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UNI Global Union is pushing the private equity industry to discard its veil of secrecy and show its practices in the light of day. Even the blanket term “private equity” is misleading as it groups together a venture capitalists and leveraged buyout firms who are doing very different things.



The rise of leveraged buyouts has had a disastrous effect on the lives of workers around the world. In these deals a company is purchased with a large amount of debt, usually with the assets of the company being acquired used as collateral along with assets of the purchaser.



“We need to make it clearer to people what is going,” said UNI General Secretary Philip Jennings. “Reports suggest that 20-40 percent of private equity firms will go out of business. Many of these buyouts were done at the top of the boom, loading companies with debt. As the recession bites the real economy, bought-out companies are under significant duress. The social implications are real and serious.”



A recent Moody’s report said that 20-40 percent of the top 100 private equity firms will disappear within three years.



People are becoming increasingly disenchanted with the capitalist system and its effects on their lives. A new survey released by the BBC on Monday said that “nearly a quarter of people across 27 countries worldwide feel capitalism is gravely flawed.”



Leveraged buyouts are often high risk-high reward deals, said Sony Kapoor, economist and managing director of the think tank Re-Define, but the rewards always go to the leveraged buyout firm while the risks are mostly “social risks” like layoffs, depression of wages and loss of industry that are absorbed by the general public.



Kapoor spoke at a one-day meeting on private equity hosted by UNI in Nyon on Monday, where unions discussed the effects of leveraged buyouts on workers and how they can fight back.



He said that most leveraged buyouts add little real economic value and the returns reported by private equity are often illusionary. He elaborated saying that



· The largest source of Private Equity returns come from rising stock markets which allow the PE firms to buy companies when the stock prices are relatively low and sell them when prices rise.

· The second largest source of PE returns come from the high leverage that is integral to LBO deals. Because debt is ‘cheaper’ than equity, increasing debt levels inflate profits. But this also increases risks to the viability of the company

· There is also an important tax dimension to LBOs. Interest payments are tax deductible, capital gains taxes are lower than income taxes and PE firms often operate from offshore tax havens. All of these inflate post tax profits for the firm as well as for the PE investors but reduce tax revenues for the government.

· LBOs often also involve significant layoffs and investment freezes which inflate profits in the short term but are detrimental to the long term sustainability of the company.

· Very few LBOs actually make significant profits due to real strategic changes which improve the long term outlook for the bought company



The large number of LBO firms in the marketplace means that they have a powerful effect on both the companies they take over and even the ones they don’t, Kapoor said. Fear of leveraged-buyouts pushes CEOs to focus on keeping their stock price high so that they are not a target. That leads to short-term thinking that only focuses on producing results that will please investors every quarter and not on planning for the long-term growth of the company.



Kapoor says unions need to focus on this message as they talk to the public and to pension and other investor funds to drive home the message that, as a large force in the global marketplace, LBOs are bad for society.



While as a niche player PE firms engaging in LBOs can add value to underperforming companies the model is not workable on a larger scale. The asymmetry that LBOs pose where profits are privatized and risks socialized does not work for anybody - investors, workers or tax payers – in the long term.



Kapoor says that while it is possible for a small ‘niche’ investor to extract a return of 10% or more from an economy growing at 3%, this does not work for large investors such as pension funds which are a substantial part of the financial system. It can work in the short term while asset prices are rising in a bubble but these bubbles inevitably burst leaving investors high and dry.



Pension funds who believe that they can generate long term sustainable returns of say 10% by investing more in alternative asset classes such as private equity and hedge funds are deluding themselves and setting the financial system up for yet another bursting of the bubble



Sony Kapoor is an ex-investment banker and the Managing Director of Re-Define (Rethinking Development, Finance and Environment www.re-define.org ) an international Think Tank.