Private equity needs public standards of disclosure

When a small number of Labour Members of Parliament sign a Commons motion, one should take that as an indicator of left wing opinion, but not as a practical threat to the institution they are criticising.  That is almost certainly true of the early day motion calling for the House “to consider legislation to exercise control over the damaging behaviour” of private equity groups and to review the relief on loan interest.  The only surprising thing is that Tony Blair felt it necessary to respond that “the private equity market brings a lot of benefits to the British economy”.

The private equity companies have, so far, a very good record, both in terms of reconstructing failing enterprises, where they have done that, and of making money for their shareholders.  They have become a normal part of asset allocation for institutional funds.  The problem is not their performance, but their transparency, as the managers of the larger private equity funds perceive.

In the early days, when small private equity funds were acquiring relatively small businesses, the question of transparency did not really arise.  The funds needed to report in the form that would satisfy their owners, but the owners wanted them to have considerable freedom of operation.  Now that they are acquiring large public businesses, they need to bring their reporting into line with what is normal for such businesses.  If private equity bought Sainsbury’s, the business would still have to deal with national and local Government, with its suppliers, with tens of thousands of staff and millions of customers.  It would be unsatisfactory if any of these groups was deprived of the information needed to monitor the relationship.  The bigger the business, the greater the need for transparency.

Some people in the private equity business see this quite clearly.  Mr. Jonathan Nelson, the founder of Providence Equity Partners, has stated that “we all need to get used to operating in a bright spotlight, even brighter than the one shining on us today.”  Some have gone further.  Wanching Ang, the Managing Director of Allianz Private Equity Partners has said: “the industry is on the defensive.  That’s avoiding the problem.”

The people best able to influence the actual conduct of private equity businesses are the partners, who put up the money.  They should have their own reasons for wanting a greater transparency.  As private equity expands, there will be more competition, weaker managers will be seeking poorer opportunities and taking higher risks, particularly in terms of debt.  That has already happened, in the hedge fund boom.  In the next recession, there will be some private equity failures.  Transparency is the best protection for the investors and therefore for the businesses themselves.  Private equity needs fuller disclosures for the industry’s sake.

Comments

[Edwin Thornber]

I am of the opinion that Gordon Brown has asked his union based friends to butter up public opinion in preparation for a tax raid on the private equity sector.

Taken in conjunction with the additional regulation proposed in the early day motion, we could be witnessing the birth of another Brownian led destruction of a prosperous part of The City's financal health.

Does anyone remember what happened to the pensions industry when Brown unleashed his clunking great fist to squash that once world leading sector?

[Winchester whisperer]

If a public company is sold, it needs to have the agreement of the majority of the shareholders. The opinions of the staff, the unions, the suppliers and local government officials are irrelevant unless they happen to be shareholders as well. Private equity firms are by definition private. There is no reason for the government to force them into greater disclosure. A free market has public and private companies. Shareholders should be able to sell to a private company if they wish. The government should not interfere with the capital market process.