The benefit of Sovereign inclusion

Private equity and unions should both benefit from the inclusion of sovereign wealth funds and personal vehicles within Sir David Walker’s regulatory recommendations.

Walker’s desire to expand his soon-to-be-published recommendations on the voluntary regulation of the private equity industry to include sovereign wealth funds and rich entrepreneurs is one that should be matched by big leveraged buyout funds and unions alike.

For private equity’s largest investors, calling for the likes of Dubai International Capital, Delta Two and Robert Tchenguiz to adopt the same measures of disclosure and reporting would put all financial investors in the UK’s biggest buyouts on a level plane.

For the unions, it would extend the degree of protection and inclusion in these transactions and ongoing ownership to more than just the Permira/Carlyle/Kohlberg Kravis Roberts/Duke Street Capital “axis of evil” they have targeted to date.

The former group have already been playing ball – KKR has agreed to adopt Walker’s recommendations in advance of their publication – aware that the LBO landscape and the public’s awareness of it have changed dramatically in the past 18 months.

Ironically, that awareness comes after even more dramatic changes in the past three months that have made Walker’s report seem redundant in the current LBO-less market, but should prove important both in terms of explaining what exactly it is that private equity does to improve its portfolio companies, especially now that gearing will play less of a role for more recent investments.

Terra Firma, this means you. Guy Hands’ private equity outfit may be pointing to a new model for financial sponsors in big LBOs – buy EMI with a significant amount of equity (a staggering £1.4bn of the £2.4bn total), then sell off some of that exposure post-completion – but the news that the firm might also cut substantial numbers of jobs and sell off some of EMI’s non-core units plays into union accusations of asset-stripping and quick flipping.

The unions make no such claims for quasi-private equity investors, despite a number of them buying some of the UK’s largest and best-known assets. Delta Two, a Qatari state vehicle, has been in discussions with the Sainsbury family regarding a £10.6bn bid for the UK supermarket chain for months following CVC Capital Partners’ failed bid. Much of the union’s ire towards private equity was fuelled by interest in both CVC’s tilt at Sainsbury and KKR’s buyout of Alliance Boots.

Regarding Delta Two’s pursuit of Sainsbury, the unions have said next to nothing. The firm operates in much the same way that private equity does, but the unions don’t seem to recognise that – perhaps understandably, given their lack of familiarity with the term “risk capital” (the “it does what it says on the tin” definition of private equity) at this summer’s Treasury Select Committee hearings.

They should. Dubai International Capital, the international investment arm of Dubai ruler Sheikh Mohammed bin Rashid al-Maktoum’s Dubai Holding, last week bought German chemicals maker Almatis for US$1.2bn. It also purchased a 9.9% stake in US hedge fund Och-Ziff, which has more than US$30.1bn under management, including UK retailer Peacock and tool hire business HSS.

Earlier investments in Europe include Tussauds Group (in which it retains a 20% stake after a sale to Blackstone’s Merlin Entertainments), Travelodge, Doncasters Group, Mauser, DaimlerChrysler and a minority stake in defence firm EADS.

In January, DIC even made a play for one of England’s biggest football teams, Liverpool FC, only walking away when it could not agree terms with the board – ironically, its investment in Och Ziff means it has an effective tie with an even bigger football team, Manchester United, as Och Ziff was one of the Glazer family’s backers.

However, at the time of the Liverpool interest, many of the club’s fans rejoiced at a Roman Abramovich-style takeover, making reference to the Sheik’s wealth and forgetting that it would be a disciplined private equity-style unit (and not its owner) that would be investing and looking to divest with substantial profits within several years. Liverpool’s eventual owners, Tom Hicks (of Hicks Muse fame) and George Gillett, will almost certainly follow a similar strategy.

Football fans can be forgiven for regarding the differences among sovereign wealth funds, personal vehicles and private equity proper as semantics, but for unions also to ignore the differences or indeed the very existence of private equity-style investors would be a clear own goal.

By Robert Venes