UNI says private equity industry still has questions to answer
UNI Global Union said today that the key findings released by the World Economic Forum’s (WEF) recent study on private equity do not allay the broader concerns that unions and governments have about the wider social and economic implications of private equity.
“There is little to show that the LBO boom has been better for the global economy,” said UNI General Secretary Philip Jennings. “We are in the midst of financial catastrophe, which has been brought on by greed, a failure of values and supervision and a reliance on self-regulation. As the G20 examine the failure of financial regulation, it is important that regulators address the impact of the private equity model on economies and communities. We really need to dig deeper into this way of doing business.”
The financial crisis has raised serious questions about the overleveraged balance sheets that many firms are holding and under the weight of which they may collapse. As early as last year Alchemy Partner’s chairman Jon Moulton, a leading private equity practitioner said “The industry needs to prepare for bad news…There will be large private equity failures this year and next, and press and politicians will get on to us. Companies will go bust and get into trouble… We have got some savagely leveraged companies out there.” The key findings in the four studies released by the WEF today do not address the debt issue.
“The study looked at firms during the heyday of private equity and what looks like a golden period of leveraged buyouts,” said Jennings. “Today is very different and the study confirms that in previous credit crunch periods the axe fell on portfolio companies. As the financial meltdown continues we are worried about corporate failures. We hope that the claims of private equity management brilliance will now be devoted to saving jobs, weathering the economic storm and acting in a socially responsible way over the long term.”
The WEF studies examined management practices and measured labour productivity. UNI urges caution in interpreting the results on management efficiency as the study also shows that “the results for private equity versus dispersed shareholding firms are not statistically significant.” The study reveals that private equity often targets companies that are already performing well.
Debate continues to rage about the private equity way of doing business. For example, the annual report on the performance of the largest UK companies owned by private equity, released by the BVCA in association with Ernst & Young, indicates that operational improvement accounted for less than a fifth of the profits made by private equity.
The WEF study illustrates that “workers in these companies are working in a pressure cooker environment,” says Philip Jennings. Further studies need to look at the broader impact on health and safety, labour relations and broader corporate social responsible. The report once again underlines that private equity ownership does lead to “an intensification of creative destruction.”
In light of the taxpayer bailouts for banking and other industries, questions continue to be raised, for example, about the private equity use of tax havens and tax breaks. This is a further area worth of study.
UNI will also look into the effects of private equity deals in France and in emerging markets to examine the social costs of these transactions.
Leaders in the private equity industry believe that there is a fundamental change in the works. David Rubenstein, founder and managing director of the Carlyle Group, has been outspoken about the challenges for the industry.
“More than a few well-known (private equity) investments will likely not survive. It is fairly obvious that there will be a death watch on some of them,” Rubenstein said at the Super Return private equity conference in Berlin in early February 2009.
UNI, along with the global labour movement, is determined that neither the G20 nor the European Union drops their guard in terms of adequate regulation and supervision of private equity companies.
UNI Global Union General Secretary Philip Jennings is a member of the WEF project advisory committee supervising the study on the Globalisation of Alternative Investments.
UNI is the global union for skills and services. We represent 900 trade unions and 20 million workers worldwide.
For more information contact Gabrielle Fulton at Gabrielle.fulton@uniglobalunion.org or +41 79 701 9049