A Backlash Against Private Equity
For titans of finance, the annual Super Return Conference in Frankfurt is a chance to hobnob, broker deals, and attend sessions on topics such as "How big can financing, funds, and fees get?" But when legions of private equity heavyweights arrived at this year's conclave on Feb. 27, they faced union protesters brandishing placards saying "Conference of the locusts" and "Private equity equals asset stripping."
The small demonstration was just the latest protest against the growing clout of private equity in Europe—a trend not lost on the gathering. Inside the hall the talk often turned to why private equity's image has gotten so tarnished, how big an anti-private equity backlash might become, and what participants could do to restore a bit of luster to their corner of finance. "We're all trying to figure out how to deal with the onslaught of public equity," Texas Pacific Group founder David Bonderman told the 1,700 delegates at the conference.
As the size and number of private equity deals multiply across Europe, opposition is brewing. Even in Britain, which boasts the most active private equity market in Europe, low-level grumbling by trade unions over job cuts has escalated into a public outcry. In recent weeks, Labour politicians and even City of London bigwigs have criticized the industry for its lack of transparency and the amount of debt foisted on takeover targets. "High levels of debt at a time when interest rates are rising could lead to a financially destabilizing environment," says Michael Hughes, chief investment officer at Baring Asset Management Ltd. in London.
The controversy has arisen at a time of unease in Britain over record numbers of corporate takeovers, huge bonuses and salaries in the financial sector, and the growing compensation gap between the City of London and the rest of the country. "It's a shame that an industry that has contributed so much to the economy is suddenly seen as the lightning rod for everything that ails British business," says Patrick Dunne, managing director at 3i Group PLC in London.
NO LONGER UNDER THE RADAR
The tipping point came on Feb. 6, when a quartet of private equity firms said they were mulling a $22 billion bid for British supermarket chain J Sainsbury PLC (JSAIY ). "Until recently the firms have operated well below the radar screen of public interest," Richard Lambert, director-general of the Confederation of British Industry, noted in a Feb. 14 speech in London. "Now they have reached a size where that approach has to change."
The industry is making moves to get out in front of the issues—and to stay one step ahead of regulators who might seek to rein it in. Notoriously media-shy Damon M. Buffini, managing partner at Permira, Europe's largest private equity firm, is speaking out about the industry's need to become more open. "You only have to look at the British car industry to understand that if you don't take action to put a business on a firm footing, things can go badly wrong," he said in a rare radio interview with British Broadcasting Corp. on Feb. 23. In addition to agreeing to meet with union leaders, Permira has promised to reveal the names of its investors and provide more information about the companies it owns.
No doubt private equity has played a big role in London's success as a global financial center. Taking advantage of a strong economy and low interest rates, buyout firms have been able to borrow vast amounts of cash, pay themselves hefty dividends, and give their shareholders high returns. But with public scrutiny at an all-time high, industry executives fret that all it would take is one bad deal for regulators to crack down. Says Steven G. Puccinelli, head of private equity in Europe for buyout firm Investcorp: "We need to do a better job explaining what we do."
By Kerry Capell, with Gail Edmondson in Frankfurt