Private Equity and the Culture of Value Extraction

Abstract

Click to increase image sizeClick to decrease image size The authors acknowledge the financial support of the EU 6th Framework under the ESEMK research project (http://www.univ-evry.fr/esemk/). Notes 1. ‘The new kings of capitalism’, The Economist, 27 November 2004, p. 3. 2. ‘Locust, pocus – German capitalism’, The Economist, 7 May 2005, p. 75. 3. Emily Thornton, ‘Gluttons at the gate’, Business Week, 30 October 2006. 4. Peter Koenig, ‘Is private equity building up a debt bubble’, Sunday Times, 6 March 2005, Business Section, p. 1. 5. Financial Services Authority (FSA), Private Equity: A Discussion of Risk and Regulatory Engagement, Discussion Paper 06/6, London, 2006. 6. ‘2006 fundraising smashes all previous records’, Private Equity Online, 5 January 2007, http://www. preqin.com/article.aspx?articleid=233 (accessed 15 January 2007). 7. See, for instance, Jason Singer & Henny Sender, ‘Leading the news: private equity gets ever bigger to pay for buyouts. New cash lets firms ponder deals valued above $50bn’, The Wall Street Journal Europe, 26 October 2006, p. 3; Steve Rosenbush, ‘Private equity: what's the limit?’, Business Week, 8 December 2006. 8. International Financial Services London (IFSL), Private Equity, City Business Series, IFSL, October 2006, p. 8, http://www.ifsl.org.uk/uploads/CBS_Private_Equity_2006.pdf (accessed 15 December 2006). 9. See, for example, British Venture Capital Association (BVCA), The Economic Impact of Private Equity in the UK 2006 (BVCA, 2006); BVCA, Private Equity – a UK Success Story (BVCA, 2006); European Private Equity and Venture Capital Association (EVCA), Employment Contribution of Private Equity and Venture Capital in Europe (EVCA, 2005). 10. British Venture Capital Association (BVCA), The Economic Impact of Private Equity in the UK 2005 (BVCA, 2005), p. 6. In its 2006 report, the BVCA also for the first time estimated the number of people by companies currently backed by private equity: this was estimated to be 1.2 million, or 8 per cent of the private sector employees (BVCA, The Economic Impact of Private Equity in the UK 2006, p. 5). 11. IFSL, Private Equity, p. 4. 12. John Micklethwaite & Adrian Wooldridge, The Company: A Short History of a Revolutionary Idea (Weidenfeld, 2003). 13. Michael Jensen, ‘The Eclipse of the Public Corporation’, Harvard Business Review, September–October (1989), p. 64 14. Ibid., p. 72. 15. Ibid., p. 70. 16. Bryan Burrough & John Helyar, Barbarians at the Gate. The Fall of RJR Nabisco (Harper-Collins, 1991). 17. According to The Wall Street Journal, ‘private equity’ was introduced as a euphemism for the discredited term LBO. See Matthew Monks, ‘Private equity stars play name game’, The Wall Street Journal, 4 October 2006. 18. Martin Dickson, ‘Why private equity is a pure form of capitalism. Disadvantages of the public company market’, Financial Times, 12 November 2005, p. 16. 19. European Private Equity and Venture Capital Association (EVCA), Employment Contribution of Private Equity and Venture Capital in Europe (EVCA, 2005), executive summary, p. 3. 20. Ibid., p. 4. 21. ‘Investing in enterprise’ is the motif of the BVCA. 22. Although there is little publicly available or systematically collected data on outcomes such as employment, the Work Foundation's report on private equity, published in March 2007, brings together important evidence, including that from the University of Nottingham's Centre for Management Buyout Research's database of private equity-held firms. Distinguishing between management buy-in (where new managers are put in charge) and buy-out (where existing management remains in post) highlights differences in patterns of job loss and creation over time, although in both cases wages grow more slowly than in private sector companies more generally. The overall story is quite complex, though generally management buy-ins were more likely to lead to employment loss than buy-outs. Where new management takes over, the general pattern is of an initial reduction of 10 per cent in employment in the first year (rising to 18 per cent reduction after six years), though only 37 per cent of MBIs in the sample did cut jobs. See Phil Thornton, Inside the Dark Box: Shedding Light on Private Equity (The Work Foundation, 2007). 23. McQueen, Private Equity: Visionaries or Locusts? (McQueen, 2006), p. 11, http://www.mcqueenltd.com/News.aspx (accessed 20 January 2007). 24. Stephen N. Kaplan & Annette Schoar, ‘Private Equity Performance: Returns, Persistence and Capital Flows’, Journal of Finance, Vol. 60, No. 4 (2005), p. 1792. 25. David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment (The Free Press, 2000), p. 228. 26. For example, the 1986 buyout of Safeway by KKR was 96 per cent debt-funded. 27. The 3.75 per cent margin produces a cost of debt that is higher than many funds (or corporations) would typically be charged. Thus any bias in the simulation would be to the disadvantage of the return of re-leveraged FTSE 100 companies. 28. Swensen, Pioneering Portfolio Management, p. 231. 29. BVCA, Private Equity – the New Asset Class. Highlights of the London Business School report ‘UK Venture Capital and Private Equity as an Asset Class for Institutional Investors’ (BVCA, 2000). See also the Myners report which encouraged institutional investors to give more consideration to private equity as an asset class: HM Treasury, Institutional Investment in the UK: A Review (The Myners Report) (HM Treasury, 2001), ch. 12. 30. FSA, Private Equity, para. 3.77. 31. Dan Roberts, ‘Hyper-capitalism’, Financial Times, 2 May 2006, p. 20. 32. For more discussion of the business model of private equity, see Peter Folkman, Julie Froud, Sukhdev Johal & Karel Williams, ‘Working for Themselves: Capital Market Intermediaries and Present Day Capitalism’, Business History, Vol. 49, No. 4 (2007), pp. 552–72. 33. Peter Smith, ‘A public relations offensive on the buy-out high-wire’, Financial Times, 26 January 2007, p. 15. 34. Thornton, ‘Gluttons at the gate’. 35. Barry Clement, ‘500 jobs are axed as Birds Eye shuts plant’, The Independent, 12 January 2007. 36. According to Ernst and Young's director of retail, ‘it's so significant because of the magnitude of the turnaround in a relatively short timescale’ (Retail Week, 5 May 2006). 37. ‘Debenhams’, Financial Times, 31 May 2006, p. 2. 38. ‘Debenhams’ return to the LSE ensures saga ends well for all', The Lawyer, 8 May 2006, p. 13. 39. Jonathan Braude, ‘Debenhams to make debut’, TheDeal.com, 21 April 2006. 40. Simon Bowers & Julia Kollewe, ‘Turnaround experts engineer a roadside rescue for Little Chef’, The Guardian, 4 January 2007, p. 21. 41. Financial Times, 2 May 2006. 42. Elizabeth Rigby, ‘Back on the shelf: Debenhams has to sell itself as it returns to the stock market’, Financial Times, 21 April 2006, p. 19. 43. Marianne Barriaux, ‘Private equity blamed as Debenhams issues third profit warning in five months’, The Guardian, 18 April 2007. 44. Robert Cole, ‘Doomed before barbarians arrived’, The Times, 4 January 2007, p. 45. 45. The idea of re-financing the company to allow value to be extracted, as in the case of Debenhams, is not an isolated case. The Wall Street Journal reports that between 2003 and mid 2006, some US$69 billion was borrowed by (US) companies ‘primarily to pay dividends to private equity owners’; in the six years to 2003, the equivalent sum was US$10 billion. See Greg Ip & Henny Sender, ‘Private money: the new financial order’, The Wall Street Journal, 25 July 2006, p. A1. 46. Thornton, ‘Gluttons at the gate’. 47. By April 2007, Debenhams shares were trading at a level 24 per cent down on the flotation value in May 2006. See Barriaux, ‘Private equity blamed’. 48. Centre for Management Buy-out Research (CMBOR), Exit (University of Nottingham, 2005). 49. Peter Temple, Private Equity: Examining the New Conglomerates of European Business (Wiley, 1999). 50. Dennis K. Berman & Henny Sender, ‘Private equity firms face anticompetitive probe’, The Wall Street Journal, 10 October 2006, p. A3. 51. See, for example, Smith, ‘A public relations offensive’. 52. Real Deals, 7 April 2005 53. See, for example, Nandini Lakshman, ‘Private equity invades India’, Business Week, 8 January 2007. 54. Paul Langley, The Everyday Life of Global Finance, IPEG Papers in Global Political Economy, No. 5, 2003. 55. Ibid., p. 9. 56. For views on the lack of transparency of private equity-owned companies see Thornton, Inside the Dark Box. 57. See, for example, Lina Saigol & Peter Smith, ‘Failed bid highlights challenges’, Financial Times, 11 April 2007; ‘Boots provides takeover aid test’, Financial Times, 20 April 2007. 58. Serena Ng, ‘Moving the market – tracking the numbers’, The Wall Street Journal, 27 December 2006, p. C1 59. Adam Harmes, ‘Institutional Investors and the Reproduction of Neoliberalism’, Review of International Political Economy, Vol. 5, No. 1 (1998), pp. 92–121. 60. Ibid., p. 107. 61. Dennis K. Berman, ‘Will private equity suffer a push-back? The era of easy deals may be nearing end; holders demand more’, The Wall Street Journal Europe, 3 January 2007, p. 19. 62. Julie Froud, Sukhdev Johal, Adam Leaver & Karel Williams, Financialization and Strategy: Narrative and Numbers (Routledge, 2006).