Given the dastardly deeds being attributed to private equity groups, their recent moves – on both sides of the Atlantic – to lobby governments, create trade associations and adopt voluntary codes of conduct will not mollify their critics and regulators, warns Jeffrey Garten, the Yale School of Management business guru, in the FT.
Garten helpfully suggests additional measures the big boys should consider:
- First, “allay fears that the enormous financial leverage that private equity firms employ does not risk widespread danger to the global financial system”. This would entail giving detailed information about their capital structures, borrowings and debt service strategies to central banks (on a confidential basis).
- Second, the data, including how private equity investments perform once they go public, should be audited by one of the four big accounting firms.
- Third, leading partners and other high-flying names in private equity should create charitable organisations with the scale and scope that parallels the size of the private equity groups themselves. “It took Andrew Carnegie and John Rockefeller a long time to become major philanthropists. Bill Gates did it in much shorter time and to almost immediate positive effect to himself and his company. The new tycoons might take note,” Garten advises.
None of these measures will prevent increased public scrutiny, nor bouts of negative media coverage. What is certain, however, is that without a more fulsome strategy, beyond what private equity firms seem to be contemplating, “these companies will be hanging from an even more precarious limb”.Why is Garten bothered? Because, he says, by helping themselves, the private equity firms are actually serving the broader public interest. “The world needs a robust private equity sector alongside, and in tension with, the public markets. Private equity investors create billions of dollars of value. They challenge complacent management and boards of directors to think like owners. They will be a leading edge of the massive corporate restructuring that will take place as emerging market companies become world players.”
Sounds exactly like the kind of spokesman the industry needs.