the target of Canada's biggest buy-out ever. For its part, BCE swiftly denied that discussions were being held with a private equity investor. BCE “has no current intention to pursue such discussions,” said the company. Canadian analysts are sceptical about the possibility of a PE takeover. They believe that BCE is more likely to merge with another Canadian telecoms operator. The most likely partner is Vancouver-based Telus Corp., Canada’s second largest operator. But such a deal would face high regulatory hurdles. It would also lead to job cuts, in the shape of cost-cutting synergies. CEP website; BCE website; Bloomberg.com, 2 April ’07; TeleClick.ca, 2 April ’07; Globe and Mail, 30 March ’07.



The Socialist group of the European Parliament has warned that the growth of PE and hedge funds threatens to undermine the European Union's economy and social model. Leading Socialist MEPs presented a 300-page impact report on 29 March, advocating measures to curb the funds’ influence on companies and workers. Where they invest in equity, hedge funds seek an even more rapid exit than PE funds - often staying in a company for as few as six months and most likely no more than 18 months. London’s Financial Times newspaper observed that the trenchant critique contained in the report highlights broadening concern among European policymakers. The Socialist MEPs say the funds should be subject to tighter transparency and disclosure requirements, along with tougher rules on taxation and corporate governance. Ieke van den Burg, a Dutch Socialist MEP and the group's spokeswoman on economic and monetary affairs, argued that leaving the sector to regulate itself would not be sufficient. "I don't believe that the market will solve it and I don't want to wait for a major crisis," Ms van den Burg said. “We have no wish to demonise any actors in the financial markets. But our ambition is to have a market that works better and that serves the real economy.” The Socialist MEPs’ report sets out six concerns for the EU’s social market economy: risks for people’s pensions, viability of private companies, security of service provision, decent work and a say for the workforce in company affairs, financial market stability, and ethics, including the fees charged by funds and low taxes. Internal Market Commissioner Charlie McCreevy is studying the report in detail. Earlier he had said that the case for additional regulation at EU level was not proven, but under review. Financial Times, 30 March ’07; EurActiv.com, 30 March ’07; PSE press release, 29 March ’07.



Private equity firms are estimated to indirectly employ 19% of private sector workers in Britain, according to a study by the British Venture Capital Association, and 7-9% in France, according to French unions. Several PE firms rank among the biggest employers in the United States. International Herald Tribune, 24-25 March ’07; Journal Inquirer.com, Connecticut, 16 March ’07.



A meeting between the UK’s GMB union and a leading European-based PE firm agreed to further consultations. GMB general secretary Paul Kenny said the 27 March discussion with Damon Buffini, managing partner of Permira, had centred on allegations of anti-labour practices and harassment at the AA motoring organisation, which Permira bought in 2004. Mr Kenny called on Mr Buffini to raise the pay of AA staff after the company increased profits, to reverse job-cutting and hire additional AA patrol staff, and to end a culture of bullying and harassment. A joint statement issued after the 21/2-hour meeting said: “The parties have agreed to consult further and to seek to build a constructive dialogue. Permira is happy to confirm that it is its position that employees can choose to be represented by whomever they choose, including the GMB.” After repeated GMB requests to meet, Mr Buffini finally agreed in February, saying he was “eager to set the record straight”. The union had mounted high-profile stunts, such as using a camel in a demonstration outside Mr Buffini’s church last summer. The GMB says the PE fund has already stripped the AA of £500 million ($1 billion), and sacked 3,400 of the 10,000 workers. Guardian Unlimited, 27 March ’07; TIMESONLINE, 26 March ’07; GMB website.



Is the financial climate turning against private equity firms? Thanks to the global liquidity glut of the past few years, PE firms have attracted huge amounts of money from investors like pension funds, insurance companies and wealthy individuals. To fuel their company buyouts, they have supplemented that equity capital by large-scale borrowing at fixed interest. But much of that debt is considered high-risk. According to an expert quoted by the International Herald Tribune, in the United States more than 50% of the loans tied to highly leveraged (high debt) transactions in 2006 involved firms whose bonds or loan financing received a CCC rating, the lowest and most risky for new financings. Recent instability on world stock markets reflects, in part, nervousness about the growing risk of debt defaults. That could slow the flow of money to private equity funds, as could regulatory pressures and a possible tightening of official monetary policies. Some observers say that if The Blackstone Group has decided to sell shares to the public, it may be because its savvy owners feel that the private equity market is peaking. “It is virtually the conventional wisdom that the golden years for both private equity and for hedge fund performance are in the past,” says one observer. Is a bubble going to burst? And, if so, who would suffer? See articles by Jenny Anderson and Sharon Reier, International Herald Tribune, 24-25 March ’07.



Goldman Sachs Group, the world's largest investment bank, hopes to raise $19-20 billion for its sixth PE fund, the company's chief executive Lloyd Blankfein said on 27 March. It would be the biggest buyout fund ever raised. The fund, Goldman Sachs Capital Partners VI, would leapfrog the $18.1 billion that Blackstone, the leading PE firm, has raised so far for its next fund. In their buyout operations, PE funds collect money from private investors to acquire companies, take them private, restructure them and then bring them public again. Goldman already has about $180 billion of assets in its hedge fund and private-equity businesses, which include Goldman Sachs Capital Partners, the company's private-equity unit. The bank’s strategy is not just to advise on deals, but also to provide financing and to invest capital. It also invests alongside private-equity firms, which are some of its best clients. They borrow from Goldman and pay it advisory and underwriting fees. Past Goldman buyout deals include the purchase of fast food chain Burger King. AP via washingtonpost.com, 27 March ’07; Reuters, 28 March ’07; Bloomberg.com, 27 March ’07; Dow Jones, 27 March ’07.



A Californian pension said on 29 March it had sued Amaranth Advisors LLC, the Connecticut-based hedge fund that collapsed in September. Representing the retirement benefits of approximately 35,000 employees, the $7 billion San Diego County Employees Retirement Association filed the complaint for securities fraud against Amaranth, three of its officers, and its former natural gas trader. The complaint claims that Amaranth collapsed as a result of trader Brian Hunter’s “excessive and unbridled speculation in natural gas futures”. That was contrary to statements that Amaranth would be diversified and risk controlled. Amaranth, which had $9.2 billion in assets at the end of August, lost more than $6 billion after Mr Hunter’s massive natural-gas bets went wrong. This is the first investor lawsuit related to the biggest hedge fund collapse so far. SDCERA's complaint rests on whether Amaranth informed investors properly that it was taking such big bets and whether the firm took enough steps to control risk. Experts said it might be hard to prove fraud and misrepresentation, since hedge fund documents tend to give the fund managers a broad mandate to invest as they see fit. The SDCERA complaint reportedly also argues that Amaranth was mismanaging iteself, with Mr Hunter alone receiving a $100 million bonus for 2005. SDCERA hopes to recover losses it suffered. In January, it said it had so far received $48 million in distributions from Amaranth, about a quarter of its original investment. Nick Maounis, Amaranth’s founder, has called SDCERA’s suit “meritless”, saying Amaranth’s investment decisions had been “legitimate but ill-fated”. The 350 employees at Amaranth’s headquarters have lost or are losing their jobs. At the time of the collapse, the AFL-CIO trade union confederation said it justified the union’s criticism of a pension-reform law just signed by US President Bush, which loosens restrictions on pension-money flows into hedge funds. “This shows what an appalling decision that was,” said an AFL-CIO rep. Mr Hunter, meanwhile, has formed a new fund, Solengo Capital, “structured to become a multi-billion dollar commodity investment vehicle”. Said an industry insider quoted by the International Herald Tribune: “Failed fund managers seem to be able to reincarnate themselves and re-attract money.”

Financial Times, 30 March ’07; IHT, 31 March ’07; MarketWatch, 30 March ’07; Reuters, 30 March ’07; Bloomberg.com, 20 September ’06; State of Connecticut, 16 October ’06.