Bashing Private Equity

By Maria Bartiromo

As behemoth Blackstone Group--led by Stephen Schwarzman--goes public, a backlash is building against private equity. Congress is contemplating tax changes that would have a significant impact on private equity profits, and criticism of the buyout juggernaut is gaining ground in both the U.S. and Europe (see, 7/11/07, "Kill the Private-Equity Tax Break"). One of the loudest and most articulate voices being raised belongs to Philip Jennings. That's not a household name, but Jennings heads Switzerland-based UNI (Union Network International), a global labor federation representing some 900 trade unions with more than 15 million members around the world.

You've been meeting with Blackstone and other private equity firms. What are you trying to accomplish?

We're trying to put private equity on a new path when it comes to the way that they treat their employees, who number in the millions. We see a complete absence of consideration about socially responsible issues like labor standards and working conditions.

Some might say: "Look, you and your colleagues have just woken up to the fact that the Steve Schwarzmans of the world are making lots of money, and you just want a piece of it."

We're not the only people just waking up. The financial press, politicians, regulators, and the public are realizing that we are in a new era. A new form of capitalism has emerged. Somebody said to me, "We have a mutation in capitalism taking place." I think the Steve Schwarzmans of the world and the new business elite have to think deeply about the political ramifications of the inequalities we are seeing. That's what's missing in the private equity equation. This is not about envy, but it is about greed.

Is there any evidence to suggest that private equity firms are treating labor unfairly?

As we look at the expansion of private equity deals around the world, we are really concerned about what this means for job security, future employment prospects, pensions, and the relationships between the workforce and the companies. Private equity is spinning that this is great for jobs and great for workers, almost 100% of the deals being done, the pension funds are in deep trouble. Private equity is not used to being challenged or contradicted, and we think the time has come for a real public debate about the direction of private equity, what it means to economies, to financial stability, and to the kinds of societies that we're trying to build.

But can you really do anything about it?

I think so. In a fairly short period of time, we have seen [governments] waking up to the dangers of private equity. In a number of countries, a series of inquiries has been launched looking at transparency, the taxation implications, and corporate governance. I think we can change the environment within which private equity works. Six months ago nobody was [focused on] private equity. Now there's a bill in Congress concerning tax treatment of private equity firms. The same discussion is taking place in Britain. And we're making it our business that this discussion takes place around the world. Private equity people feel that they're untouchable, that they're beyond the democratic process.

What about the fact that European labor laws are one of the biggest reasons that Europe's economy has been unable to break out until very recently?

Europe is doing pretty well, thank you very much. The European economy is turning the corner. The most successful, most competitive European economies are those that strike a balance between competitive markets, an entrepreneurial approach to the economy, and getting the social dimension right. In the competitive economies there's a strong consensus that "Yes, we'll have flexible labor markets, but we'll also have secure labor markets in the sense that people won't be abandoned." If you don't do this, then you get a political backlash, and you have the U.S. at the moment.

Where do you stand on the change in tax treatment people are talking about in Congress?

We welcome a much more rigorous analysis of how private equity exploits the tax system for its own benefits. Why is it that private equity seems to be on a different playing field from the rest of the private sector? Last week a private equity leader in Britain said he didn't think it was right that he pays less tax than the office cleaner, and therefore the tax authorities have a duty to scrutinize this and to level up. And I don't think it's right that private equity should benefit from idiosyncrasies and weaknesses in the tax system. Another problem is...a lot of these deals are channeled through offshore tax havens. I've heard comments like: "This is a war on prosperity." This is not a war on prosperity; this is a private equity war against the health of public accounts. If the corporate tax base continues to shrink, that is going to put a question mark on all the social areas where governments have to spend money.

Don't you worry that Congress is interfering with the capital markets?

No. I would be worried if they were ignoring what was going on. We have to look at the sheer magnitude of private equity transactions. Last year it was nearly $4 trillion worth of deals. The amount of money private equity has at its disposal is simply enormous. They can buy any publicly quoted company in the world. There is no limit. So we're now in a new phase of a robust financial capitalism, and regulators and politicians have to address it. Maria, this is not business as usual. That is why regulators are beginning to express profound concerns. What happens when one of these companies goes belly-up? You have a systemic risk problem. We're in new territory here. The risks are significant, and [this new capitalism] has not been tested.

How much labor money, in the form of institutional investment vehicles such as pension funds, would you estimate is invested in private equity firms or hedge funds?

There's no doubt that of the money raised this year, a very significant proportion comes from pension funds. And what we are saying is we have a lot of those pension funds out there where we have trustees, where we have union representation, and we're asking them to look closer at investment strategy because we're worried about the bubble bursting. And we want pension funds to say: "Look, if we're going to invest this money in you, you have to make a new compact with the people in the businesses where your investment is going."

Which private equity firm is the greediest?

I haven't got a hit list of the greediest private equity firms. We tend to focus on the larger companies. And you keep finding difficulties across the board. In Britain, I would say Permira [which is trying to take over Valentino Fashion Group] has come in for particular criticism. But if you scratch the surface, there are problems with each of them.

Join a debate about the tax breaks on private equity gains.

Maria Bartiromo is the anchor of CNBC's Closing Bell.

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