Unflattering comments about private equity from the chairman of Germany’s ruling Social Democratic party (SDP) could be dismissed as electioneering. Or they could be taken in tandem with dividend fatigue in the debt markets as part of a grass-roots malaise that buyout firms must address directly. Muntefering – or as some might dub him “interfering” – denounced firms including Carlyle and KKR as “locusts” in a memo that was leaked last week.
The comments may have something to do with the May 22 election in North Rhine Westphalia, Germany’s biggest state. A similar charge could be levelled at Tony Blair’s pre-election UK government in the wake of the Inland Revenue’s unexpected policy shift on transfer pricing. That is the view, at least, of industry professionals who think it is better to maintain a dignified silence to avoid turning a molehill into a mountain. They may be right, but private equity has found itself on the receiving end of criticism lately from a variety of sources.
Renewed volatility in the high-yield bond markets means that investors are nervous about values in the wake of ISS; analysts are putting out reports about “LBO hysteria”; and banks are queasy about where and when leverage will crack.
Industry leader Jeremy Coller has also urged buyout firms to pursue stricter corporate governance before a case of incompetence or dishonesty prompts the imposition of heavy-handed regulation from on-high. Some even argue that a Sarbanes-Oxley style regime is just a matter of time in the UK.
For the “no smoke without fire” camp, preventative action is much better in these circumstances. This does not mean pitching saccharine stories about private equity’s benevolence to the national media. Rather, individual private equity firms need to pull their heads out of the sand and start publicising the positive results, as well as acknowledging the negative ones.
A campaign of silence plays into precisely the kind of prejudice that the “locust” comments encourage, namely that buyout firms have lost all semblance of entrepreneurial expertise and exist solely to siphon off profits in the gap between management changes and IPOs.
There are other reasons why the industry would serve its own interests if it opted for greater transparency. These include the FOIA in the UK, the institutionalisation of the asset class and growing support in some quarters for a ratings system for GPs. Institutionalisation is perhaps the major driver, as investors more used to the transparency and accountability of the public markets increasingly influence and drive the private equity business.
Events may well be conspiring to take the “private” out of private equity whether the industry likes it or not. Is it really realistic to expect an asset class that accounts for roughly 70% of sub-investment grade borrowing in the European leveraged finance market – and a significant proportion of IPO business – to retain such a low-key, discreet profile?