The private equity boom goes on, writes Mervyn E King* in Wednesday’s FT, despite critics who say companies are selling out too easily.
So what are facts around the industry? In the UK, the statistics indicate that one in five employees in the private sector are employed by companies owned by private equity funds. The growth in jobs at these companies has been 9 per cent a year over the past few years, compared with 1 per cent at FTSE 100 companies. Not only has job creation been superior, but the returns to investors in private equity funds have also been superior to returns from listed equities, writes King.
So what are some of the “voodoo notions”?
- One is that there is less transparency for investors in private equity-owned companies. The reality is that the institutional investor has unrestricted access to management. Discussion between the two is absolutely transparent and the investors urge managers from time to time to change course strategically. Managers in turn regularly share issues with the investors. Managers and investors are not restricted by insider trading regulations. The institutional owner of shares in a listed company can only discuss with executives issues that are in the public domain. Consequently, there is greater disclosure to the providers of capital in a company owned by a private equity fund than in a publicly listed company. Management and ownership are not split.
- Then there are the notions of a lack of compliance and reporting. Publicly owned companies listed on exchanges are driven by short-term issues: they have to report every three months in some jurisdictions, in others every six months. Management is measured on short-term issues and compliance-driven. The management of a private equity fund company is measured and rewarded on long-term strategic issues and the achievement of a hurdle rate of return many points above the long-term cost of capital and borrowing. In private equity, there is a freedom from an almost mindless compliance with regulations. The reporting to investors is quick and absolutely transparent.
- Another issue is decision-making. In a private equity context, it is much quicker than in a listed company. The decision is made after a direct communication between the owner-investors and management.
Private equity’s detractors are calling for regulation, notes King. From the facts, it appears rather that the regulations surrounding listed companies should be re-examined. In private equity, because of the growing investment by pension funds, it is ordinary people who are benefiting far more than the managers.
When it is realised that the success of private equity has benefited millions and not only the managers, and there is a generally accepted code of conduct, perhaps the “voodoo notions” will be debunked.
*The writer is an international corporate governance expert who chaired the United Nations Governance and Oversight Committee (so, not the Bank of England guy)