Private equity: we told you so!
Fears are now growing that many private equity (PE) takeovers will go bust. Almost none of the conditions needed for the kind of takeovers that unions were most worried about are now in play:
- There is no longer easy cheap loan finance available from banks. Many PE takeovers were highly leveraged (ie were funded by bank loans). Even if nominal interest rates fall, this does not automaticlaly make it easier for PE.
- The taken over companies are suffering from the down-turn too. That makes them less able to generate the profits needed to pay back the loans.
- It will now be much harder to sell companies on. Many PE investments were based on buying cheap and selling on again at a good profit, either through selling off assets such as land or through ‘efficiency’ savings. The costs of loan finance could be paid by the profit on the sale, and therefore did not need to be covered by the day to day activity of the business.
Of course not every private takeover of a publically listed company is like this. Indeed some companies have gone private because their owners are in it for the long term and want to avoid the short-term perspectives of stock exchange investors. But the PE bubble was driven by ultra-short termism and asset stripping, as even some PE practictioners concede.
The FT reports todays that companies owned by private equity account for 29 per cent of the 57 pension schemes in the Pension Protection Fund – the collective insurance scheme for defined benefit pension schemes.
It gives us no pleasure to say ‘we told you so’, as the real victims will be the staff of the companies that do not survive the PE credit crunch.
But unions did not make themselves very popular when they warned of the dangers of these highly leveraged buy-outs. The ‘hug a hedgie’ Conservatives have always been happy in the company of PE and hedge funds, but even the Prime Minister made Permira’s Damon Buffini a member of his business advisory panel.